The Ministry of Industry and Trade (MOIT) under the Vietnam Competition and Consumer Authority (VCCA) has recently issued its report on economic concentration activities in Vietnam over the period from July 2019 to July 2021. (You can access the report in English on the MOIT’s website here.) This article will briefly review some of the main findings of the report and discuss the recent developments in the laws that affect economic concentration, or Merger and Acquisition activities within Vietnam.
The VCCA found that the 2019 and 2020 totals by the value of economic concentrations in Vietnam fell. In 2019, the total M&A value was USD 7.2 billion, down 6% from the year before. And the total M&A value of 2020 is USD 3.5 billion, almost a 50% drop in value. The report attributes this year-on-year decrease in actual economic concentrations on the Covid-19 pandemic and its effects on worldwide FDI. One thing that the report found is that the number of Vietnamese enterprises acquiring Vietnamese enterprises has increased as a proportion of total economic concentrations over time. The geographical location of M&A is also of interest. Nearly a third of reported M&A occurred outside of Vietnam’s territory, though the ultimate effects of such concentration occurred in Vietnam. This is a result of relatively recent changes in the laws that require certain offshore M&A to be reported to Vietnamese authorities.
As far as the sectors involved in M&A over the two years covered by the report I’ll quote directly:
Over the past two years, economic concentration transactions in Vietnam have taken place
in many sectors and fields, from manufacturing, trading of goods and services to
exploitation and use of resources. In which, some sectors of goods and services with
economic concentration activities took place more ebulliently with large transaction values
or a large number of transactions, typically: real estate, services, manufacturing and trading
in automobiles, motorbikes and their components and spare parts, construction materials,
electricity, power electronics, plastics, industrial and medical equipment, food and
beverage (beer, beverage), energy (traditional energy and renewable energy).
One number of interest is that over the two-year period the VCCA reported 125 applications for assessment of which 112 transactions were approved after a preliminary assessment and 13 transactions were referred for an official assessment. The report concludes with a review of the VCCA’s scope and authority and a discussion of exactly what types of economic concentrations fall within its purview.
Merger Control Rules
For merger control purposes, the Law on Competition (LoC) aims to prevent negative impacts on competition in relevant markets. To accomplish this, the VCCA applies the effects–based approach and broad tests are applied. For example, under Art 29 of the LoC, forms of economic concentration comprise, among others (merger / consolidation / joint ventures), an acquisition of enterprise which means a direct/indirect acquisition of capital/assets, sufficient to control or influence the target or its trades/business lines (the Control test). Such control test is defined broadly, and may be met if the acquirer will hold:
- more than 50% of capital/voting rights in the target,
- ownership/use right of over 50% of assets of all or one business lines of the target;
- one of the following control rights in the target:
- To directly or indirectly decide the appointment, removal, or dismissal of a majority or all of the members of the board of management, chairman of the members’ council, director or general director of the acquired enterprise;
- To decide the amendment of or addition to the charter of the acquired enterprise;
- To decide important issues during business activities of the acquired enterprise comprising selection of the form of organization of business, selection of business lines and the geographical area and forms of business; selection to adjust the scale and the business lines; selection of the form and method of raising, allocating and utilizing business capital of such enterprise.
- The by laws may trigger a merger filling requirement if such merger meets the control test and any of the 4 following thresholds (size tests, i.e. the size-of-transaction, market share, assets and revenue), based on the fiscal year preceding the transaction:
|Total assets of one of the parties (including affiliates) in Vietnam (i.e., size-of-person)||VND15,000b/
|VND15,000b||20% of total assets of all credit institutions in Vietnam||VND3,000b/
|Total sales/purchase revenue of one of the parties (including affiliates) in Vietnam (i.e., size-of-person)||VND10,000b/
|VND3,000b||20% of total sale revenue (not purchase costs) of all credit institutions.||VND3,000b|
|Transaction value (i.e., size of transaction), for onshore transaction only||VND3,000b||VND 3,000b||20% of total charter capital of all credit institutions||VND1,000b/
|Combined market share of the parties||20%||20%||20%||20%|
2. Merger review
There is a two-phase process by the regulator, VCCA comprising a preliminary review (30 days) and an official review (90-150 days, a complicated process, applied in certain cases, e.g. dominant position when the combined market share is 20% or more). Results may be returned from such merger review as an unconditional clearance (authorization), conditional clearance, or rejection (prohibited merger).
3. Critical risk/consequence of violations (Decree 75/2019 and Art 110 LoC):
- Fine: up to a maximum 5% of the total turnover of the violating enterprises on the relevant market in the fiscal year immediately preceding the year of violation;
- Other potential sanctions: revocation of license (ERC), confiscation of profits earned from the violation;
- Further orders may be imposed: restructure business; Remove illegal provisions from a business contract or transaction; Divide, separate or re-sell part or all of the capital contributions or assets formed further to an economic concentration; Be subject to price control measures for the contracts of the enterprise formed further to an economic concentration.
Economic concentrations, then, are a major way for enterprises and investors to add value to their investments, but as of recent years, they have come under increased scrutiny by Vietnam’s regulators. Hopefully, this post has provided some background to understand the current M&A situation and some of the requirements for reporting upcoming M&As to the authorities.