Good news for M&A in Vietnam! Effective 1 July 2015, foreign investors won’t need to undergo lengthy investment certificate procedures when buying stakes in Vietnamese target companies. The change, introduced by the new Investment Law, will hopefully end years of uncertainty and frustration faced by foreign investors eyeing Vietnam market entry or expansion via M&A.
M&A activity in Vietnam saw a 15% uptick in 2014 and is expected to increase in 2015. We’ve seen a strong increase of interest from international investors, especially in the last months of 2014 continuing into 2015. The TPP (which includes the U.S. and Japan), the EU-Vietnam FTA as well as tariff reductions under the AFTA are all scheduled for this year. These will increase market access for foreign investors in Vietnam and lower barriers to trade in goods and services.
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Why is the investment certificate question so important?
Put simply, it can take forever to get an investment certificate (IC) and without one investments are at high risk. Under current law, Vietnam has different licensing procedures for foreign and domestic investors. The IC serves as business registration for foreign investors. In practice, despite a 45 day maximum statutory time limit, the lC process can take 4 to 6 months or longer, while domestic business can be registered within a day.
Under the new Investment Law, the IC is replaced by an “investment registration certificate” (IRC) and an enterprise registration certificate (ERC). Obtaining ERCs should be straightforward, as they only contain basic business info and also apply to domestic investors. We have high hopes that IRCs will be processed faster than current ICs, but wouldn’t it be nice to invest without an IRC?
Explicitly, no IRC for M&A activity!
The new Investment Law expressly provides that no IRCs will be required for acquisitions of target companies. As a result, the time needed to complete purchase of stakes in Vietnamese entities is expected to be reduced tremendously. Buying into public companies listed on the Vietnamese stock exchanges will not require IRC either, but foreign ownership of listed companies is still capped at 49% (and max. 30% for financial institutions). Rumors have long abounded that the caps will soon be raised but, until that day, investors will need to buy unlisted companies to take control.
Provincial Departments of Planning and Investment (DPI) will still have to “register” (read: “approve”) plans to acquire a majority of a target or stakes in a company that is active in a “conditional” sector. Conditional sectors for foreign investors include construction, urban planning and education (Annex 4, new Investment Law). In practice, DPI officials have broad discretion to approve applications, but they should need much less paperwork then for an IRC application.
In addition, the business registration office will have to update ERCs to reflect changes in a unlisted company’s ownership, statutorily, in 3 working days.
Foreign investors should be able to get down to business much faster than in the past: buying out Vietnamese partners’ domestic companies looks set to become a far more viable approach than at present. As always, watch out for conditional sectors and do due diligence on targets. Never transfer any funds to dubious accounts or pay charlatans who promise licenses for everything under the sun. Get a good a lawyer, really.