Vietnam

5 Chapter M&A

    • Trend

       Some of the benefits of investing in Vietnam is that the country´s economy is growing rapidly at a 4% to 8% since its recovery from the Asian Financial Crisis of 1997. Vietnam joined the World Trade Organization (WTO) and after this many changes occurred in Vietnam to facilitate investment, changes on the legal framework and implementing international commitments. The M&A activity increased starting 2006, in the following year the value increased up to 475% with a total of 108 business transaction, all of this happened after joining the WTO.

      In 2015, the total value of M&A transactions in Vietnam was 5 billion USD. In the first 6 months of 2016, the value of M&A in Vietnam exceeded 3 billion USD, in sectors as retail, commodities, and real estate. Thailand, Japan, and Singapore are the major buyers in Vietnam´s market.

      Cross-Border transactions in Vietnam occur mainly with ASEAN the Economic Community (AEC) which is a Political, Social and Economic Cooperation since 2015, between Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.
      The average size of deals in Vietnam is between 2 to 5 million dollars per project and the main acquirers are from Japan or from ASEAN mostly.
       
      M&A activities in Vietnam
      (First half of 2014 to first half of 2016)[1]
       
      Period
      Value ($m)
      Volume
      H1 2014
      205
      10
      H2 2014
      642
      15
      H1 2015
      2351
      29
      H2 2015
      1488
      18
      H1 2016
      1551
      20

      [1] http://vneconomictimes.com/article/banking-finance/top-10-m-a-deals-in-vietnam-revealed

    • Risks which is different from mergers and acquisitions

       Some of the risks of investing in Vietnam are that the economy is still at an early stage and is a socialist-orientated economy because the government still controls many key industries. Many changes occurred on the legal framework but is still not enough, the concepts of mergers and acquisitions are not yet equalized and regulated uniformly in the Vietnamese laws. Another problem in M&A transaction is the lack of information on target businesses and financial information.

    • Phase of primary discussion

       　

      At the end of a due diligence process after both parties had agreed to disclose their information, the parties will conclude a non-disclosure agreement. It is important to mention that Vietnamese company owners are often not familiar with international M&A procedures and they are usually reluctant to disclose their information even though there is a non-disclosure agreement bounding both parties for secrecy.

       

      　[Consensus of purpose and conclusion of letter of Intent]

      The letter of intent, known as a memorandum of understanding, is only signed by the acquirer and not by both parties when the owner is prepared to sell. In it the owner declares its intent to sell and the acquirer its intent to buy.   

    • Final phase of discussion

      　 [Due Diligence]

      The scope of the due diligence depends on the business of the company, usually it is very difficult to obtain information about Vietnamese companies unless the owner agrees to provide them. The financial statements are publicly available only for joint stock companies. Financial information must be carefully checked because domestic companies do not yet reach international standards. Negative information may be found investigating newspapers or internet, suppliers and customers be good sources of information, but sometimes difficult to reach or obtain information from them. In most due diligence cases, documents and information provided by the owner are the only source to obtain knowledge about the company´s legal, tax and financial situation.

    • State of development of laws related mergers and acquisitions

       In Vietnam, there is no specific law for M&A but there have been changes made into the corporate and investment law. But still Mergers & Acquisition are relatively new in Vietnam which means the legal framework is still being developed. Another law involved in M&A is the law on securities which regulates the acquisition of public shares.
       
      ■ Ratio of foreign capital contribution and related regulation and law

      The Law on Securities states that the ratio of capital contribution and purchase of shareholding by foreign investors in several sectors, industries and trades shall be regulated by the Government.

       

      　[Ratio of capital is 10%]

      The Law on securities states that, “A fund management company shall not be permitted to use the capital and assets of a securities investment fund to invest more than ten (10) per cent of the total asset value of a closed investment fund in real estate; to invest the capital of an open investment fund in real estate.”

       “Minority Shareholders Rights”.

