Earlier this month in a report by Bloomberg (here) and elsewhere the rumors seemed confirmed that Singapore’s Grab and Indonesia’s Gojek were in discussions anticipating a merger. While neither company is incorporated nor headquartered in Vietnam, they both have subsidiaries and substantial business in the country and their merger at an international level will have a major effect on each company’s market share there.
Grab, the oldest and largest ride hailing service in Vietnam (for more on Grab’s tax treatment by Vietnam see our post here), possesses nearly 75% of the market share while Gojek competes for the leftovers with half a dozen other companies. If the merger does go ahead, the questions for Vietnam include what will happen to each company’s subsidiaries and assets in the country (will Gojek dissolve and its assets be subsumed by Grab or will the two subsidiaries themselves merge or will there be some other formula agreed upon by the two headquarters), and what the Vietnamese government has to say about it?
A little over two years ago the National Assembly passed a new competition law which sets out the guidelines for obtaining approval in the case of mergers and acquisitions that occur either within the country or that affect the country. Under that second prong, Vietnam’s government claims that they have the ability to approve M&A of companies outside of Vietnam if such a deal will “have or may have a competition-restraining impact on Vietnam’s market.” As Grab has such an overwhelmingly large market share of an approximately 2 billion USD business, it is reasonable to suspect that the government and those tasked with oversight of “economic concentrations” will require Grab and Gojek to obtain approval from Vietnam regulators prior to closing the deal.
But what steps must the two companies take to obtain Vietnam’s signature on the deal and how long can they expect it to take?
M&A Approval in Vietnam
For companies that are required to obtain regulatory approval prior to M&A activities, the application of competition law scrutiny falls theoretically under the purview of the National Competition Commission, but as that entity has yet to actually be created, the Vietnam Competition and Consumer Authority, or VCCA, is currently examining applications for economic concentrations. The VCCA was created under the old competition law and receives submissions via the Ministry of Industry and Trade, or MOIT. Regardless of what government organ performs the task, the rest of the details remain the same.
Dossier Submission Requirements
When Grab and Gojek determine the details as they concern Vietnam, they will then submit their application with supporting documentation which includes:
- an application in the form prescribed,
- Draft contents of the agreement on economic concentration, or draft contract or memorandum of understanding on economic concentration between the enterprises;
- Valid copy of the enterprise registration certificate or equivalent document of each of the enterprises participating in the economic concentration;
- Financial statements of each enterprise participating in the economic concentration for the two consecutive years immediately preceding the year of notification certified by an auditing organization as required by law;
- List of parent companies, subsidiary companies, member companies, branches, representative offices and other subsidiary entities (if any) of each of the enterprises participating in the economic concentration;
- List of all types of goods and services in which each of the enterprises participating in the economic concentration is currently conducting business;
- Information about market share of each enterprise participating in the economic concentration in the sector in which the economic concentration is proposed to be implemented for two consecutive years immediately preceding the year of notification of the economic concentration;
- Plans for overcoming the ability to cause competition-restraining impact by the economic concentration;
- Report on assessment of the positive impact of the economic concentration and measures for enhancing the positive impact of the economic concentration.
As you can see, then, the requirements are not particularly onerous so much as time consuming. The list is long and each item contains yet more tasks to accomplish, but much of this information should be available through a regular due diligence exercise and lacks only compilation in the proper form for submission to the VCCA. Of note, here, is that the last three items: information about market share, plans for overcoming competition restraining impact, and positive impact should be particularly well prepared. As we will see, they play the most important role in obtaining an approval from the VCCA, especially for larger M&A deals like the one contemplated in this article.
Once the VCCA has received a complete and proper submission dossier from the companies intent on M&A, they will first conduct a preliminary appraisal. This process is a low level review that can often satisfy the requirements of law and, at the decision of the VCCA, approve the M&A or refer it for further review at the official appraisal level.
When conducting a preliminary appraisal, the VCCA looks at three elements of the proposed M&A:
- Combined market share of the enterprises participating in the economic concentration in the relevant market;
- Extent of concentration in the relevant market before and after the economic concentration; and
- The relationship of the enterprises participating in the economic concentration in the chain of production, distribution and supply of a certain type of goods or services or whether their business lines are mutual inputs or complementary to assist each other.
