THEORETICAL OVERVIEW OF M&A
Definition of M&A
M&A is an economic term without official definition Instead of defining M&A, the researchers and law-markers give the definition of two separate words: Merger and Acquisition
Mergers involve the combination of two or more companies into a single economic entity, where the assets and liabilities of the selling firm are absorbed by the purchasing firm, which maintains its original identity despite potential organizational changes In contrast, acquisitions typically refer to a corporation seeking to gain a controlling interest in another by inviting its shareholders to tender their shares, allowing the acquiring firm to purchase specific assets, divisions, or even entire companies.
M&A with respect to economy is a process of procedures that leads to the change in capital structure and corporate governance of the parties 5
Vietnamese law, as others law around the world, has no direct definition regarding M&A, however, M&A activities are specified in several legislations
According to Articles 152 and 153 of the Law on Enterprises 2005, a merger occurs when one or more companies of the same type transfer all their lawful assets, rights, obligations, and interests to an existing company, resulting in the ceasing of their existence In contrast, consolidation involves two or more companies of the same type transferring their assets, rights, obligations, and interests into a newly formed company, also leading to their dissolution Notably, the Law on Enterprises 2005 does not provide a definition for acquisition.
Law on Investment 2005 regarded M&A as a direct investment form which excluded capital capital share and purchase of shareholding 6
3 J Fried Weston, Kwan S Chung, Susan E Hoag (1990), supra note, p.4
4 Sherman, Andrew J (2011), Mergers and acquisitions from A to Z, American Management Association, US, p.2-3
5 Cited by Tran Thi Bao Anh (2012), Legislation regulating on mergers and acquisitions of enterprises in
Vietnam, Final report of scientific research of the Ministry level, p.15
6 Article 21 and Article 25, Law on Investment 2005
The Law on Competition 2004 outlines definitions for mergers and consolidations that closely align with those in the Law on Enterprises 2005 Additionally, it defines an acquisition as the purchase of all or part of another enterprise's assets, enabling the acquiring enterprise to control or govern the activities of the acquired entity.
Mergers and Acquisitions (M&A) are defined under Article 904 (1) of the UK Company Act 2006, which states that a merger involves the transfer of the undertaking, property, and liabilities of one or more public companies to either an existing public company (merger by absorption) or to a newly formed company (merger by formation of a new company).
A merger involves the combination of two companies to form a new entity, while an acquisition occurs when one company buys the assets, rights, and obligations of another Both mergers and acquisitions are part of the broader category known as M&A transactions, which can take various forms and exhibit distinct characteristics as discussed in the following sections.
Related concepts
M&As related to a variety of concepts, among the most important of which as follows
Market share reflects a company's position within a specific market for goods or services Generally, a higher market share indicates greater competitiveness, as it not only enhances the company's influence but also establishes barriers that limit competition.
Economists will accurately assess market share using guidelines established in legislation As outlined in the Law on Competition 2004, market share is determined by comparing an enterprise's "turnover" to the total turnover of all enterprises within the relevant market for a specific good or service This relationship can be expressed through a specific formula.
"Assets" encompass both tangible and intangible resources of an enterprise While intangible assets, such as creations, land use rights, and patents, cannot be precisely quantified, they provide significant long-term benefits to the organization.
8 trademarks, licenses, concession licenses, brand credibility,… 9 Tangible assets mean the other assets of enterprise such as goods, tangible fixed assets, stocks, etc
Foreign investors defined in this thesis are simply enterprises, specifically 10 :
- An enterprise duly constituted and organized under foreign law (hereinafter foreign enterprises)
- An enterprise duly constituted and organized in Vietnam with the foreign holding ratio over 49%
Enterprise means an economic organization, which having its own name, permanent office, and having organized for the purpose of conducting business operation 11
Enterprises in Vietnam include both foreign and domestic entities, with Vietnamese enterprises categorized as sole member limited liability companies, multi-member limited liability companies, joint stock companies, partnerships, and private enterprises Notably, all enterprise types possess legal entity status, except for private enterprises For clarity, the term "company" will refer specifically to those enterprises that have legal entity status.
Control can be defined as the exertion of power to influence outcomes within an enterprise While management typically oversees daily operations, ownership can also exert control by dominating decision-making processes According to the Law on Enterprise 2005, decisions made by the general meeting of shareholders or the member's council require approval from at least 65% of present shareholders or members with voting rights, and at least 75% for significant issues Notably, if a company acquires at least 75% of another's charter capital, it gains complete control over that entity Additionally, Resolution No 71/2006/QH11 permits Vietnamese enterprises to set a lower decision-making threshold in their charters, allowing for a majority of 51% The level of control is thus directly related to the proportion of charter capital held, highlighting the interplay between majority ownership and decision-making authority.
In his 2013 research, PhD Nguyen Trung Thang explores the valuation of trademarks and intangible assets within the context of mergers and acquisitions (M&A) The study emphasizes the importance of accurately assessing these intangible elements to enhance the overall value of the transaction For further insights, the full article can be accessed at Masso Group's knowledge portal.
10 Article 2.1 Decision No 88/2009/QD-TTg
13 Available on http://www.investopedia.com/terms/c/control.asp , last visited at 30 June 2014
15 This provision is directly applied to replace the corresponding provisions of Law on Enterprises 2005
9 shareholders/members and minority shareholders/members and the board of management
In the thesis, the right to control will be mentioned relatively as if an enterprise owns more than 50% of share capitals or ordinary shares of another 16
Characteristic of M&A transactions
From the definition of M&A and practical M&A activities, there are some various characteristic in respect of M&A as the followings:
M&A transactions primarily focus on buyers gaining control over sellers, marking a significant aspect of these strategic dealings Typically, such transactions result in a shift in control and a corresponding change in the strategic direction of the involved enterprises It's important to note that transactions where the corporate governance of the target enterprise remains unchanged do not qualify as M&A transactions.
- An enterprise acquired less than 50% the charter capital or shares of another;
- Financial investments in which an enterprise acquired shareholding of another but have not participated to control the target enterprise
In the context of this thesis, it is preferable for buyers involved in a trade, merger, or consolidation to be enterprises, as this aligns with the objectives of the study.