      Minority shareholders are shareholders who have minority stakes in a company that is controlled by a majority shareholder and need to be protected to encourage investment. The Vietnamese corporate law has few protections for the minority shareholder’s rights, because minority shareholders are owners with no right to raise their voice due to a lack of security on their rights.

      Article 79 from corporate law, grants broad powers to the shareholders to exercise their rights at a general meeting and in most companies, majority shareholders supervise the company’s management, this is the majority rule. Article 80 gives the minority shareholders a right to raise direct suits, director shall be liable to damages in case he goes against the law.

       

      　[Ratio of capital is 25%]

      Article 32 from the Law on securities states that, “An offer to purchase voting shares leading to ownership of twenty-five (25) per cent or more of the number of currently circulating shares in any one public company; must be made as a public offer. “

       

      　[Ratio of capital is 49%]

      There are specific laws for public companies operating in business lines and sectors. For public companies operating in business lines and sectors, in which there have been conditions applicable to foreign investor, but there have been no specific provisions on foreign ownership ratio, the maximum foreign ownership ratio is 49 per cent.

      　 [Regulated sectors]

      There are existing limitations in certain sectors, and require that the Prime Minister must issue an investment approval.

      Sectors by law in which investment is subject to conditions:

      ·         Sectors impacting on national defense and security, social order and safety.

      ·         Banking and finance sector.

      ·         Sectors impacting on public health.

      ·         Culture, information, the press and publishing.

      ·         Entertainment services.

      ·         Real estate business.

      ·         Survey, prospecting, exploration and mining of natural resources; the ecological environment;

      ·         Development of education and training.

      ·         A number of other sectors in accordance with law.

       

      ■Restructuring of structures

      　[Division of companies]

      Limited liability and shareholding companies can be divided in to several companies of the same type. This will be subject to decision of the Member´s Council, the owner of the company or the shareholders based upon law. The decision of the division of the company must be sent to all creditors and employees within 15 dates of the decision.

      All divided companies will be liable of the outstanding debts, labor contracts and other liabilities of the dividing company.

       

      　 [Separation of companies]

      The separation of a limited or shareholding company is the transfer of a portion of the assets on a company that already exists into another one newly established and from the same type,

      The decision will be taken by the shareholders meeting, the member’s council or the owner of the company. The separated companies will be jointly liable for the outstanding debts, labor contracts and other liabilities unless it was not agreed before by the creditors, the separating companies, customers, or employees of the separating company.

       

      　[Consolidation of companies]

      A consolidation is when two or more companies of the same type unify or consolidate their assets, rights and interest into another company, the transferrer will then cease to exist. For consolidation, a contract must be prepared and approved by the owner, members or shareholders. According to law, “If the market share of the consolidated company will be from 30% to 50 % in concerned market as a result of the consolidation of companies, the legal representative of the consolidating companies must report to the competition controlling agency prior the consolidation".

       

      　[Merger of companies]

      One or more companies can merge by transferring all their assets, rights, liabilities and interests into another company, the company merging all its assets will then cease to exist. After this is approved by the owner, members or shareholders, after the decision there must be a contract and a business registration according to law. The merger contract must be sent to all the creditors and within 15 days of the decision all employees must be notified.

      By law, "If the market share of the merged company will be of from 30% to 50% in concerned market as a result of the merger companies, the legal representative of the merging companies must report the competition controlling agency prior to the merge, unless otherwise by the law on competition".

    • The law on Securities

       This Law regulates public offers of securities, listing and trading securities, conducting business and investing in securities, securities services and the securities market.

      It´s applicable for any Vietnamese or foreign company, organization or individual participating in investment in securities and activities on the Vietnamese securities market.

       

      ■ Regulation of takeover

      　[The Asset Deal Case]

      In this case the tax attributes are normally lost, tax losses cannot be transferred. Assets must be depreciated based on the acquisition price.

