A senior official of the Vietnam Competition Authority (“VCA”) recently warned that merger enforcement was now a priority of VCA. In particular, he observed that the VCA would be focused on businesses that failed to fulfill their obligations to pre-notify their economic concentrations as required under the Law on Competition (No. 27/2004/QH11) (the “Law”). He also noted that the VCA had created a special unit to study market developments and news reports as a means of detecting such economic concentrations.

This is a particular concern for clients as the monetary penalty for not notifying is set, pursuant to the Decree on Dealing with Breaches in Competition Sector (No. 120/2005/ND-CP, dated 30 September 2005), as 1-3% of the total revenue of the parties in the previous financial year. For a prohibited economic concentration, the monetary penalty could be up to 10% for closing or, where an exemption is applied for, a penalty of 30-50 million VND applies if the concentration is completed prior to the issuance of an exemption by the relevant authority. Other penalties may also apply including dissolution of the transaction.

The Basics: The Law defines economic concentrations to include mergers, consolidations, acquisitions, joint ventures and other prescribed acts of economic concentration. Generally, under Article 20, unless it would result in a small or medium size enterprise (“SME”), an economic concentration where the parties have a combined market share between 30% and 50% is required to notify the VCA prior to implementation. Where the parties to an economic concentration have a combined market share exceeding 50%, the transaction is prohibited under Article 18 of the Law, unless the economic concentration would result in a SME or an exemption is granted under Article 19.

A SME is defined pursuant to Decree No. 56/2009/ND-CP (30/6/09), (“Decree 56”) based on total capital or employees. The criteria to establish each type of SME (e.g. very small, small, and medium) may vary based on the type of business being considered.

How do you know if you are subject to notification or prohibition? The merger control provisions of the Law apply to organizations and individuals conducting business in Vietnam (“Enterprises”), including, among others, foreign enterprises operating in Vietnam. It is not yet clear how this will be interpreted in regards to economic concentrations where one or more of the parties do not have a physical or legal presence in Vietnam, but only have sales into Vietnam. A further complication is the treatment of foreign to foreign mergers which occur between entities that would not be considered Enterprises, but which have subsidiary Enterprises whose direct ownership or control are not affected by the transaction. A technical reading of the Law suggests that such a foreign to foreign merger would not be captured by its merger control provisions; however the VCA’s 2010 Annual Report, in discussing the potential Prudential/AIA transaction, suggests that such a transaction would have been notifiable. Recent conversations with VCA officials indicate that, despite the statutory limitations of the Law, increasing numbers of foreign to foreign economic concentrations are being reviewed by the VCA. While not clear under the Law, review of the foreign to foreign economic concentration under the merger control provisions of the Law may be viewed as a means of preventing the VCA considering future cooperative behaviour among subsidiary Enterprises as an anticompetitive agreement in restraint of competition.

One concern noted by the senior VCA official is that businesses do not seem to appreciate that market shares are not based on total enterprise sales within a given sector. Instead, market shares must be determined based on specific product and geographic markets as identified by the VCA. This is a crucial area of merger review and usually requires consideration and evaluation of sales and other data. The determination of a relevant product and geographic market is essentially based on substitutability and the factors considered are set out in detail in the Decree on Competition providing detailed regulations for implementation of a number of articles of the Law on Competition (No. 116/2005/ND-CP, dated 15 September 2005).

Using a hypothetical economic concentration of two relatively small competing enterprises as an example, the enterprises in question may determine that, as there are many larger competitors in their general line of business, there is no obligation to notify under the Law. However, the Law requires that they consider each relevant market separately and, in this case, the enterprises may be sales leaders for a specific product in a given area. The VCA will seek to determine whether that product and that area constitute a relevant market by considering whether a) other products are substitutable for the product in question in terms of use, characteristics or price and b) whether enterprises selling in other areas could easily compete in the relevant area. Under the right circumstances, despite having many large competitors, two enterprises may exceed the market share thresholds with respect to only one or more parts of their business.

Therefore, in any economic concentration, it is important to consider the parties’ businesses carefully to determine whether it is possible that the thresholds are met with respect to any specific lines of business. Where there is any question, legal advice should be taken and, if necessary, the VCA has stated that it welcomes consultations by enterprises who are seeking guidance in this regard.

What to do next: If a proposed economic concentration exceeds the relevant thresholds, the lawful representative of each enterprise must file either a notification or an application for an exemption as the case may be. The Law requires the following information to be provided for notification dossiers, with some modifications for enterprises that have been in existence for less than 1 year:

  • The prescribed notification form;
  • For each enterprise participating in economic concentration:
    • Valid copies of its business registration;
    • Financial statements for the latest two consecutive years certified by auditors;
    • A list of its dependent units;
    • A list of the kinds of goods and/or services dealt in (including by any dependent units); and
    • Reports on its market shares on the relevant market for the latest two consecutive years.

With respect to exemption application dossiers (which are required for persons seeking an exemption under Article 19), the Law requires the following information to be provided, with some modifications for enterprises that have been in existence for less than 1 year:

  • The prescribed application form;
  • Valid copies of the business registration certificates of each participating enterprise;
  • Financial statements of each participating enterprise for the latest two consecutive years certified by auditors;
  • Reports of each participating enterprise on its market share on the relevant market for the latest two consecutive years;
  • A report explaining the basis for the exemption; and
  • Written authorization of the representative party by the participating parties.

If an economic concentration is subject to notification, the VCA has 7 working days from receipt of the notification to indicate whether the notification is complete. Once the application is confirmed as complete, the VCA has 45 days to provide a written response to the notifying enterprises indicating whether or not the economic concentration is prohibited under Article 18 of the Law and the basis of such prohibition. This period may be extended twice for up to 30 days each time.

With respect to applications for exemptions, the review period varies based on the type of exemption being sought. Where the Minister of Trade is responsible (i.e. exemptions based on bankruptcy), the review period is 60 days after the receipt of a complete dossier with up to two extensions of a maximum of 30 days each. Where the Prime Minister is responsible, the review period is 90 days or 180 days for complicated cases.