Thirdly, the subject of M&A transaction is shareholding or capital share of enterprises
In Vietnam, while enterprises have the option to acquire tangible assets like warehouses, licenses, and distribution networks to strengthen their market position, this practice is not widely adopted Additionally, certain types of enterprises are excluded from mergers and acquisitions (M&A), limiting their ability to engage in such transactions.
According to Article 145 of the 2005 Law on Enterprises, owners of private enterprises are allowed to sell their businesses, but the buyer must re-register the enterprise Since private enterprises lack a legal entity, they do not possess their own assets, leading to unlimited liability for the owner This means that the owner and the enterprise are treated as a single entity, with no distinction between their rights and obligations While owners can sell their business, they cannot separate themselves from it.
Article 34 of Decree No 116/2005/ND-CP defines control or domination over other enterprises under Competition Law as a situation where one enterprise acquires ownership rights to assets that allow it to hold over 50% of the voting rights in the shareholders' meeting or management board This level of control enables the controlling enterprise to influence the financial policies and operations of the controlled enterprise, with the aim of deriving economic benefits from its business activities.
Pham Tri Hung (Coordinator) (2010), Legislation regulating on mergers and acquisitions of enterprises in Vietnam, Final report of scientific research of the Ministry level, p.8
17 Michael E S Frankel (2005), Mergers and Acquisitions Basics, Iohn Wiley and Sons, Canada, p.1
18 Ho Chi Minh University of Law, Business entity textbook, p.41
10 private enterprise being sold can be understood as the selling assets of an individual
In a partnership, general partners hold the authority to manage all business activities and bear unlimited liability, whereas limited partners possess voting rights solely concerning issues that affect their rights and obligations Notably, the control held by general partners is non-transferable, and a capital share in the partnership does not equate to control rights Consequently, acquiring all or part of a partnership does not qualify as a merger or acquisition (M&A) transaction.
Legal forms
Mergers and acquisitions (M&A) must adhere to specific legal forms that comply with regulations, despite varying interpretations These legal forms guide the procedures and conditions related to M&A activities While M&A is fundamentally an economic phenomenon, lawmakers focus primarily on aspects that serve public interests, including competition, minority shareholders, creditors, and employees Consequently, parties involved in M&A can choose the most appropriate legal structure based on their unique circumstances.
The Law on Enterprise 2005 does not explicitly address the acquisition of an entire company; however, it can be inferred that both Limited Liability Companies (LLCs) and Joint Stock Companies (JSCs) can be fully acquired by transferring all capital shares or shareholdings to another entity.
Buyers can initiate a tender offer by proposing a premium price that incentivizes shareholders to relinquish control The decision to sell the company requires approval from at least 75% of the members or shareholders present at the meeting, particularly when a merger or consolidation is planned Alternatively, negotiations can be conducted in good faith to achieve unanimous selling approval In the case of a sole member LLC, selling the entire business is straightforward if the owner consents to sell 100% of the capital shares.
19 Pham Duy Nghia (2012), Short criticism from corporate governance perspective Journal of Legislative Research, (10(171)), p.46-49, p 48
21 Luu Minh Duc & Nguyen Dinh Cung (2010), Mergers and acquisitions with respect to corporate governance perspective: theory, international experience and reality in Vietnam, the Journal of Economic Managemant
Available on http://thongtinphapluatdansu.edu.vn/2010/01/01/4271/ , last visited 27 June, 2014
1.4.2 Acquiring capital shares of LLC
In an LLC with two or more members, the transfer of capital shares is restricted, requiring members to first offer their shares to other members or request the company to redeem them If the remaining members or the company decline or cannot purchase the shares, the selling member may then transfer them to a third party Additionally, any new member must be approved by the existing members' council In the case of a sole member LLC, the owner can transfer part of their capital share, resulting in the conversion of the LLC into one with multiple members.
The charter capital of an LLC can consist of contributions made or pledged within a 36-month period, but the Draft New Law on Enterprises 2014 suggests reducing this commitment timeframe to 90 days While members or owners have the right to transfer their contributed capital shares, the question arises regarding the transferability of committed capital shares Although capital contributions are obligations for members, they may represent rights for potential buyers Current regulations do not explicitly address the transfer of committed capital shares; however, Article 315 of the Civil Code permits the transfer of civil obligations with the obligee's consent In theory, committed capital shares could be transferred if approved by the members' council, but the lack of clear guidelines complicates practical implementation Consequently, it is concluded that members or owners are limited to selling only their contributed capital shares.
A Joint Stock Company (JSC) can issue both ordinary and preference shares, with preference shares encompassing various types such as voting preference shares, dividend preference shares, and redeemable preference shares, as specified in the company charter Only shareholders holding ordinary shares and voting preference shares have the right to vote at the general meetings, while voting preference shares are non-transferable In mergers and acquisitions (M&A), shareholding acquisition is exclusively related to ordinary shares.
An LLC is restricted from issuing shares and is limited to a maximum of 51 members In addition to their capital contributions, LLC members maintain a relationship that involves the confidentiality of business information.
26 Article 6.1, Article 6.2, Article 18.1, Decree 102/2010/ND-CP
27 Article 49.3, Draft New Law on Enterprises 2014
Shareholdings can be freely transferred to others; however, founding shareholders are restricted from transferring their shares to non-founding shareholders within the first three years unless approved by a general meeting of shareholders.
A public bid occurs when a company seeks to acquire a significant portion or all voting shares of a public firm to gain control, ensuring fairness for the target company's shareholders This process must adhere to specific principles to maintain equity among all stakeholders involved.
- The tender offer conditions are applied fairly to all shareholders of the target company or the investor of the targeted investment fund
- The parties involved in the tender offer are provided sufficient information to reach the proposal to purchase shares and closed-end fund certificate
- Respecting self-determination right of the shareholders of the target company or the investor of the targeted investment fund
- Complying with regulations of the law on securities and securities market and other relevant laws;
- The party making tender offer must appoint a securities company as an offering agent
When acquiring a public company, buyers seeking control without needing approval from the general meeting of shareholders must conduct public bids in specific situations.