      　[The Share Deal Case]

      The purchaser will take over the company and retain all tax attributes. This types of acquisitions are commonly structured as direct investments from offshore. Interest charges by the offshore company for the share acquisitions are not deductible against the income of the company trying to buy.

      　[Public offers to acquire]

      Article 32 in the Law on Securities states an offer to purchase voting shares and where the entities must sell its shares must be made by a public offer to acquire and that any organization or individual who must make a public offer to acquire shares in a public company must register the public offer to acquire with the State Securities Commission. The Commission must give a written opinion within seven days from the date they received the application, if the commission rejects the application the commission must give a reason why it was rejected.

       

      ■Registration to acquire a public offer

      By law a request for registration of a public offer to acquire must be done to the State Securities Commission to be approved and must contain:

       (1) Name and address of the organization or individual.

       (2) Class of shares the subject of the offer to acquire.

       (3) Number of shares the subject of the offer to acquire which such [acquiring] organization or individual currently holds.

      (4) Proposed number of shares the subject of the offer to acquire.

       (5) Duration for implementation of the offer.

       (6) Acquiring price.

       (7) Conditions of the offer.

       

      ■Board of directors which is subjected to the company, duty of board of directors which is subjected to the investment fund.

      Directors and members of the management board must submit reports accurately and truthfully per law, because if not the Government has imposed criminal sanctions for insider trading, fraudulent reporting, and securities price manipulation.

      The Board of Management must send the company’s opinion on the tender offer to the State Securities Commission and to all shareholders within 10 days from the date of receipt of the registration. Within seven days, the acquirer must publicly announce the tender offer in three consecutive editions, online or in newspapers.

       

      ■ Regulation of insider trading

      In Vietnam prevention for insider trading is promoted as in other countries. This problem is addressed in Article 9 of the Law on Securities which prohibits a person from:

      • To use inside information to purchase or sell securities.
      • To disclose or give inside information to another person.
      • To advise another person to purchase or sell securities based on inside information.

      This article includes all types of securities such as, stocks, bonds, and investment fund units, pre-emptive rights, warrants, call options, put options, future contracts, pool of securities, and securities indices.

      ■ Price decision of takeover

      Assets must be valuated before a transaction with an agreement between both parties, seller, and buyer. Assets are subject to VAT when sold, the seller is subject to corporate income tax at 22 % on every gain from the asset.

       

      ■ Withdrawal of takeover

      Exit mechanisms or withdrawals are unclear by law, it is not specified if these mechanisms must be enforced or not in Vietnam. Binding precedents are not commonly applicable in Vietnam, each case is decided based on facts and applicable laws.

       

      ■Trade of takeover

      　[Public offering]

      A public offer is an offer to sell shares, bonds, or fund certificates through the mass media or to at least a hundred investors. The process of a public offer and listing is different but a company can do both at the same time. The General Meeting of Shareholders approval is required for the issuance and the plan utilization, the issuer must place the shares for trading on the stock exchange within one year from the date of completion of the public offer.

      There are no special tax laws or regulation applicable to capital gains derived from a corporate shareholder or from an initial public offering.

      　[Terms of public offering]

      ·         For Shares: the issuer of shares must be a shareholding company with paid-up capital of at least 10 billion VND at the time of registration.  By law on if the company is in the infrastructure or high technology sector, the company must have an underwriter and a bank supervising the earnings from the offer.

      ·         For Bonds: An issuer of bonds must have a paid-up capital of at least 10 billion VND at the time of registration, must have earnings from the year before the public offer, and with no accumulated losses before the registration of the offer and no more of 100 overdue debts payable. There must be an issue plan and a plan for the utilization and repayment of earnings.

      ·         For Fund Certificates: the issued funds must be of at least 50 billion VN, with an issue plan and a plan for investment of the capital funds earned.

