Last week I wrote about the process of obtaining approval for outward investment by Vietnamese citizens (see Establishing an Offshore Holding Company for Vietnamese Startups). For many Vietnamese startups, that’s only the first step in the process of reorganizing their enterprise to make it viable for foreign Venture Capitalists (“VCs”) and other investors. The second step is in converting the original Vietnamese enterprise into a foreign-owned enterprise, one owned by the offshore holding company we discussed last week.
This week, with the help of one of our legal assistants, Ms. Nguyen Thi Thanh Truc, I want to go through the process that the now foreign company must go through in order to acquire the original Vietnamese startup for the purposes of becoming a foreign-owned subsidiary and improving the startup’s scalability and appeal to foreign investors.
In one instance we worked on recently, the startup founder had to capitalize the offshore company in order to have the funds available to purchase the startup prior to funding from angel investors. Ideally, the purchase by the offshore company can be made using a foreign partner or investor’s funds to capitalize the offshore company and thus avoid the need to obtain the outward investment approval I wrote about last week, but failing that, the offshore company will have to go through certain steps to purchase the Vietnamese startup.
In most cases that we’ve seen, the Vietnamese startup is originally fully locally owned (the “LocalCo”) prior to the investment by the offshore company. More often than not, this investment converts the LocalCo into a 100% foreign-invested enterprise with the offshore company buying all the shares in the company as a single-member limited liability company or a lesser percentage with a few shareholders remaining in Vietnam (usually the founders) to meet the three shareholder minimum for joint-stock companies.
According to Truc, the process in general for the conversion from a LocalCo into a foreign-owned subsidiary by the acquisition of all or a part of shares or charter capital in the LocalCo by the offshore company requires a few steps:
- Step 1: Foreign Investment Registration for the acquisition of a capital portion
- Foreign investment registration approval is required if the acquisition by foreign investors (“Foreign Investor”) leads to:
- increase in foreign ownership in the Target doing businesses under List of Conditional Sectors;
- increase in foreign ownership in the Target from less than 50% to more than 50% of its charter capital; or
- increase in foreign ownership in the Target where foreign ownership already exceeds 50% of its charter capital
- Other notes:
- The timeline for approval is 15 days from the day the DPI receives the duly prepared dossier, excepting for the case that the LocalCo has a land use right certificate for land on an island or on a coastal or border commune, ward or town, or in another area which affects national defense and security.
- If the DPI approves the acquisition, they will confirm the satisfaction of conditions in relation to the capital contribution or purchase of shares or purchase of capital contribution portions executed by the Foreign Investor (“M&A approval”); and
- The responsible authority is the Department of Planning and Investment where the LocalCo is located (“DPI”).
- Step 2: Opening the investment capital account at a commercial bank in Vietnam:
- The LocalCo is required to open a direct investment capital account (DICA) to receive the investment capital from the Foreign Investor/Offshore company and implement other permitted receipt-payment transactions if more than 51% of the charter capital (equity) of the LocalCo is acquired; or
- The Foreign Investor is required to open an indirect investment capital account (IICA) to transfer the investment capital and implement other permitted receipt-payment transactions if less than 51% of charter capital (equity) of the LocalCo is acquired.
- Step 3: Amendment of enterprise registration contents.
- The required procedures:
- The amended enterprise registration certificate (“ERC”) is required to record: increases of charter capital; changes of name of the LocalCo or its legal representatives;
- Notice of change of the members / owners of the LocalCo (if it is a limited liability company) or notice of change of foreign shareholder (if it is a joint-stock company) to record the information of the Foreign Investor as member / owner / foreign shareholder of the LocalCo; and
- Conversion of the form of LocalCo from LLC into JSC and vice versa as required by the situation.
- Other notes:
- Timeline: three working days from the day the DPI receives a properly prepared dossier;
- Deliverables: amended ERC and Confirmation on change of enterprise registration contents issued by the DPI; and
- Responsible authorities: DPI.
As we’ve noted for several of our clients, these procedures must wait until the offshore holding company is incorporated and registered at the relevant jurisdictions’ regulatory authorities. Only after the legal or authorized representative of that company has the power to enter into contracts on behalf of that company can they finalize the application for registration of their foreign investment (if required under Step 1). It is also important to note that if the offshore company is acquiring 50% or less of the shares of the Vietnamese startup, and there are no other existing foreign shareholders of that company, then they will not have to go through Step 1 but will be subject to the requirements outlined in Steps 2 and 3 as regulated by the Enterprise Law.
This step is easier for the Vietnamese startup as foreign direct investment into Vietnamese enterprises has had an increasingly popular background since it first became an option back in the mid-1990s. So long as the offshore company satisfies all anti-money laundering requirements in setting up a company in Vietnam, and the requirements of the Investment Law and Enterprise Law, then there should be little difficulty for the offshore holding company to acquire the Vietnamese startup. And once that’s done, the VC or other investor can inject capital into the offshore entity, take a shareholding in the offshore entity, and be governed by the offshore jurisdiction, effectively separating the investor from Vietnam legally. Maybe an ideal situation for the investor, but it does put all of the liability for the actions of the startup to the government of Vietnam on the shoulders of the founders. Something to think about before bowing to the demands of a foreign VC.