- The buyers who have owned 25% or more voting shares continuously acquire 10% or more voting shares;
- The buyers who have owned 25% or more voting shares continuously acquire from 5% to fewer than 10% voting shares within 01 year since the last public bid
Public bids significantly impact the target company's securities prices when successful, more so than other forms of acquisition The process of public bids is governed by stringent procedures enforced by the Securities Commission.
According to Article 25 of the Securities Law 2006, a public company is defined as a Joint Stock Company (JSC) that meets specific criteria: it must offer shares to the public, have its securities listed on a Stock Exchange or Securities Trading Center, and possess a minimum of 100 investors, excluding professional investors, along with a paid-up charter capital of at least 100 billion VND.
Legal outcomes
Following a merger or acquisition (M&A) transaction, the acquiring company and the target company can select various methods to establish their relationship The outcomes that comply with legal procedures are recognized as legitimate results of the transaction.
The Law on Enterprises 2004 stipulated that merging entities must be of the same company type, preventing private enterprises and partnerships from merging with limited liability companies (LLCs) This regulation has been viewed as inadequate in recent years, prompting the Draft New Law on Enterprises 2014 to propose a revision The new draft allows for mergers between different types of companies, enhancing flexibility in business combinations.
All companies shall cease the existence and a new company shall be established
The Draft New Law on Enterprise 2014 permits the consolidation of two or more companies from different sectors, similar to a merger This law allows private enterprises to merge into a Limited Liability Company (LLC) Upon consolidation, the involved companies will transfer all assets, rights, liabilities, and interests to the newly formed entity, leading to the cessation of their existence.
Both merger and consolidation are exercised when acquiring the whole company or voluntary of the parties
To streamline processes, it is unnecessary for parties to assess consolidation or merger; instead, a buyer acquiring at least 51% of the charter capital or shares of the target company establishes a holding company-subsidiary relationship.
This Chapter has presented the subjects of legal framework on M&A Because of the complication of activities, we cannot reach a certain definition on M&A However, the
37 Securities Commission (2003), State Management subjects to take over, consolidation on Vietnam securities market, scientific research of the Ministry level, p.39
40 Article 210, Draft New Law on Enterprises 2014
41 Article 211, Draft New Law on Enterprises 2014
14 subjects could be recognized through their characteristics, legal forms, and legal outcomes Comprehensive awareness of the subjects of legal framework will be the basis to understand the next chapter
LEGAL FRAMEWORK ON M&A OF ENTERPRISES
Whether a M&A transaction can be carried out
2.1.1 Economic concentration under Law on Competitive 2004
Competition is intrinsic to economic markets, and historical trends demonstrate the significant regulatory role of government in maintaining this competition Mergers and acquisitions (M&A) are viewed as a form of economic concentration, which is one of the key practices that can restrict competition under the Law on Competition Consequently, this law serves as a vital reference for parties involved in M&A activities Even unintentional economic concentration can severely diminish market competition The Law on Competition aims to safeguard trade and commerce from monopolies, price fixing, and discrimination Thus, one of its primary objectives is to delineate acceptable levels of concentration to effectively protect market structures.
2.1.1.1 Fundamental criteria to determine economic concentration
In M&A transactions or economic concentrations, parties must operate within a relevant market, defined by two key criteria: the products or services offered (relevant product market) and the geographical area of operation (relevant geographical market) Goods or services within this market can be substituted based on characteristics, intended use, and pricing, while competitive conditions can vary significantly from neighboring areas Although Vietnam's Law on Competition outlines detailed criteria for determining the relevant market, the process remains complex, and the country currently has limited experience in this area.
44 Pham Duy Nghia (2010), “Legislations on acquisition of enterprises: Short criticism from corporate governance perspective”, Journal of Legislative Research, (10(171)), p.46-49, p 48
45 Black’s law dictionary 9 th ed (2009), p.111
Antitrust law is the more common term in US, but competition law is popularly used in the other countries
47 Section 1, Chapter 2, Decree No 116/2005/ND-CP
The determination of whether enterprises operate in a relevant market is under the jurisdiction of the Administrative Body for Competition, which is guided by economic principles An example of a merger that falls outside the scope of economic concentration is the merger between Coca-Cola Vietnam and KPMG, as they belong to distinct business sectors Consequently, mergers and acquisitions involving parties in unrelated markets are not governed by the Law on Competition.
In M&A transactions involving parties operating in the same relevant market, the combined market share is assessed to evaluate the potential impact of the deal While a high combined market share alone does not necessarily indicate a substantial reduction in competition, it serves as a strong indicator of potential negative effects on market dynamics To manage these concerns, government authorities implement appropriate control policies based on specific thresholds of combined market share.
Economic concentration is prohibited when participating enterprises have a combined market share exceeding 50% in the relevant market This scenario leads to the establishment of a dominant enterprise or group, significantly altering the competitive market structure, which ultimately restrains competition and misleads consumers.
Enterprises involved in economic concentration with a combined market share of 30% to 50% in the relevant market are required to notify the Administrative Body for Competition before proceeding These companies can only engage in economic concentration after completing the notification process and receiving a written response from the Administrative Body for Competition.
In cases where the combined market share of businesses in a relevant market is below 30%, it is determined that the economic concentration does not lead to a dominant position for any enterprise or group of enterprises Consequently, such a concentration is unlikely to harm competition within the market.
48 Nguyen Ngoc Son (2004), Determining the relevant market according to Competition Law 2004, Journal of Legislative Research, (11(63)), p.25-31
50 Vietnamese Competition Authority (2012), Economic concentration report, p.93.
51 Vietnamese Competition Authority (2012), supra note 50, p.114
53 University of Economics and Law (2010), Competition Textbook, p.162
17 economic concentrations will freely carry out 55 if the established enterprise after economic concentration is still medium and small size enterprise 56
Vietnamese competition laws generally prohibit black market activities, yet they recognize the potential benefits of economic concentration by allowing certain exemptions Specifically, transactions where the combined market shares of the involved parties exceed 50% may still be approved under specific conditions.