While I could break out each point in more detail, as the competition law has specific criteria it looks to in determining market share and concentration. It also has some specific formulae for finding whether an M&A can be approved with just a preliminary appraisal or whether it requires further review. Regardless of the outcome of the preliminary appraisal, the VCCA has only 30 days to make its decision. If they fail to notify the applicants of any decision, such failure may be interpreted as approval and the M&A may proceed to closing. If, however, the VCCA decides the M&A requires further examination then they will open an official appraisal of the deal.
This is the second level of review applied to proposed M&A in Vietnam that is too large or too complex to be approved with a simple preliminary appraisal. This process is lengthier and the VCCA is allowed up to 90 days to complete its review and, in extremely complex cases an additional 60 days on top of that. Here, the VCCA is less concerned about the basic numbers–as the deal is obviously too big or complicated to be satisfied with the formulae provided for the preliminary approval–but with the overall effect the deal will have on competition in the relevant market.
In making its decision to approve or refuse or condition a large M&A, the VCCA looks at three specific elements of the deal as follows:
- Assessment of significant competition-restraining impact or ability to cause significant competition-restraining impact of the economic concentration, and measures for remedying competition-restraining impact;
- Assessment of positive impact of the economic concentration in accordance and measures for enhancing positive impact of the economic concentration; and
- Overall assessment of the ability to cause competition-restraining impact and the ability to cause positive impact of the economic concentration as the basis for consideration and decision on the economic concentration.
As you can see, this is where the last three parts of the application dossier really come in useful. Here, too, there are fewer guidelines for making such determinations as the Government deems these criteria less able of reduction to pure numbers. The pay scale of those making the official appraisal is higher and their autonomy greater. The reviewing officials with the VCCA may refer to other ministries or departments as necessary but are not required to appeal to the Prime Minister or National Assembly at any point. (It is important to note, however, that if foreign investors are involved and the M&A causes a material change in the scope or nature of the previously approved investment certificate, there may be additional steps necessary that could involve such approvals, though that is an issue for the local Department of Planning and Investment, not the MOIT or the VCCA.)
Unlike the 30 days deemed approval of the preliminary appraisal, failure of notification of a final decision by the VCCA after an official appraisal does not signify default approval, though tardiness on their part may provide the constituent parties with possible remedies. Whenever the VCCA issues its decision it will be in one of three forms: approval, denial, or conditional approval. There are four types of conditions which the VCCA can impose upon a proposed M&A deal before allowing it to proceed to closing and they include:
- Division, separation, and/or reselling part of the capital contribution or assets of the enterprises participating in the economic concentration;
- Controlling content related to the purchase or selling price of goods, services or other transaction conditions in contracts of the enterprise formed after the economic concentration;
- Other measures for overcoming the ability to cause the effect of restricting competition in the market;
- Other measures for enhancing the positive impact of the economic concentration.
These conditions are fairly liberal in their lack of definition, and the opportunity for abuse is present, but the Government’s interest in fostering economic productivity is suggestive that the conditions, in general, will not be too onerous.
Once the decision is announced, then, the enterprises–in this case Grab and Gojek–will then be allowed to proceed to closing. But if one or both of them dispute the results of the VCCA’s official appraisal, they have limited options for appeal. While not directly stated in the law, appeals to the Chairman of the VCCA are for decisions of the VCCA not appraisals per se. This may seem somewhat limited, but it does concentrate the decision making power in one individual rather than in a committee and provide some degree of separation from the original decision. Unfortunately, there is no other appeal provided unless as may be allowed under general administrative law.
Grab and Gojek, therefore, would be subject to this process should they decide to proceed with their reported merger talks. Vietnam will have a say in any such merger–at least as far as its effects in Vietnam are concerned–regardless of the fact that neither company is incorporated in the country. This is true of any M&A activity that has a major effect in the Vietnamese market and especially true of such major players as Grab and Gojek. Hopefully, then, these two behemoths will consider this before deciding to move too swiftly towards a desired merger.