1. Transaction Activity
1.1 Private Equity Transactions and M&A Deals in
General
Vietnam is still thriving as an attractive market for private
equity (PE). Deal sizes are getting bigger, with complex
transaction structures becoming more prevalent.
As many other jurisdictions, Vietnam is rebounding from the
effects of COVID-19. But the stagnating global economy and rising
inflation resulting from the Russia-Ukraine conflict are taking
their toll on Vietnam’s recovery from COVID-19. As evidence,
the National Assembly of Vietnam projects only a 6.5% growth rate
for Vietnam in 2023.
Consequently, PE funds have faced harsh operating conditions so
far this year, and have, in many cases, been forced to make
difficult funding decisions due to difficulties in obtaining
financing. Despite these challenges, it has not all been doom and
gloom, and perhaps unsurprisingly, the PE market is thriving.
There has also been a notable uptick in venture capital (VC)
activity, especially with investments into the digital economy
(e-commerce, fintech, etc). Vietnam has a tech-savvy and highly
entrepreneurial population which has a need for alternative access
to financing. In fact, technology start-ups attracted the most
attention in the local PE market in 2023.
With the finalisation and issuance of Vietnam’s new Power
Development Plan 8 (PDP8) for the period 2021-30, with a vision to
2050, it is expected that Vietnam will attract greater interest for
PE transactions in the green energy sector, once the regulations to
implement PDP8 are rolled out.
Favourable Laws and Policies
The Vietnamese government remains committed to increasing the
ease of doing business for foreign investors in Vietnam and it is
taking progressive steps to enhance administrative transparency and
to reduce procedural hurdles. Privatisation of government-owned
enterprises and stricter corporate governance requirements for
locally incorporated entities have also contributed to the number
of investable targets.
Added Value for Local Businesses
PE brings significant value to local Vietnamese businesses. PE
money not only provides Vietnamese targets with much-needed growth
capital to consolidate and expand their business operations, but it
also provides healthy controls and constraints to focus the use of
the investment capital for optimal growth and value creation. This
added layer of operational supervision and corporate governance
lends institutional legitimacy to businesses, which eventually
enhances their future exitability to trade buyers or buyout funds.
Cash flow and financing often pose inhibiting obstacles to young
entrepreneurs, who do not have much equity of their own to bring
into their businesses.
PE investors should be aware that much of the sophistication,
financial engineering and exit-driven structuring implicit in PE
may be lost on local business owners. Care should be taken to
ensure that the owners and management teams truly understand the
nature of the investment.
Opportunity Through Crisis
All things considered, during the first half of 2023, Vietnam
saw impressive recovery from COVID-19, and as such, it attracted
significant PE investment.
1.2 Market Activity and Impact of Macro-Economic
Factors
Generally, PE-funded growth equity and buyouts are the most
common types of transactions in Vietnam, although VC activity,
albeit with smaller deal sizes, has been on the increase. Most PE
investing is done by making direct investments into private
companies; however, many individual investors prefer the liquidity
of Vietnam’s listed equities exchanges. While mergers do play a
role in Vietnamese M&A, they are uncommon among foreign direct
investors.
Rising interest rates and other current macro-economic factors
have had an effect on PE investors’ ability to raise financing
for transactions and forced investors to be more selective in
finding and valuating potential targets. However, the increased
financing costs are still manageable.
PE transactions in certain manufacturing industries with supply
chain problems resulting from global geopolitical issues are taking
a hit due to increased risk to investors.
2. Private Equity Developments
2.1 Impact of Legal Developments on Funds and
Transactions
The year 2022 has seen a new Law on Investment (LOI) which came
into force at the beginning of the year. In keeping with customary
practice within the Vietnamese legislative framework, the
implementing regulations have duly delineated the ramifications of
the novel investment law. A prominent feature of LOI is the
incorporation of investment policies pertaining to national defence
and security. As stipulated, any business investment shall be
subject to suspension, cessation or discontinuation if such
endeavour poses a risk to Vietnam’s national defence or
security. Moreover, a novel pre-approval requirement will be
applicable to M&A transactions involving domestic entities
endowed with land use rights situated upon islands, border or
coastal regions or other areas that impact national defence and
security. During the first half of the year 2023, the legal
framework and guidelines under LOI remained unchanged and free from
adverse alterations.
Free trade agreements (FTAs) established with neighbouring
countries have exerted a direct influence on the regulatory
thresholds governing foreign investment within specific local
industries, thereby affording investors the opportunity to obtain
majority stakes in previously restricted or conditionally permitted
business sectors. By harnessing the benefits of these FTAs,
investors operating in Vietnam gain access to a broader market,
achieve cost reduction and enhance their competitive standing. The
dearth of PE entities, whether of domestic or international origin,
holding interests in Vietnamese enterprises and actively engaging
in transactions within the Vietnamese market has contributed to a
scarcity of capital within certain industries. M&A activities
cooled down in Vietnam in the last months of 2022.