− One or more of the parties participating in the economic concentration are at risk of being dissolved or becoming bankrupt 59 ;
− The economic concentration has the effect of extension of export or capital share to socio-economic development and/or to technical and technological progress
2.1.2 Vietnam’s WTO commitments and ratio of foreign capital
The M&A market in Vietnam continues to thrive, emerging as a highly attractive destination for investment Over the past few years, both the volume and value of M&A activities have significantly increased, positioning M&A as an effective channel for attracting foreign direct investment (FDI) However, the era of internationalization has introduced various pressures and challenges to the Vietnamese economy A key objective for the Vietnamese government is to safeguard the internal economy while leveraging foreign resources Consequently, foreign investors looking to engage in direct investments through M&A will encounter certain restrictions.
− Hold up to 49% shareholdings of public joint stock company 61
− Owning not exceed 20% charter capital of joint stock credit institution 62 63
− Uncommitted sub-sectors in WTO Commitments
According to Article 3 of Decree No 90/2011/ND-CP, medium and small enterprises are defined as distinct business entities that are officially registered and possess a charter capital of less than 10 billion VND, or employ an average of no more than 300 individuals annually.
57 University of Economics and Law, supra note 52, p.161
59 Article 4.2, Law on Bankruptcy 2014 stipulated that “Bankruptcy is status in which enterprises, co-operatives are incapable to pay their due debts and are declared bankruptcy by court”
60 KPMG (2013), Doing deals in Vietnam – A dealmarker’s perspective, p.3
61 Article 2.1, Decision 55/2009/QD-TTg of the Prime Minister on holding rates of foreign investors on the Vietnamese securities market
According to Article 3.1 of Decree 01/2014/ND-CP, joint stock credit institutions refer to financial entities structured as joint stock companies This category includes joint stock commercial banks, joint stock financial companies, and joint stock finance-leasing companies.
63 Article 7, Decree No 01/2014/ND-CP on Foreign investors' purchase of shares of Vietnamese credit institutions
Since 01 st January 2008 64 , foreign investors without restriction have acquired capital shares/ shareholdings of Vietnamese enterprises except for acquiring shareholdings of joint stock commercial banks and uncommitted sub-sectors 65 According to Schedule of Specific Commitments in Services, foreign investors are allowed to invest in 110 out of 155 sub-sectors of Service Sectorial Classification List 66 that the 45 remaining sub- sectors are e.g medical and dental service, real estate services, postal service, radio and transmission service, social service, tourist guide service, etc In light of the spirit of GATS, Vietnam has no obligation to grant the right to access market or apply principle of national treatment for the foreign investor in sub-sectors, not including in the Commitments In theory, specialized laws will provide the restrictions in these fields; however, there is no regulation on this matter In the practice, the lack of regulations led to the inconsistent interpretations of State agencies and the confusion of foreign investor, especially certifying for investment projects or accessing market in the sub- sectors in which Vietnam uncommitted 67
Uncommitted sub-sectors, banks, and public companies are crucial to the economy, necessitating limits on foreign investor shareholding to reduce reliance on foreign resources However, these restrictions appear ineffective, as foreign investors often navigate around them, effectively controlling Vietnamese enterprises and engaging in M&A activities despite the limitations.
− Being shadow owners of Vietnamese enterprise who dominating business secretly
Establishing an enterprise in Vietnam that aims to acquire or control another Vietnamese enterprise is subject to specific regulations According to the current Law on Enterprise, foreign investors are defined as entities with over 49% foreign shareholding However, the Draft New Law on Enterprise 2014 expands this definition, categorizing any enterprise with a foreign shareholding ratio of 68% or more as a foreign investor, thereby impacting the ability to establish or control local businesses.
In Vietnam, legal entities can register an enterprise with fully restricted lines, which then establishes subsidiaries to transfer these restricted lines Ultimately, foreign investors can acquire the holding enterprise, enabling them to control the operations of the subsidiaries.
64 01 year since Vietnam acceded to WTO 01/01/2007
65 Schedule of Specific Commitments in Services (2006), horizontal commitments, p.3
66 Note by the Secretariats of WTO, 10 th June 1991
67 Ha Thi Thanh Binh (2009), Internalizing of Viet Nam’s WTO Commitments in Services, Journal of Legislative Research (5(142))
69 Doan Hong Nhung, Capital capital shares, purchase of shareholdings in Vietnamese enterprise
Available on http://dddn.com.vn/dau-tu/khi-chinh-sach-vong-quanh-2013121003023893.htm , last visited on 12 July 2014
2.1.3 Ratio of non State-owned capital in State owned enterprises
Valuation of enterprises
Price is a crucial factor in M&A transactions, as it dictates the value transferred to the seller for the business being sold It serves as the primary determinant of a deal's success and is a critical element that influences the negotiation process Establishing the price in an M&A contract involves a complex analysis of extensive documentation, typically conducted by professional institutions such as auditing firms and valuation agencies The value of an enterprise encompasses more than just a numerical figure; it also includes its economic significance Additionally, it is important to note that the price is not static, but rather fluctuates over time.
Valuation, as defined by Black's Law Dictionary, is the process of determining the value of an entity or asset In the context of mergers and acquisitions (M&A), valuation addresses the critical question, “How much is a company worth?” Additionally, it is important to note that the Law on Prices will come into effect on January 1.
In 2013, regulations were established that empower authorized institutions to assess the monetary value of assets, as outlined in the Civil Code This valuation is based on the market price at a specific location and time, serving a defined purpose in accordance with established valuation standards Additionally, enterprises are classified as a type of asset, necessitating their valuation in the same manner.
70 Available on http://dangcongsan.vn/cpv/Modules/News/NewsDetail.aspx?co_id0110&cn_ide6748, last visited on 29 June 2014
74 Black’s law dictionary 9 th ed (2009), p.1690
Vietnam is committed to adhering to both Vietnamese and international valuation standards While there is currently no specific legal framework for enterprise valuation, each asset type within an enterprise will be evaluated according to established standards.
