On 17 June 2020, Vietnam’s National Assembly passed a new law on investment. The new law offers some new approaches to investment–both domestic and foreign–in the country and broaches new territory for encouraging and regulating the sector. As I’m looking at M&A recently, I thought I would discuss two of the major developments in the new law that affect foreign investors seeking to acquire Vietnamese enterprise.

While there are changes that simplify the Government’s approach to approving foreign investors in regulated sectors, and benefits enumerated for SME startups, the two major changes affecting M&A come in a change in the determination of foreign ownership ratios and the situations in which regulatory approval–separate from competition law issues–is required for an acquisition to proceed.

Change to Foreign Ownership Ratio Determinations

Under the Current Investment Law, an economic organization must satisfy the conditions and carry out investment procedures in accordance with regulations applicable to foreign investors upon investment for establishment of an economic organization; investment in the form of capital contribution or acquisition of equity in an existing economic organization; or investment on the basis of a business cooperation contract, if:

  1. 51% or more of its charter capital is held by a foreign investor(s);
  2. 51% or more of its charter capital is held by an economic organization(s) that has 51% or more of its charter capital held by foreign investor(s); or
  3. 51% or more of its charter capital is held by a foreign investor(s) and an economic organization(s) that has 51% or more of its charter capital held by foreign investor(s).

If, therefore, capital contribution or equity investment by a foreign investor brings a domestic enterprise under the umbrella described above, then the enterprise must obtain an M&A approval and obtain an investment registration certificate. 

The new law on investment doesn’t significantly alter this threshold, but it does reduce the gray area between 50% and 51% where a foreign investor might own a smidgeon majority share of an enterprise without having to go through investment registration procedures. The new law reduces the foreign ownership ratio from “51% or more” to “more than 50%”, thus creating a cut and dried majority threshold and disallowing foreign control of domestic enterprises. Ostensibly, this change is for the purpose of consistent with provisions of controlling interest stipulated under the new enterprise law, which was passed by the National Assembly at the same time as the law on investment.

M&A Approval Requirement Clarified

Under the Current Investment Law, a foreign investor must obtain an approval from the licensing authority before making a capital contribution, or acquiring equity, in an existing economic organization where such economic organization operates in industries or business lines in which investment is conditional to foreign investors, or capital contribution or equity acquisition results in 51% or more foreign ownership of the economic organization. However, there has been some confusion in terms of interpretation and implementation of this provision, mostly due to different legal points of view taken by licensing authorities in different provinces. This has been especially tricky when a foreign investor already controls a Vietnamese enterprise and additional foreign investment is contemplated. 

The new law on investment regulates specific instances where such approval is required. Those instances include:

  1. Any increase in foreign ownership in the economic organization engaging in business lines listed in the List of Restricted Sectors;
  1. An increase of foreign ownership in the economic organization that is less than or equal to 50% to more than 50% of the charter capital;
  1. An increase of foreign ownership in the economic organization where foreign ownership of the charter capital already exceeds 50% of the charter capital; or
  1. The economic organization utilizes land located within areas having an effect on national security, such as sea-islands, borderlands and coastal areas, etc.

This means that M&A transactions that retain the same level of foreign investment, or decrease it, are not subject to obtaining regulatory investment approval from the MPI, as well as an increase in foreign investment in an enterprise that fails to raise the foreign ownership threshold in said enterprise above 50%. While not entirely simplifying the situation, this does go towards clarifying certain confusing points that prevailed under the current law on investment.

M&A in Vietnam has progressed tremendously from the initial issuance of the foreign investment law back in the nineties and with the issuance of this new law on investment the National Assembly has taken another step in clearing ground that was previously difficult for foreign investors to conduct their business in Vietnam. If you have questions about the new law on investment of M&A in Vietnam, please feel free to contact your lawyer in the firm, or visit our site at www.indochinecounsel.com. We will be posting an alert outlining all of the changes in the ew law soon.

This blog post gained greatly from that alert which was prepared by Le Thanh Cong, et al.