This article first appeared on thesaigontimes (printed copies) in December 2015.
The amended Enterprise Law and Investment Law were expected to promote mergers and acquisitions (M&A). A while after their introduction, however, foreign investors are still facing numerous legal obstacles as far as capital contribution and share purchase in Vietnamese enterprises are concerned.
Complicating licensing procedures
The law provides that the purchase of shares must be registered only if the deals result in foreign investors directly or indirectly holding 51% of the stake. What the investors should do is simply performing procedures for membership change or notification of foreign shareholders under the provisions of the Enterprise Law. Such procedures take about 18 days. Moreover, investment registration certificates are not required for share purchase.
That’s the law, but reality is different. Some local authorities insist that Vietnamese companies have to apply for investment registration certificates immediately after the completion of the aforementioned procedures if foreign ownership reaches from 51%.
It’s not a problem if this requirement is applied to new projects of local firms after foreigners have acquired the majority stake. Yet, the application for investment registration certificates is demanded as soon as foreign investors have carried out the share purchase. This stipulation is like making extra regulations against the law.
Many local businesses could not comprehend why their enterprises, after years of normal operations, are suddenly considered as “projects” after foreign entities are involved in. And one they are projects, there would be a certain life cycle of the business, whose length depends totally on local authorities’ own will. Meanwhile, for Vietnamese investors, the law allows them to define the duration of operation and state it in their charters. When the duration expires, they could revise the charters.
It is unknown what the authorities will do when such investment projects expire and on what basis an extension is allowed or not. Would proud corporate tax payers be “strangled to death” when their investment registration certificates expire? This is really a big concern on the part of foreign investors.
Ambiguous payment accounts
Last year, the State Bank of Vietnam issued three circulars with guidelines for foreign investors: Circular 05/2014/TT-NHNN (indirect investment accounts), Circular 16/2014/TT-NHNN (payment accounts) and 19/2014/TT-NHNN (direct investment accounts). All three types of accounts can be used for payment in capital transactions. An investment certificate simply tells whether the investment is direct or indirect.
A few months later, when the vague concepts of direct and indirect investment have been removed by the amended Investment Law, the central bank still took no actions. Meanwhile, the amended Enterprise Law stipulates an additional requirement that shares purchase must be done through the capital accounts of the investors at banks in Vietnam. That has led to different interpretations, accompanied by various payment processes, which has left banks confused and investors frustrated.
One plus one minus one equals one
A plus of Decree 78/2015/ND-CP guiding the new Enterprise Law is that it stipulates that “the proof of share transfer completion” is no longer the type of documents required during the registration for change of members and owners. Instead, investors may only submit capital transfer contracts. Therefore, the State agencies have no legal basis for forcing the buyers to pay off the money before adjusting the papers as they used to.
However, as for the procedures for announcing foreign investors as shareholders in an unlisted joint stock company, Decree 78 requires the decision and a valid copy of the minutes of the shareholders’ general meeting on such ownership change. In reality, unlisted companies include public companies with hundreds of shareholders. As a matter of fact, one a foreign shareholder acquires shares, the regulation requires the company to hold a shareholders’ meeting to be able to notify the licensing agencies of the acquisition, or else it would be penalized. This requirement is absurd, cumbersome and will cost businesses more.
When will there be ownership right?
We should get back to a basic question: when will share ownership right be transferred from a seller to a buyer? There are three basis markers: when the name of the buyer is recorded in the shareholders’ register; when the involved parties reach an agreement for their contract; and when the procedures for registration or notification to the State are completed.
For the first marker, the amended Enterprise Law stipulates that a member of a multi-member limited liability in a share transfer deal retain their rights and obligations to the company, corresponding to their capital share, until information about the buyer is fully recorded in the register of members and that the transferee only becomes a shareholder when their information is fully recorded in the shareholders’ register. It is clear therefore that the ownership right over capital contributions in a multi-member limited liability company and shares in a joint stock company is transferred from the seller to the buyer after the latter’s information is recorded on the register of shareholders or members; instead of depending on the implementation of procedures for registration or notification to the State, or whether there is an investment registration certificate or not.
However, the time of ownership right transfer when the owner of a single-member limited liability company puts up his stake for sale is still missing in the law.
(Translated by thesaigontimes, modified by Ngu Truong)