The system of Vietnamese valuation standards comprises 13 standards that:
- Standard No 1: Market value is the basic for valuation of assets
- Standard No 2: Non-market value is the basic for valuation of assets
- Standard No 3: The code of ethics on profession of valuation
- Standard No 4: Reports, dossier and appraisal certificates of assets
- Standard No 5: The process of valuation
- Standard No 6: The economic principles dominate valuation
- Standard No 10: Discounted cash-flow method
- Standard No 12: Classification of assets
- Standard No 13: Valuation of intangible assets
The value of an enterprise encompasses both tangible and intangible assets, highlighting the significance of intangible assets that were previously overlooked by regulations The adoption of Standard No 13 on January 7, 2014, which became effective on February 21, 2014, marks a significant enhancement in the regulatory framework for asset valuation.
2.2.2 Valuation of State-owned enterprises
State-Owned Enterprises (SOEs) were crucial to Vietnam's economic and social development during the era of central planning However, as globalization progresses, these enterprises are facing challenges related to effectiveness and competitiveness Additionally, the state-directed growth of SOEs has stagnated in the market economy, exacerbated by high public debt and inflation.
The equitization of SOEs according to Decree 59/2011/ND-CP is to transform SOEs into JSC Entities eligible for equitization are 77 :
76 Vuong Dinh Hue (2011), Crucial solutions to restructure SOEs, discussion in Restructure Economy
- Sole member LLC in which the State holds 100% charter capital being parent companies of Economic Groups; and State Corporation (including commercial banks)
- Sole member LLC in which the State holds 100% charter capital being enterprises under ministries, ministerial equivalent bodies, Government bodies, and provincial people’s committees
- Enterprises with 100% State own capital which have not yet converted in to sole member LLC
The objectives of equitization program are to 78 :
Transform state-owned enterprises into multi-owner entities to attract both domestic and foreign investment This strategy aims to enhance financial capacity, modernize technology, and improve management practices, ultimately boosting economic efficiency and competitiveness.
- Ensure harmony between the interests of the State, the enterprise, investors and employees of the enterprises
To promote transparency and public awareness, it is essential to implement market principles that prevent secretive equitization within enterprises This approach ensures that the process of equitization aligns with the growth of both the capital market and the securities market.
State-owned capital represents public ownership, primarily funded by tax revenues that contribute significantly to the State budget The mergers and acquisitions (M&A) of State-owned enterprises (SOEs) involve a shift from public to private interests, necessitating a robust mechanism to oversee the equitization process, particularly in terms of accurate valuation Ensuring precise valuations is crucial as it facilitates a smoother equitization process.
*Methods: the valuation of SOEs may be determined by the asset method, the discounted cash-flow method, the others
The asset method determines the actual value of an enterprise undergoing equitization by calculating the total value of all its existing assets at the time of equitization This valuation also considers the profitability of the enterprise, ensuring it is acceptable to both the buyer and seller of shareholding.
The discounted cash-flow method assesses the true value of state-owned capital in an enterprise by evaluating its future profitability.
The date of enterprise valuation coincides with the closing of accounting books and the preparation of the financial statement for the most recent annual or quarterly accounting period, especially when employing methods such as discounted cash flow.
Valuation plays a crucial role in determining the enterprise's worth, which serves as the foundation for evaluating charter capital size, structuring the initial share issue, and setting the starting price for public auctions.
2.2.3 Principles of bidding in public bid
Public companies must prioritize the interests of both majority and minority shareholders, with a particular focus on protecting minority shareholders, who often face disadvantages The law plays a crucial role in ensuring a balance of common interests, emphasizing the need for regulations that safeguard the rights and investments of minority shareholders.
The commencement price shall be determined that:
When making a public bid for a listed or registered target company, the offer price must be at least equal to the average reference price of the company's shares, as reported by the Stock Exchange for the 60 days preceding the bid registration.
M&A contract
The M&A contract encompasses all agreements between the parties, reflecting the comprehensive and precise outcomes of prior negotiations while carefully addressing associated risks Serving as the primary legal foundation for the entire M&A process and subsequent actions, this contract is crucial despite not being classified as a specific type of contract under the Civil Code Therefore, it must adhere to the general contract provisions outlined in the Civil Code and other relevant legal documents.
Article 3.1 of Circular No 202/2011/TT-BTC provides guidance on the financial handling and valuation of enterprises during the transformation of 100% state-owned enterprises (SOEs) into joint-stock companies (JSCs), as stipulated by Decree No 59/2011/ND-CP.
CP of 18/07/2011 of the Government
The M&A process is a lengthy endeavor that typically involves pre-contractual agreements outlining the conduct of the parties during due diligence, negotiations, and contract formation Key agreements in this phase include confidentiality agreements and principal agreements, which are crucial for ensuring transparency and trust throughout the transaction.
In the process of a proposed deal, buyers and sellers must take the time to understand each other, with buyers typically requiring confidential information from sellers to inform their purchasing decisions Sellers provide necessary documents and information for buyers and their advisors to review, although this does not obligate buyers to finalize any contracts with the target companies It is essential that both parties uphold their responsibility to protect confidential information, and confidentiality agreements should encompass specific key elements to ensure this protection.
- The involving parties may be the buyers, the sellers, and the consultants advisors
- Respond for receiving and providing information
- List of information which capable or incapable be disclosed
- Warranties and undertaking to keep confidentiality
- Penalty, compensation and dispute settlement mechanism 85
Confidential agreements in Vietnam lack clear legal stipulations, making it challenging to prove breaches by either party Nevertheless, these agreements are considered contracts that reflect the mutual intent of the parties involved and become legally binding upon signing.
Principle agreements serve as memoranda that document the agreed terms and essential details necessary for finalizing a deal These agreements may contain mandatory provisions that outline the steps for entering into a formal contract While there are no specific legal requirements governing principle agreements, the involved parties have the discretion to decide whether they wish to be bound by the terms outlined in the agreement.