       

      The issuer must prepare a prospectus according to Law 70, this must include the financial statements of the issuer for the 2 years prior to the Public Offer, and must be signed by the chairman of the board of management, the general director, the financial director or accountant and the legal representative of the underwriter. The issuer must register as well the Public Offer before the State Securities Commission, which has 30 days to certify the registration after the submitting of the registration statement,

      　[Number of shareholdings and securities]

      Securities in a public offer may be distributed by underwriters, who must be authorize by the State Securities Commission to underwrite the issues of bonds. Its role is to asset in the purchase of securities for resale and to help distributing the securities to the public.  Investors that with o buy securities may be Vietnamese or foreign investors (foreign investors must apply for a securities trading code first)

      The issuer must allocate the securities within 90 days from the State Securities Commission certificate of acceptance, and physically deliver the securities to investors within 30 days from the date the offer ends.

       

      ■ Prohibitions for M&A transactions.

      The Competition law has two categories that prohibits conduct, the anticompetitive conduct, and the unfair business practices.

      The anti-competitive conduct prohibits agreements against competitions, abuse of monopolies and economic concentrations.

      The unfair business practices, for the protection of the consumer and small businesses, prohibits, misleading instructions, violation of business secrets, coercion, unfair competitions by using misleading advertisements, discrimination and illegal multi-level selling known as pyramid selling.

      With these two categories, there are two competition authorities in charge of administering competition laws, the Vietnam Competition Administration Department (VCAD) and the Vietnam Competition Council (VCC).

       

      ■ Obligation which is execution of takeover

      Circular No. 18/2007/TT-BTC delivered by the Ministry of Finance in March 13 of 2007, provides detailed provisions on public companies redeeming their own shares and re-selling them, and regulates other cases for issuance of additional shares by public companies.

    • Competition Law

      The Competition law states that any company in a dominant market position is not allowed to follow practices that might damage competitors or customers such as, selling goods or providing services below total prime cost of the goods aimed at excluding competitors. Fixing an unreasonable selling or purchasing price or fixing a minimum re-selling price for goods or services.

      Restraining production or distribution of goods or services, limiting the market or impending technical development. To apply a different commercial condition to the same transactions aimed at creating inequality in competition. And preventing market participation for new competitors. Imposing conditions on other companies by forcing them to sign contracts for the purchase and sale of goods and services with obligations not related to the contract.

    • Arrangement of WTO.

      The WTO agreements are a set of rules for members to ensure free foreign trading. Viet Nam has been a member since 11 January 2007. The agreements can be for goods, services, intellectual property. The “Trade Policy Review” is in charge on regulating rules in all countries. All WTO members are subject to review, with the frequency of review depending on the country's size.

    • Accounting standard

      ■ Accounting standard

      The VAS (Vietnamese Accounting Standards) financial statements are the statutory and primary financial statements in Vietnam and are issued by the Ministry of Finance of Vietnam. The Department of Accounting and Auditing Policy of the Ministry of Finance has formed the Vietnamese Accounting Standards Board (VASB) to develop and approve these standards. Until now the Ministry of Finance has issued 26 “VAS” and additional rules known as “circulars”.

      Vietnamese companies that must report to foreign investors prepare financial statements using IFRS Standards, but, those IFRS financial statements are supplementary financial statements published in addition to the financial statements prepared using the Vietnamese Accounting Standards (VAS).

       

      ■System of audit

      The system of Vietnamese Audit Standards oversees applying principles and procedures for auditors and auditing companies in accordance with law and regulations.

      Vietnamese Standards on Auditing (VSAs).

       

      Companies and organizations that must be audited are:

      ·         Foreign-invested companies

      ·         Credit institutions

      ·         Financial and insurance institutions

      ·         Public companies, issuers, and securities trading organizations.

    • Tax related mergers and acquisitions

      ■ Overview of acquisitions of assets and shares

      The benefits of a share purchase are that the purchaser may benefit from corporate income tax incentives and from tax losses, as well, a share purchase is not subject to VAT.  Share Purchases lead to ownership of all the company or just a part of it.

