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Today I’m joined by Linh Bui and Giang Nguyen, Linh’s a Partner and Giang’s a Senior Associate, both at Allens in the Vietnam office. Linh and Giang thank you so much for joining me.
We’ve recently seen significant reforms to investment laws in Vietnam, Linh if I start with you could you give us some background on these changes?
So over the last few years Vietnam has been reforming its legal system in order to attract more foreign investment into the country and as a part of these reform process last week two major laws on foreign investment, being the law on investment and law on enterprises has been repealed and replaced with new laws which will become effective from 1st July 2015. And overall we see some significant changes in these laws which will hopefully help to create a better legal framework for foreign investment in the country.
And Linh what are the key changes introduced by the new law on investment?
One of the key change in the new law in investment is that it will clarify how Vietnamese companies with foreign investment will be treated, depending on the levels of foreign ownership in these companies and this issue is not absolutely clear under the current law so it will be a very positive change. So under the new law in investment it will be clear now that Vietnamese companies with 51% or more of foreign ownership will be treated as foreign investors and Vietnamese companies with less than 51% foreign ownership will be treated as Vietnamese investors. And being treated as a Vietnamese investor means that if a company wants to invest or set up another entity or invest in a new project or acquire shares in another Vietnamese entity then that Vietnamese company with less than 51% foreign ownership will not have to go through the investment licensing or M&A notification process that applies to foreign investors.
Now Giang if I bring you in here, can you tell us more about the new investment licensing process that will apply to foreign investors?
Sure. The investment licensing process will change significantly under the new law on investment. [Unclear 00:02:21] if a foreign investor wants to invest in Vietnam it needs to go through a one step licensing process to apply for an investment certificate to set up the legal entity and approve the investment project that the entity will conduct in Vietnam from the 1st of July 2015. The new law now provides for two step licensing process separately to get an approval for the investment project and then to set up the legal entity to implement that project. The investment licensing process will be different depending the nature of the project, if the project is an important one then it needs to go through the in principle approval process first before an investment registration certificate can be issued.
And Linh how about M&A activities, how will the new law on investment effect foreign investors in this space?
Sure as you know the current laws on M&A activities are very confusing and it has caused a lot of trouble for M&A deals in Vietnam and the good news for foreign investors that the new law will make it clearer how to conduct an M&A transaction. So under the new law on investment if now a foreign investor buys into a Vietnamese company at 51% or more, or if the Vietnamese company operates in the condition sector then then foreign investor must send a notification to the local department of planning and investment setting out the details of the transaction and then the local department of planning and investment will have 15 days to review the notification to see whether the foreign investment satisfied all the conditions under the law and then issue a confirmation. And on the other hand if the foreign investor invests in a Vietnamese company less than 51% and that company operates in the non-conditional sector for foreign investors then the certification process will not apply. And another good news for foreign investors is that the law will make it very clear now that following an acquisition of shares by foreign investor the Vietnamese target company will not have to apply for an investment certificate which again is something that is very unclear under the current law. So we expect that this change will make it easier to do M&A deals in Vietnam and hopefully this will help to boost the M&A market in the country.
Yeah certainly. Well moving now to the new law on enterprises, Giang if I bring you back in what are the key changes there?
One of the changes in the law on enterprises is that the law will provide for a new principle [unclear 00:05:12] of business which means that companies can carry out all business activities not restricted or prohibited by law. This is quite positive and is opposite to the current law where companies can only conduct activities specifically set out in its enterprise registration certificate. Going forward companies will no longer have to do this and can operate all activities not prohibited by law, however it is not entirely clear under the new law as to how this new principle will apply for foreign invested companies which might still be restricted to conducting only activities specified in its investment registration certificate.
And I understand that there are some important changes to the capital contribution rules under the law on enterprises, Linh can you tell us a bit more about that?
So under the current law generally limited liability companies have three years to contribute its full – in full its registered capital and this rule’s going to change significantly under the new law on enterprises which will require that the registered chartered capital of a company need to be fully contributed within 90 days after it is registered. And we understand that this change, this new requirement is designed to deal with situations of Vietnamese companies having artificial charter capital but where they’ve registered a very high amount of charter capital but would never contribute it to the company. So but the problem is this new requirement to contribute all capital within 90 days will have a great impact on foreign investors particularly when they make an investment in a large project requiring a significant amount of charter capital which is supposed to be contributed all the time. At least that bit now will be a required to be contributed within 90 days and I think going forward to deal with this requirement under the new law phone investors will need to consider registering only a small amount of charter capital and then increasing it every time it needs to get more funding into the company. It definitely will create a lot of administrative burden for foreign investors and it’s something that we see will have a negative impact on foreign investors going forward.
Certainly and what about voting rules, is there any changes there Giang?
Oh yes another change in law in enterprises is the voting rules for dry stock or shares in companies. Most [unclear 00:08:02] at the annual meetings of shareholders of stock companies can now be approved by 51%, that is under the previous 65%,[unclear 00:8:15] 55% rather than 75%. This is a positive change in and brings corporate governance of Vietnamese stock companies to international standards. However we note that this [unclear 00:08:33] as a minimum only, under the law they can be increased to higher threshold in the charter of the company. Also we note that there is now similar change in voting rules for limited liability companies, this may make dry stock companies a more preferred structure for M&A deals.
And just finally Linh can you tell us about the new rules in relation to legal representative of companies in Vietnam?
Sure as you know legal representative is an important person for a company in Vietnam because that person is the only person under the law that is authorised to represent the company in signing contracts or in legal proceedings. And the current law only allows one company to have one legal representative and this often cause a lot of difficulties for companies in practice when this person goes away or is unavailable and the new law on enterprises will lift these restrictions and it will actually allow one company to have more than one legal representative as long as all these person are specified in the charter of the company and they are registered with the[unclear 00:9:47] authorities. And we should note that there’s no upper limit on how many legal representative a company can have so it’s all up to the company depending on their management needs. So definitely we see this as a very positive change and again it is one of the change that is aimed to bring the corporate governance of Vietnamese companies to be in line with the international standards.
Well certainly thank you so much Linh and Giang for talking us through the significant reforms to investment laws in Vietnam.