84 Dang The Duc (2010), M&A transactions and legal issues, report of scientific research of the Ministry level, p.24
85 Dang The Duc (2010), supra note 85, p.25
Civil Code 2005, Article 388: A civil contract is an agreement between the parties to establish, change or terminate civil rights and/or obligations
An M&A contract is a voluntary agreement between parties that emphasizes equality, goodwill, cooperation, honesty, and good faith This agreement reflects the inherent nature of contracts, allowing parties the freedom to enter into arrangements that do not contravene legal and ethical standards All provisions within the contract should represent the mutual intent of the parties while adhering to laws and social ethics to remain valid The government typically does not intervene in the specifics of business transactions, as entrepreneurs are increasingly adept at maximizing profits Instead, government focus is directed toward significant issues that impact public interest and protect disadvantaged parties.
M&A contracts can be categorized into business acquisition contracts for complete company acquisitions and share acquisition contracts for other scenarios Both buyers and sellers are motivated by various factors, with the primary driver being the enhancement of their interests and investment rationale M&A activities are classified as commercial activities under Article 3.1 of the Law on Commerce, allowing for dispute resolution through Commercial Arbitration 90 or competent courts for any conflicts arising from these contracts.
M&A contracts can be verbal or written, but due to the complexity and scale of these transactions, a detailed written agreement is essential This contract should comprehensively outline the outcomes and expectations of the long-term process, including key legal and commercial terms and conditions.
87 Ho Chi Minh City University of Law, Laws on contract and compensating for damage outside contract, internal material, p.89
90 Article 2 and Article 4 of Law on Commercial Arbitration: Commercial Arbitration has competence to solve the dispute between parties arising form commercial activities if the parties have an agreement
Certainly, the contract cannot be expressed by verbal or specific acts, but written forms
2.3.3 Rights and obligations of contractual parties
Mergers and acquisitions (M&A) involve the transfer of ownership where buyers acquire the seller's business, encompassing assets, employees, market share, and customer relationships, in exchange for cash, stocks, or other valuable assets The parties may negotiate additional commitments regarding financial statements, enterprise history, and necessary exchanges An M&A contract typically outlines essential details such as the target company's name and address, M&A procedures and conditions, employment plans, and the conversion processes for assets and shares, along with the timeline for implementation.
M&A transactions involve not only the relationship between buyers and sellers but also the interests of third parties An enterprise operates independently from its owners, holding its own rights and obligations In contracts with third parties, the enterprise is considered a party, not the owners Even in cases of partial or full sale of the enterprise, its obligations to third parties remain intact Owners may retain their ownership if payment is made in stock, and they are responsible for the enterprise's rights and obligations up to their shareholding In the event of a merger or consolidation, the newly formed entity assumes all legal rights and responsibilities, including unpaid debts and labor contracts, from the merging companies.
Cash payments have become increasingly popular in Vietnam due to their efficiency in facilitating quick transactions However, this method necessitates significant capital and strong financial resources from buyers Amid rising inflation and stringent credit policies, Vietnamese enterprises are facing challenges in executing cash payments for high-value investment projects.
92 Article 152.2 and Article 153.2, Law on Enterprises 2005
93 Article 152.4 and Article 153.2 (c), Law on Enterprises 2005
94 Tran Duy Hoang (2011), available on http://cafef.vn/thi-truong-chung-khoan/thanh-toan-ma-tien-mat-hay-co- phieu-20110330025054291ca31.chn, last visited at 28 June 2014
As of April 1, 2014, a revised ordinance on foreign exchange in Vietnam prohibits any transactions, payments, listings, advertisements, price quotations, valuations, and contract recordings involving foreign currencies, unless explicitly permitted by the Vietnam National Bank.
M&A transactions are not exempt from Article 4 of Circular No 32/2013/TT-NHNN, which mandates that payments must be made exclusively in VND within Vietnam The specific VND amount will be determined based on the foreign exchange rates of designated banks To safeguard commercial interests while adhering to Vietnamese regulations, parties may establish a foreign exchange rate compensation agreement to address potential losses due to VND depreciation against the USD, particularly in cases of prolonged payments made in installments.
Payment in cash is regulated by Decree No 222/2013/ND-CP, which aims to prevent money laundering According to this decree, all purchases and transfers of capital shares or shareholdings must not be made in cash Instead, parties involved may agree to conduct payments through bank transactions.
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M&A market in Vietnam and orientations
Status of M&A deals in Vietnam 2008 - 2013 110
Mergers and acquisitions (M&A) have a long history, dating back to the late 18th century in developed countries In Vietnam, M&A activities began to emerge with the establishment and growth of the securities market in 2000, indicating that this concept is relatively new to the country.
(2000 – 2005), M&A market is quite quiet with 18 transactions and a total value at over 61 million USD Since 2007, Vietnam officially became 150 th member of WTO,
110 Available on http://www.tapchitaichinh.vn/Thong-tin-doanh-nghiep/MA-5-nam-cho-mot-thi-truong-5-ty- USD/28576.tctc, last visited at 3July 2014
111 Donald DePamphilis (2011), Mergers and Acquisition basics- All you need to know, Elsevier Inc., United Kingdom, p.23
32 the number of transactions sufficiently increased to 113 with a total value at 1.8 billion USD 112
The period from 2008 to 2013 marked the first wave of mergers and acquisitions (M&A) in the securities market, characterized by significant enterprise reorganization During this time, M&A activity peaked in 2012 with a total value of approximately $5 billion, a fivefold increase from about $1 billion in 2008 Internal enterprise transactions accounted for 77% of the total deals, although these were generally small, averaging between $2 to $5 million per deal In contrast, larger transactions predominantly involved foreign investors, who represented 66% of the total transaction value The M&A landscape during these years was heavily focused on the finance, consumer, and real estate sectors Notable deals in 2013 included Masan Consumer Corporation acquiring 65.5% of Vinh Hao Mineral Water JSC, SCG purchasing 85% of Prime Group, and the merger of Dai A Commercial Joint Stock Bank with SGVF – Societe Generale Group.
