Updated Draft of New Law on Securities having important changes to foreign ownership limitation, IPO and tender offer

Capital Markets Vietnam Client Alert August 2019 For further information, please contact: Yee Chung Seck Partner +84 28 3520 2633 yeechung.seck@bakermckenzie.com Oanh Nguyen Partner +84 24 3520 2629 oanh.nguyen@bakermckenzie.com Chi Lieu Dang Partner +84 24 3936 9341 chilieu.dang@bakermckenzie.com Updated Draft of New Law on Securities having important changes to foreign ownership limitation, IPO and tender offer The Ministry of Finance (the "MOF") has released an updated draft of the new Law on Securities (the "Draft Law") with a view to improving the current legal framework for the securities market by further aligning it with the overall development scheme of the Vietnamese financial sector. As contemplated under the Draft Law, the new Law on Securities may take effect from 01 January 2021. We have highlighted the key points of these updates to the Draft Law as below. 1. Foreign ownership limitation in public companies Under the current regulations, if a public company conducts business within certain business lines that are subject to conditions imposed on foreign investors, and in which there is no specific provision on the foreign ownership limitation (the "Undetermined Conditional Sectors"), the foreign ownership limitation will be capped at 49% of the voting capital. If a public company wishes to lift its foreign ownership ratio above 49%, it has to prove that none of its business lines falls under the Undetermined Conditional Sectors, which is neither easy nor straightforward. Unlike the previous draft version where the foreign ownership cap applicable to public companies was proposed to be removed, the current Draft Law now delegates such matters to the Government. In particular, Article 51 of the Draft Law stipulates that any limitation on foreign ownership or condition, procedure for investment and participation of foreign investor/organization with foreign capital, will be in accordance with the further guidance and regulations released from the Government. According to the Government's Explanatory Statement for the Draft Law, in order to establish a proper plan to open market access for foreign investors, as well as create sufficient room for negotiation over certain international treaties, detailed regulations on the foreign ownership cap should be provided by the Government. 2. New conditions for public company status Currently, a private joint stock company will have to register public company status with the the State Securities Commission (the "SSC") if it falls into one of the following circumstances: (a) it has conducted a public offering; (b) it has shares listed on a stock exchange or a securities trading center; or (c) it has 100 shareholders, excluding professional securities investors, and a charter capital of VND 10 billion or more. 2 Baker McKenzie August 2019 Under Article 31.1 of the Draft Law, the criteria are amended such that a private joint stock company will become a public company if it falls into one of the following cases: (a) Case 1: The company has: i. a paid-up charter capital of VND 30 billion or more (as compared to VND 10 billion under the current law), and ii. "at least 10% of its voting shares is owned by 100 or more investors who are not major shareholders in such company", in which, a "major shareholder" is a shareholder owning 5% or more of the voting shares in a company.3 With respect to the second condition, in our view, we understand this means (to be regarded as a public company) having at least 10% of the company's voting shares being owned by 100 or more shareholders and none of such shareholders owns 5% or more of the voting shares in the company. As compared to the previous draft version, the current Draft Law ties the second condition to the voting shares rather than the charter capital, and to the shareholders owning at least 5% of the voting shares rather than 1%. These changes are also adopted in the conditions for public offering as will be discussed below. (b) Case 2: The company has successfully conducted an initial public offering in accordance with the law. In essence, the Draft Law seeks to increase the conditions on capital size and the shareholding structure of public companies As such, companies with small-size charter capital, or without shareholding spread over smaller shareholders, will not be required to register as a public company. As part of the transitional provisions, companies which have their shares listed on a stock exchange (HOSE or HSX) or a trading center (UPCOM) before the effective date of the new law are not forced to deregister their public company status if they fail to meet the new financial requirements (as mentioned in Case 1 above), unless otherwise decided by the general meeting of shareholders.4 3. New conditions for public offering Currently, public offering is the offering to sell the securities (i) by means of public information channels, (ii) to 100 or more investors, excluding professional securities investors, or (iii) to an unidentifiable number of investors. The Draft Law sets out different conditions for an initial public offering ("IPO") and a subsequent public offering. With respect to an IPO, the Draft Law imposes new conditions; some of the key ones are as follows:5 3 Article 4.15, Draft Law. 4 Article 134.4, Draft Law. 5 Article 14.1, Draft Law. 3 Baker McKenzie August 2019 (a) The company has at least VND 30 billion of paid-up charter capital (as compared to VND 10 billion under the current law); (b) The company must be profitable for the two years preceding the year that the company registers the IPO (as compared to one year under the current law); "At least 15% of the company’s voting shares must be [sold/offered] to 100 or more investors who are not major shareholders"; if the company’s charter capital is VND 1,000 billion or more, the minimum threshold is 10% of the company's voting shares; With respect to this condition, the current language of the Draft Law is not clear. We interpret this to mean that the company will be required to offer at least 15% (or 10%, as the case may be) of its voting shares to 100 or more investors and none of such investors can acquire 5% or more of the voting rights; (c) [Shareholders who are] major shareholders of the company (i.e. any shareholder owning 5% of total voting shares in the company) before the IPO must commit to together hold at least 20% of the company’s charter capital within at least one year from the completion date of the IPO; (d) The shares of the company must be listed or registered to be traded at the Securities Exchange after the end of the IPO; and (e) As of the date the company submits its IPO application dossier to the SSC, the company is not being criminally prosecuted and does not have an un-expunged criminal record on violation of economic management order. With respect to a subsequent public offering, the public company must meet the following new conditions:6 (a) The company has at least VND 30 billion of paid-up charter capital (as compared to VND 10 billion under the current law); (b) The total value of the shares issued at par value must not be greater than total value of outstanding shares at par value, unless the company has an issuance guarantee with strong commitment to (i) purchase all shares of the company to re-sell or (ii) purchase the remaining shares of the company that have not been fully allotted; and (c) If the public offering is for purposes of raising capital for a project of the public company, at least 70% of the total offered shares must be purchased. 