Vietnam - Unclear Guidance On Business Lines Conditional To Foreign Investors Creates Uncertainty For M&A Approval Exemptions.
Legal News & Analysis - Asia Pacific - Vietnam - Corporate/M&A - FDI
20 January, 2019
To date, the apparent lack of a detailed list of business lines which carry investment conditions applicable to foreign investors leaves open as to which business lines, industries and trades are considered conditional to foreign investors and, by extension, raises the issue of whether an M&A Approval is required or an exemption will be granted.
An M&A Approval (formerly known as the registration of [the foreign investor’s] capital contribution or purchase of shares or capital contribution) must be obtained prior to an M&A transaction, as set forth in Article 26.1 of the Law on Investment 2014 (“LOI 2014”). This requirement however does not apply where the target company operates in industries or trades in which business investment is unconditional to foreign investors and the foreign investor holds less than 51% of the charter capital of the target company.
Under Decree No. 118/2015/ND-CP dated 12 November 2015, investment conditions applicable to foreign investors are conditions on, inter alia, ratio of foreign investors’ ownership, investment forms and/or scope of investment activities which foreign investors must satisfy in order to invest in the industries and trades in which foreign investment is conditional.1
Given the aforesaid absence of an exhaustive list of business lines which carry investment conditions applicable to foreign investors, in practice the licensing authorities usually rely on the existing list of conditional business lines, which is found in Appendix 4 (as amended and supplemented) to the LOI 2014, when determining whether or not an M&A approval is required.
This has invited the question: on what grounds do the licensing authorities opine that the conditional business lines listed in Appendix 4 are those subject to investment conditions applicable to foreign investors? It would seem that they have been equating investment conditions applicable to foreign investors with business investment conditions, i.e. conditions that a business must satisfy anterior to conducting the business lines mentioned in Appendix 4.2 This is particularly worrisome because this list applies to both foreign and local investors while many of them are not subject to investment conditions prescribed in the aforesaid Decree No. 118/2015/ND-CP.
With that being said, business lines not specified in the list of conditional business lines are also subject to M&A Approval if they are so prescribed in Vietnam’s WTO Commitments on Services. The authority for this proposition is Official Letter No. 7546/BKHĐT-PC dated 18 September 2017 of the Ministry of Planning and Investment (“MPI”), in which the MPI asserted that management consultancy – a business line not listed in Appendix 4 to the LOI 2014 – carries conditions applicable to foreign investors due to it being prescribed as such in Vietnam’s WTO Commitments on Services, despite nothing therein stipulating so.
Therefore, according to the MPI, foreign investors must obtain an M&A Approval prior to purchasing shares or capital contribution of an enterprise whose business lines include management consultancy in compliance with the LOI 2014.
Such stance of the MPI has stirred concern and confusion. Management consultancy has no limitations on market access in terms of “commercial presence” under Vietnam’s WTO Commitments on Services nor does it have any restriction in terms of investment forms, scope of investment activities, or any restrictions or requirements for that matter as prescribed in Article 10 of Decree No. 118/2015/ND-CP. Put simply, there should be no investment conditions applicable to foreign investors. Hence, the MPI’s position that management consultancy is conditional to foreign investors is at odds with Vietnam’s commitments on opening market access and, at the same time, creates a profound uncertainty as to which business lines are conditional to foreign investors and in which cases foreign investors are eligible for an M&A Approval exemption.
Given the views of the MPI, not only shall the business lines listed in Appendix 4 to the LOI 2014 but sectors specified in Vietnam’s WTO Commitments on Services shall also be automatically considered conditional industries and trades.
As a consequence, M&A Approval shall be a prerequisite to virtually all M&A transactions involving foreign investors, effectively rendering the M&A Approval exemption superficial while also potentially damaging the investment environment in Vietnam.
For these reasons, it is imperative that the MPI circulates a comprehensive and exhaustive list of industries and trades in which business investment is conditional to foreign investors in order to avoid impeding the foreign investment flow and to uphold Vietnam’s commitments to opening market to foreign investors.
OTHER LEGAL UPDATES
There are also other legal documents promulgated, including:
- Decree 108/2018/ND-CP amending Decree 78/2015/ND-CP on enterprise registration. The Decree will take effect from 10 October 2018 and will introduce a few changes to the way enterprise registration procedures are conducted. Notably, enterprises will no longer be required to chop their seals on some of the enterprise registration application documents such as the application form, the resolution and meeting minutes of their management bodies.
- Decree 119/2018/ND-CP on electronic invoices in the trading of goods trading and provision of services. The Decree, when effective from the start of November 2018, will replace Decree 51/2010/ND-CP on [ordinary] invoices in goods trading and service provision. Essentially, from 1 November 2020, electronic invoices will replace ordinary paper invoices and enterprises are given a two-year transition window from 1 November 2018 to adjust gradually to the change.
- Circular 03/2018/TT-BTNMT amending the administrative procedures in relation to the specialised appraisal which is the responsibility of the Ministry of Resources and Environment. The Circular is effective from 1 October 2018 and simplifies the procedures for importing scrap and waste products to use for production purpose.
- Circular 23/2018/TT-BYT on the recovery and handling of unqualified food under the authority of the Ministry of Health. The Circular specifies the cases where foods must be recovered from the market and how to handle them after recovery. The Circular is effective from 1 November 2018.
- Decree 123/2018/NĐ-CP amending a number of decrees on the conditions for investing and conducting business in the agricultural sector. Among other things, this Decree makes changes to the conditions for manufacturing and trading crop protection chemicals. The Decree is effective from 17 September 2018.
For further information, please contact:
Dr. Net Le, Partner, LNT & Partners
1Decree No. 118/2015/ND-CP Article 2.6 and Article 10.1
2 Decree No. 118/2015/ND-CP; Article 2.7