Historically, mergers and acquisitions (M&A) have surged during times of economic growth, characterized by low or declining interest rates and a robust securities market In Vietnam, the M&A landscape is poised for a new wave of transactions starting in 2014.
2018 with these following key elements:
- The global economy and Vietnamese economy are anticipated to recovery in
The 2014 economic and social status report for the first half of the year highlighted a low inflation rate, a stable macroeconomic environment, and a notable increase in goods exports.
- Vietnam accedes to TPP (Trans-Pacific Strategic Economic Partnership Agreement) and the establishment of ASEAN Common Economy
112 Available on http://chinhphu.vn/portal/page/portal/chinhphu/noidungtinhhinhthuchien?categoryId0003029&articleId05
113 Available on http://baodautu.vn/ma-het-thoi-an-xoi-o-thi.html, last visited at 3 July 2014
115 Available on http://kinhdoanh.vnexpress.net/tin-tuc/doanh-nghiep/scg-hoan-tat-thau-tom-prime-group-
2744048.html, last visited at 3 July 2014
116 Available on http://vietnamnet.vn/vn/kinh-te/154869/cac-thuong-vu-m-a-dinh-dam-nam-2013.html, last visited at 4 th July 2014
The article discusses the economic forecast for 2014 and highlights key lessons for business development It emphasizes the importance of adapting to market changes and leveraging opportunities for growth The insights provided aim to guide businesses in navigating the economic landscape effectively For more details, visit the official Lien Viet Post Bank website.
119 Available on http://chinhphu.vn/portal/page/portal/chinhphu/noidungtinhhinhthuchien?categoryId0003029&articleId05
The equitization of state-owned enterprises (SOEs) is guided by Decision No 929/QD-TTg, which was approved by the Prime Minister This decision outlines a strategic plan for the restructuring of SOEs, specifically targeting economic groups and state-owned corporations during the period from 2011 to 2015.
- The restructuring in banking sectors
- The amendment and supplementations of legal framework on M&A, i.e Draft New Law on Enterprises and Draft New Law on Investment are gathering the feedbacks and will propose to National Assembly
AVM Vietnam Company's report predicts that the total value of M&A transactions from 2014 to 2018 will reach $20 billion, an increase from $15 billion during the 2008 to 2013 period This growth in M&A activity is expected to be particularly prominent in sectors such as banking, consumer manufacturing, real estate, information technology, and transportation-logistics.
Review of legal framework on M&A
Chapter 2 highlights the shortcomings in Vietnam's legal framework regarding mergers and acquisitions (M&A), revealing both theoretical and practical deficiencies The author identifies key issues that hinder the effectiveness of M&A regulations in the country.
The Vietnamese legal system suffers from a lack of unification, characterized by an overwhelming number of legal documents that often overlap This results in inconsistencies, as later legislation may not align with earlier laws A prominent example of this issue is the varying definitions of key terms such as "merger" and "consolidation."
The terms "acquisition" and "foreign investors" in the context of the Law on Enterprises and Law on Competition are often confusing due to varying definitions across multiple legal documents, including the Law on Enterprise 2005, Law on Investment 2005, Circular No 213/2012/TT-BTC, and Decisions No 55/2009/QD-TTg and No 88/2009/QD-TTg Conflicts arise between legislations such as Decree 108/2006/ND-CP and Decree 102/2010/ND-CP, highlighting the need for a cohesive legal framework With up to a hundred legislations governing mergers and acquisitions (M&A), there is a pressing necessity to codify these laws, ensuring that the regulatory system is harmonized and that overlapping provisions are unified for clarity and consistency.
The current legal framework faces significant challenges due to a lack of guidance, despite the abundance of legal documents and redundant content Newly ratified laws often struggle with enforcement and require further clarification through resolutions, decrees, circulars, decisions, and local regulations This deficiency in legislation is prevalent across various sectors, particularly in procedural matters Additionally, the absence of clear guidance on the application of international standards, such as WTO commitments, enterprise valuation, and M&A contracts, exacerbates these issues.
120 Available on http://baodautu.vn/ma-tai-viet-nam-huong-toi-moc-20-ty-usd.html, last visited at 4 July 2014
Unclear and complicated procedures significantly hinder foreign investors, as highlighted in the analysis of Decree 108/2006/ND-CP and Decree 102/2010/ND-CP The excessive number of lengthy procedures creates a burden for enterprises, underscoring the need to eliminate unnecessary steps Streamlining these processes is essential to establish a supportive legal framework that fosters the growth of the M&A market.
In 2018, Vietnam's shift towards a market economy necessitated business liberalization and equal opportunities across economic sectors However, the country continues to impose excessive restrictions on investors Additionally, the criteria for calculating market share are unrealistic, making it nearly impossible for enterprises to accurately define their relevant market and determine their market share.
For the aforementioned shortcomings, the amendment and supplementation of legislations should be oriented to:
The legal framework for mergers and acquisitions (M&A) should be codified to establish a consistent and harmonious system, rather than introducing specific legislation, as M&A activities intersect with various sectors International experience shows that many countries do not have unified legislation governing M&A, highlighting the importance of creating a cohesive legal structure to effectively manage these transactions.
- Internalize the international practices The linking between Vietnamese laws and international practices shall promote the process of internationalization and the co-operation between foreign and Vietnamese investors
- Facilitate procedures and investment conditions to attract investors.
Recommendations
Improving the legal framework governing mergers and acquisitions (M&A) is essential for enhancing the effectiveness of the M&A market This study offers specific recommendations for amending and supplementing existing legislation to facilitate these improvements.
3.3.1.1 Unifying the definitions of mergers, acquisitions and consolidations under Law on Enterprises and Law on Competition
Mergers, acquisitions, and consolidations are defined under the Law on Enterprises and the Law on Competition, forming the essential legal framework for M&A activities To enhance clarity and effectiveness in this area, it is crucial to unify these definitions.
