A while ago I was working with another lawyer on an M&A deal. The target company was a Vietnamese entity that operated in a restricted sector. This meant that foreign ownership was limited. Our client was a foreign entity that had a Business Cooperation Contract with the Vietnamese entity that stated that the foreign entity would benefit when the Vietnamese entity was sold. As part of this BCC, the foreign entity had invested heavily in the Vietnamese entity.
Now, come time to sell the Vietnamese entity, the question arises as to whether the BCC is enforceable.
I remember standing outside the conference room where we had just met with the client–the owner of the foreign entity–and discussing the transaction. This foreign lawyer turned to me and essentially said: “If you have any ideas, we need to make sure the BCC is enforced.” In other words, she wasn’t sure the courts would accept the BCC as something legitimate.
According to Vietnamese law, a BCC should be something that is enforceable and acceptable to the courts; however, the courts have little experience in interpreting and enforcing BCCs. They look at them askance, and wonder whether they should be allowing their use. This is because the BCC operates, in many aspects, as a substitute for a joint venture. At least, that’s the stated purpose in the Law on Enterprises.
The idea is that enterprises–particularly infrastructure investors–be able to invest in projects that are capital intensive without having to form an entity in Vietnam. The problem is that they are not necessarily the safest way to invest in the country. The allure, though, is that they offer a cheap alternative to entity formation and allow for cooperation between foreign investors and domestic entities.
This is not enough to risk your money on. If the courts don’t understand them, and the laws don’t explicate them, which is the case, then there is no reason for foreign investors to trust them. Take the time, and spend the little extra money, to form a joint venture. It’s safer, the courts understand it, and the laws governing it are well developed.
Be smart, do it right.