The 2005 Law on Investment and Law on Enterprises laid a foundation for establishing a new Vietnamese investment regime in general and creating a level playing field for foreign and local investors in particular. The legal framework for the M&A sector in Vietnam has since been developing at a rapid pace. Currently, with some limitations under both Vietnamese law and Vietnam’s WTO commitments, foreign investors can freely acquire shares in Vietnamese enterprises. The new wave of M&A sets to hit Vietnam, as Vietnam is once again perceived as an attractive investment market. The primary investors have been from Japan, Korea, Taiwan and recently from the ASEAN countries, particularly Singapore and Thailand. Once the Trans-Pacific Partnership (“TPP”) and Free Trade Agreement between EU and Vietnam (“EVFTA”), which currently enter their final rounds of negotiation, are concluded, they may also drive more interest in M&A activities in Vietnam.
We much appreciate that the recent development of the Investment Law and Enterprise Law highlighted endeavors of the Government of Vietnam on easing the procedures of M&A activity in Vietnam. The Government of Vietnam by introducing the new Investment Law and Enterprise Law at the end of 2014 has made stronger commitment on the improvement of M&A regulatory framework to re-ignite M&A activity in Vietnam.
Recent M&A deals
M&A activities in Vietnam witnessed a steady growth after Vietnam officially became a member of the World Trade Organization in 2007. Vietnam saw the first M&A wave in the period of 2008 – 2013 with a reported total value of US$15 billion when the Japanese investors kept rushing to Vietnam and made about US$1.2 billion worth deals in 2012. Japan leads the nation that bring M&A deals in Vietnam in terms of both quantity and value. This helps the M&A market in Vietnam reach of peak of US$5.1 billion in that year. According to statistics from Capital IQ, there were 92 successful M&A deals in 2008, 308 deals in 2012 and 182 deals in 2013. Fast-moving consumer goods is considered as the most attractive sector, with the total M&A transaction value up to US$1 billion, accounting for 25% of the total M&A value in Vietnam while the retail and real property have always been robust in M&A with big deal value.
Vietnam’s M&A market saw a strong recovery in 2014 when six deals are reportedly made every week. The total M&A deals in 2014 was 313 with value of US$2.5 billion, a 15% increase compared with the previous year. Notable deals in 2014 include the acquisition of all 19 supermarkets of Cash & Carry and their related real property of Metro by Berli Jucker with a deal value of US$ 879 million; Vingroup, one of the biggest local private companies in Vietnam, bought 70% of Ocean Retail Company’s capital; Mondelez International acquired 80% of Kinh Do Joint Stock Company’s capital in sweets manufacturing section at US$370 million; and Standard Chartered Private Equity acquired a significant minority stake in An Giang Plant Protection Joint Stock Company at US$90 million. The business community highly hope that total value of M&A deals could reach US$20 billion in the second wave (2014-2018).
Good news for M&A in Vietnam
Starting from 01 July 2015, foreign investors will not need to undergo lengthy investment certificate procedures when buying stakes in Vietnamese target companies. While this remains to be seen, 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.
We have 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 EVFTA 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.
Why is the investment certificate question so important?
Under current law, Vietnam has different licensing procedures for foreign and domestic investors. The Investment Certificate (“IC”) serves as business registration for foreign investors. In practice, despite a 45 day maximum statutory time limit, the IC 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. The IC process now statutorily takes 15 days while ERCs are issued within 3 working days. The process may be longer in practice but it is better than before in terms of clear application of time frame.
Explicitly, no IRC for M&A activity!
Foreign ownership in public companies, including listed companies or companies with 100 shareholders or more with contributed equity of VND 10 billion or more, cannot exceed 49%. Although in principle enterprises with foreign ownership of up to 49% are entitled to the same treatment as local companies, such rules appear to be disregarded in practice. For example, the Department of Planning and Investment (DPI) of Ho Chi Minh City refused to register the distribution of pharmaceutical products of a local company on the ground that 4.3% of its shares were then held by foreign investors. It is therefore very difficult for foreign investors to conclude an M&A deal.
Now, 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.
New waves of M&A?
With positive changes that the new Investment Law brought, together with a significant equitization target of about 368 state-owned enterprises in 2015, the conclusion of the TPP and EU-Vietnam FTA as well as the formation of ASEAN Economic Community by the end of this year, Vietnam will witness another wave of M&A. Banking and finance will attract main foreign investment as the number of commercial banks are required to be reduced to 13-15 in 2017 and smaller banks under the pressure of competition and capital requirements will look for new foreign investors to achieve expansive. In addition, consumer goods and real estate also remain attractive sectors.