121 Available on http://daibieunhandan.vn/default.aspx?tabid&NewsId188, last visited at 5 July 2014
The Draft New Law on Enterprises 2014 proposes to align its approach to mergers and consolidations with the Law on Competition by eliminating the requirement for companies to be of the "same type." This amendment is a logical step forward, as it aims to streamline the process, ultimately reducing both costs and time for enterprises, which will no longer need to convert to a different company type.
On the other hand, Law on Competition needs to make clear the definition of acquisitions on the meaning of “assets” It should be provided in detail whether
Assets, from an accounting standpoint, refer to the tangible resources or capital shares and shareholdings, or a combination of both In various scenarios, buyers may acquire the rights to control the sellers, highlighting the significance of understanding asset ownership and its implications in transactions.
3.3.1.2 Amending the definition of foreign investor
The Law on Investment 2005 defines foreign investors as organizations or individuals who utilize capital for investment activities in Vietnam According to the Law on Enterprise 2005, the status of foreign investors is determined by nationality, classifying an enterprise as a foreign investor if it is established under foreign law Additionally, Circular No 213/2012/TT-BTC and Decision No 55/2009/QD-TTg provide further regulations regarding foreign investment in the country.
No 88/2009/QD-TTg referred foreign investor including enterprises established according to Vietnamese law and had the own of enterprises who established in pursuant to foreign law more than 49%
Draft New Law on Investment 2014, in a more strict interpretation, proposed to stipulate the foreign investors includes 124 :
Vietnamese enterprises must have individuals or organizations specified in points (a) and (b) of this clause holding at least 50% of the charter capital, thereby granting them voting rights Additionally, Limited Liability Companies (LLCs) or Partnerships are required to have at least 50% of their members consisting of these specified individuals or organizations.
(4) Vietnamese enterprises have individuals, organizations provided in point (a) and (b) this clause hold from 50% of charter capital (have the voting right)
The purpose of the Draft New Law is to prevent foreign investor from trying to access some restrain market and this provision seems to be more efficient than ever
To strengthen its economic market, Vietnam should focus on expanding sectors open to foreign investment, particularly those not covered by WTO commitments This includes adjusting the foreign ownership limits in commercial banks and public enterprises to attract more international investors.
124 Article 4.3, Draft New Law on Investment 2014
36 company should be increased The sectors in which the State holding more than 50% capital should be reduced to ensure the balance between economic sectors
This recommendation should be implemented after several years even as the State has stabilized the macro economy
3.3.3 Criterion to determine the obligation of notification to Competition Administrative Body
Enterprises involved in economic concentrations must notify the Competition Administrative Body if their combined market share exceeds 30% However, calculating market share can be complex and costly, leading companies to potentially report inaccurate figures to reduce their burden To balance the pros and cons of using market share as a criterion, many regulatory systems globally prefer turnover as a more straightforward alternative The turnover criterion offers several advantages, including simplifying compliance and reducing administrative costs for businesses.
- Enterprises are easy to provide data;
- In accordance with international practices; and
To evaluate the potential impact of a concentration, the Administrative Competition Body may request additional information from the involved parties and other companies operating in the relevant market It is often more effective for the Administrative Competition Body to gather comprehensive market data during this assessment.
The EC mergers regulation stipulated that concentrations with a Community dimension shall be notified to the Commission prior to their implementation 126 A concentration has a Community dimension where 127 :
- The combined aggregate worldwide turnover of all the undertakings concerned is more than EUR 5000 million; and
For a merger or acquisition to be assessed under EU competition law, at least two of the involved companies must have a combined Community-wide turnover exceeding EUR 250 million, unless each company generates more than two-thirds of its total turnover within a single Member State.
The criterion should be used a definite turnover for determining the notified obligation of the enterprise in economic concentrations However, subject to each certain goods or
125 Vietnamese Competition Authority (2012), supra note 50 , p.145
126 Article 4.1, Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings
127 Article 1.2, Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings
37 service market, the market sizes are distinct Therefore, it should add some sub-criteria about turnover depend on characteristic of particular market
The lack of guidance will lead confusing interpretation and implementation As analysed, the State should enact legislations on:
- Guiding the application of WTO commitment and the other treatments;
- Guiding the ratio of foreign investors in Vietnamese enterprises in uncommitted sector
- Guiding the ratio of foreign investors who do not come from the members of WTO in Vietnamese enterprises
M&A contracts are unique due to their specific subject matter, requiring detailed provisions that address various aspects such as pre-contractual agreements, contract forms, payment methods, and the rights and obligations of the parties involved Additionally, these contracts must also outline the rights and obligations toward third parties and the implementation processes to ensure clarity and effectiveness in both theory and practice.
The Draft New Law on Investment 2014 aims to simplify investment registration procedures by eliminating them for most sectors, with some exceptions Foreign investors engaged in mergers and acquisitions will no longer be required to obtain an Investment Certificate, as the sellers will handle the necessary procedures in accordance with enterprise laws, demonstrating compliance with investment conditions This significant change in investment legislation seeks to alleviate procedural burdens for businesses, necessitating amendments to current enterprise laws.
Capital share transfer procedures should be uniformly established for both domestic and foreign investors, divided into two distinct processes: (i) adjustments to the Enterprise Registration Certificate and (ii) adjustments to the Investment Certificate Furthermore, it may be beneficial to eliminate the need for Investment Certificate adjustments for enterprises that hold both certificates but are not required to register investments under the Investment Law.
128 Article 43, Draft New Law on Investment 2014
129 Article 61, Draft New Law on Investment 2014
The legal framework governing mergers and acquisitions (M&A) requires a comprehensive revision, collection, and reorganization of approximately one hundred pieces of legislation This process should involve eliminating redundant and outdated provisions while consolidating laws with overlapping scopes Such codification will enhance the clarity, comprehensibility, and applicability of the legal system.
A robust legal framework is crucial for attracting investors and strengthening the market and economy As Vietnam's M&A market continues to develop, now is the opportune moment to refine our legal system in alignment with international commitments and government objectives The previously mentioned recommendations are vital for enhancing our legislation.