4. New conditions for private placement (a) New definitions A "private placement of securities" is defined under the current law as an offering of securities to less than 100 investors not including professional securities investors, and without using the mass media or 6 Article 14.2, Draft Law. 4 Baker McKenzie August 2019 the internet. The Draft Law has removed the element of "without using the mass media or the internet" from this definition.7 (b) Limited type of participating investors in a private placement The types of investors that can participate in a private placement of a public company will only include (a) professional securities investors and (b) strategic investors. 8 "Strategic investors" is defined under the Draft Law as investors having financial capability, technology expertise, and long-term partnership with the company and been selected by such company in accordance with the criteria approved by its general meeting of shareholders. Definition of "professional securities investors" under the Draft Law is now expanded to include the following persons: i. commercial banks, branches of foreign banks, finance companies, insurance business organizations, securities companies, securities investment fund management companies, securities investment companies, securities investment funds, state-owned non-budget financial funds, state-owned financial institutions entitled to purchase securities in accordance with laws; ii. companies having paid-up charter capital of more than VND100 billion or organizations listed on a stock exchange; iii. securities practicioners; and iv. individuals holding listed or registered securities with a value of at least VND 2 billion as certified by a securities company at the time that such individual identifies his/her status as a professional securities investor or having the most recent annual taxable income of at least VND 1 billion as certified by a tax authority. (c) Lock-up period The transfer restriction period will be at least 3 years for strategic investors and at least one year for professional investors (except in some stipulated cases). 9 Under the current law, all shares issued through a private placement by a public company are subject to a oneyear lockup (except in some stipulated cases), regardless of the type of the subscriber. 5. New triggering events of public offer to purchase The Draft Law provides for new circumstances that will trigger a public offer to purchase ("POP") by a purchaser: 10 7 Article 4.21, Draft Law. 8 Article 30.1(b), Draft Law. 9 Article 30.1(c), Draft Law. 10 Article 34.1, Draft Law. 5 Baker McKenzie August 2019 Triggering event Key change (as compared to the current law) a) an organization or an individual, and their related persons, intend to acquire voting shares to directly or indirectly hold 25% [in the aggregate] or more of the total voting shares in a public company; To calculate this 25% threshold, shareholding of related persons will also be taken into account. b) an organization or an individual, and their related persons that hold 25% [in the aggregate] or more of the total voting shares in a public company, intend to acquire more shares in such company which will result in their direct or indirect shareholding reaching or exceeding each threshold of 35%, 45%, 55%, 65%, 75% of the total voting shares in such public company; or This triggering event will be based on each threshold of 35%, 45%, 55%, 65%, 75% and not based on the number of shares or by timeline as provided under the current law. c) except for the case where the tender offer has been made for all of the shares in a public company, after a POP, if an organization or an individual, and their related persons, together hold 80% or more of the total voting shares in a public company, they must continue to acquire the same class of shares from the remaining shareholders within 30 days with the conditions on purchase price, and payment method similar to those of the previous POP. This is a new triggering event. However, there has been a similar requirement under the current regulations. 11 Based on the above new POP triggering events, the acquisition threshold that triggers a POP is only tied to the voting shares of a public company. However, the Draft Law provides that indirect shareholding will also be taken into account, but does not yet clarify further details on how indirect shareholding will be determined. With respect to the exceptions of POP, the Draft Law provides that the above triggering events for POPs do not apply to, among others, the transfer of State capital or capital owned by State-owned enterprises in another enterprise.12 6. New conditions for public companies to redeem shares Currently, public companies are entitled to redeem shares (subject to certain conditions) and keep them as treasury shares. However, the Draft Law now requires the public company to cancel its redeemed shares and decrease its charter capital accordingly in specific cases stipulated in the Draft Law.13 This means that treasury shares in public companies will only be allowed in limited cases. 11 Article 51, Decree No. 58/2012/ND-CP. 12 Article 34.2(d), Draft Law. 13 Article 35.5, Draft Law. 6 Baker McKenzie August 2019 7. Expanded scope of "related person" The Draft Law provides for a broader definition of "related person" as compared to the current law.14 For example, company secretary, being an internal person, will be deemed a related person to such company. This expanded definition will also expand the applicability of other provisions under the Draft Law, such as POPs, prevention of conflicts, obligations to disclose information, etc. In adopting public opinion, the current Draft Law removes business partners and key clients of a company from the definition of "related persons" as compared to the previous version of the Draft Law. 8. License of securities companies and fund management companies Currently, the establishment and operation license of securities companies and fund management companies, which is issued by the SSC, also serves as their enterprise registration certificate. Under the Draft Law, this provision will no longer apply. Instead, a security company/fund management company will first obtain an operation license issued by the SSC, and then obtain an enterprise registration certificate in accordance with the Law on Enterprises.15 Existing securities companies and fund management companies will have one year from the effective date of the new law to make the enterprise registration with the local Department of Planning and Investment.16 Please contact us if you are interested in receiving further updates on the new Law on Securities. 14 Article 4.46, Draft Law. 15 Article 7, Draft Law. 16 Article 134.3, Draft Law. © 2019 Baker & McKenzie (Vietnam) Ltd. All rights reserved. Baker & McKenzie (Vietnam) Ltd. is a member firm of Baker & McKenzie International, a global law firm with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner or equivalent in such a law firm. 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