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Acquisitions by foreign companies problematic

Update: June, 15/2005 - 00:00

Talking Law

(15-06-2005)

Acquisitions by foreign companies problematic

As we wrote in last week’s Talking Law, there has been increasing attention from foreign investors in the possibility of buying shares in Vietnamese companies. By the beginning of the 90s, when the private sector in Viet Nam was newly emerging, foreign investors came mainly to seek direct investment opportunities. After a decade, the domestic private sector has grown strong and it has also become attractive to foreign investors.

To respond to this interest, the Government of Viet Nam promulgated Decision 36, and the ministries promulgated several decisions and circulars to implement the decision and guide this activity. However, all such regulations govern the buying of shares in Vietnamese privately-owned (and equitised) companies by individual foreign investors only. They do not govern the purchase of shares by foreign-invested firms operating in Viet Nam. This has led to some uncertainty among foreign-invested enterprises in Viet Nam. When they buy shares in domestic Vietnamese joint stock companies, what law governs?

If foreign-invested firms are treated the same as Vietnamese limited liability companies, for instance, there are no restrictions on their share buying. They are free to make investments in any privately-owned Vietnamese firm and acquire as many shares as the parties agree on.

On the other hand, if a foreign-invested enterprise is viewed the same as an individual foreign investor for the purposes of buying shares in a domestic company, many restrictions apply. Individual foreign investors, as we noted in last week’s column, for instance, are not allowed to own more than a 30 per cent share in a privately-held Vietnamese company.

Uncertainties like these cause difficulties to the business community and to local authorities which are in charge of issuing business licenses. If a Vietnamese company comes to the local authority to request a change in their business registrations in terms of their shareholders, and the new shareholder is a foreign-invested enterprise, will the local authority accept the change?

In the Vietnamese legal system, if the law is silent on an issue, it doesn’t automatically mean you are allowed to do it. Common practice is that, if you are unsure about whether you are allowed to do something, you request a clarification from the competent authorities. Inquiries to ministries or other regulatory bodies, however, are settled on a case-by-case basis, based on actual parties.

In a real world situtation, however, this can cause difficulties to a domestic company seeking an outside investor in its shares. This company may be considering several outstanding offers from different buyers to purchase the same shares in the company. In deciding to choose one offer and reject the others, a seller needs to know whether the sale of shares will be approved. The seller can’t know which buyer to choose until it receives approval from the authorities, but the authorities won’t approve a transaction hypothetically. The transaction has to be completed and then submitted for consideration. It’s a bit of a Catch-22.

In the process of international economic integration, and in meeting its commitments in various bilateral and multilateral agreements, Viet Nam has made great efforts to revise its legal framework. One of the biggest efforts is the current drafting of the Unified Enterprise Law and Common Investment Law, which are aimed at creating more equal treatment for both foreign and domestic investors. It is hoped that mergers and acquisition activities involving foreign investors are more clearly regulated.

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