      In an asset purchase the full price of the purchase can be depreciated or amortized for tax purposes, no previous liabilities from the company are passed to the purchaser.  To be able to purchase Vietnamese assets, the buyer must establish a Vietnamese company to hold the assets.

       

      ■Acquisitions of assets

      　[Good will]

      Tax in Vietnam is applied on an entity-by-entity basis (i.e. no group consolidation for tax purposes). Acquired goodwill may be amortized over a maximum period of 3 years

       

      　[Depreciation]

      Depreciation of new and used fixed assets is calculated based on the historical cost and useful life of the fixed assets within the regulated time frame.

      The timeframe for plant and equipment is from 2 to 30 years, depending on the types of equipment. The depreciation timeframe for intangible assets is from 2 to 20 years. Goodwill, patents are not considered as intangible fixed assets for tax purposes and may only be amortized over 3 years.

      An asset is considered to be a fixed asset for tax depreciation purposes where all the following conditions are met:

      • When there is certainty that a future profit will be obtained from utilizing the assets.

      • When the useful life of such asset is at least 1 year.

      • When the value of such asset is at least 30,000,000 Vietnamese dong (VND)

      A company should be able to determine the useful life of its fixed assets within the regulated timeframe.

       

      　[VAT]

      The transfer of most assets are subject to VAT . The VAT tax is imposed on goods and services at three rates: 0 percent, 5 percent, and 10 percent. But the standard VAT rate is 10 percent.

      Business establishments are not required to declare and pay VAT on the following transactions:

      1-    capital asset contribution for establishing an enterprise

      2-    transfer of assets between dependent cost accounting entities

      3-    transfer of assets on demerger, division, consolidation or conversion of form of the enterprise.

       

      [Stamp duty]

      In Vietnam there are no stamp duty taxes but there is a registration fee for certain types of assets.

       

      Type of asset

      Stamp duty registration fee

      Land and housing

      0.5%

      Ships and Boats

      1%

      Deep-sea fishing boats

      0.5%

      Motorcycles

      1-5 %

      Automobiles

      2-20%

      Shotguns and sport guns

      2%

       

      1.1.3      Acquisitions of shares

      　　　　　[Transfer price]

      Vietnam´s transfer pricing rules are being enforced focused especially on foreign invested companies. Transfer pricing rules normally apply when transactions are under common control. Transactions are required to meet the arm’s length standard. Vietnam follows the Organization for Economic Co-operation and Development guidelines but with local modifications.

      　[Capital gain tax]

      The taxable gain is the difference between the sales proceeding from less investment cost and transfer expenses. Capital gain tax in Vietnam is 22%.

      Gains from the sale of shares in a public company, recognized as securities, can be subject to tax at 0.1 percent of the gross sales proceeds, this replaces the capital gains tax applicable on net gains.

      　[Tax indemnities and warranties]

      Tax indemnities and warranties for contingent tax liabilities should be thoroughly addressed in the transaction agreements. Because the tax exposures of a target company can be transferred to the purchaser after the share purchase transaction is complete. For this reason, customary tax due diligence exercises are important for identifying significant tax issues in M&A transactions.

      　[Net loss carried over]

      Losses may be carried forward for a maximum of five years. Carryback of losses is not permitted.

      　[Dividend before sale]

      Dividends are not subject to withholding tax and if dividends are received by a Vietnamese company the dividends are not subject to corporate income tax.

      　[Repatriation of profit]

      Profits may be extracted through the payment of royalties, service fees and interest. But each one of these is subject to many different limitations on terms of withholding taxes and transfer pricing rules.

      　[Corporate income tax]

      Companies in Vietnam are subject to a standard Corporate Income Tax rate of 25%. For Oil, Gas and companies involved in the exploitation of precious minerals the tax rate can be 32% to 50%, depending on the project.

      Different rates apply, for capital investments, is a 5%, for real property transfers is 25% and 20% for share transfers.