Remarkable Synergies Between Local Entrepreneurs and
Foreign Capital
New legislative enactments and international agreements have
additionally expanded the scope of business sectors open to foreign
investment, thus foreseeably augmenting their allure for foreign
investment. With the diversification of the Vietnamese market, it
is concurrently becoming more accessible and accommodating to
foreign (venture) capital. Vietnamese enterprises demonstrate a
concrete need for both guidance and financial resources to amplify
their market share and bolster revenue growth. Local targets are
attainable at competitive valuations, even when factoring in
heightened deal volatility and transaction expenses. Lower deal
volumes enhance the appeal for investors. Collaborative ventures
with foreign investors and partners, as evidenced by noteworthy
examples, have the potential to yield remarkable success
stories.
Notable Highlights on Data Protection
In 2023, the issuance of Decree 13 on the Protection of Personal
Data (“Decree 13”) has significantly fortified the legal
framework governing personal data protection in Vietnam. This
regulatory instrument not only enunciates numerous specific rights
regarding personal data, but also delineates the obligations and
responsibilities of the Personal Data Controller, Personal Data
Processor and Personal Data Controller-cum Processor concerning the
safeguarding of personal data. Decree 13 introduces and addresses
several novel concepts and matters that are of utmost importance.
Notably, this encompasses the classification of sensitive personal
data and general personal data, as well as the intricacies
associated with cross-border transfer of personal data. Given the
pioneering nature of these provisions, they hold considerable
significance and interest for prospective investors.
3. Regulatory Framework
3.1 Primary Regulators and Regulatory
Issues
Remaining Restrictions on Foreign
Investment
Given the broad gamut of practice areas and industry sectors
touched by PE investments, investors must be aware of all
applicable laws. The mantra for PE is “start with the end in
mind”, which means structuring carefully to avoid a fettered
exit. A typical structuring pitfall is the failure to comprehend
the nuances of local legislation governing tax, foreign capital
controls, State Bank of Vietnam (SBV) loan registrations, etc.
Market Access
The starting point for PE investors is market access, that is,
whether an investment is prohibited, permitted subject to certain
conditions or unrestricted.
The prohibited and conditional sectors are contained in a list
known as the “negative list”. Foreign investors are
either completely or conditionally restricted from participating in
these sectors. This “negative list” of commercial
activities also contains further guidance on such restrictions,
which may come in the shape of investment conditions or a complete
ban of certain business lines in these sectors. Business sectors
not appearing on this list are open to foreign investment, and
foreign investors will be treated equally to domestic investors in
matters relating to market entry, licensing and tax.
Licensing Process
Although the Vietnamese regulatory environment has seen
significant improvements over the last decade, as regulators have
developed faster and more predictable licensing procedures, the
process of closing a transaction in Vietnam is often arduous and
protracted. Nonetheless, the legislator has already taken some
steps towards a transition to offer more certainty and to reduce
the time required to make the necessary filings. Most investments,
however, still require complex processes to register an investment
with the competent authorities, ie, with the Ministry and
Department(s) of Planning and Investment, in parallel with the
usual transactional steps between the parties, such as term sheets,
due diligence, disclosure, etc. The licensing process adds
additional time, costs and uncertainty to these PE transactions,
meaning that the transaction fees (when calculated as a percentage
of the deal size) can be higher than in other jurisdictions.
The duration of such local approvals can significantly impact
the workflow of M&A deals and be a strong deterrent to the
disbursement of foreign venture capital into the country.
Additionally, exit strategies still pose an inhibiting factor to
Vietnamese investments, as many investments do not guarantee
short-term profitability and the repatriation of funds and gains
may create regulatory difficulties.
Corruption
Vietnam has started doubling down on its fight against
corruption and is imposing strict sanctions on any violations of
anti-corruption laws. In order to prevent obtaining competitive
advantages or personal favours through illicit business practices
like corruption, Vietnam is expanding the scope and reach of its
regulatory arsenal.
ESG Objectives
ESG standards are also playing an increasingly important role in
the Vietnamese legal and compliance landscape. A new environmental
protection law that came into force at the beginning of 2022
introduced a new system of environmental licences and gives
affected enterprises a 24-month time window to comply with the new
rules and obtain all the necessary environmental licences to
operate their business. To serve its ESG objectives, Vietnam has
introduced new rules for the management of foreign direct
investment. The Law on Investment (dated 17 June 2020) proposes a
new mechanism that disallows the extension of investment projects
that make use of obsolete or outdated technologies that may also
pose a danger to the environment.
Green bonds have become an increasingly popular tool among
Vietnamese issuers over the past years. As of 2020, Vietnamese
companies had issued four green debt issues with an aggregate value
of nearly USD284 million. Most of the proceeds from green bond
issues (ie, roughly 57%) are used for renewable energy development.
Sustainable energy sources form one of the cornerstones of
Vietnam’s ESG interests, alongside waste treatment and
sustainable improvements in the agricultural sector.
Vietnamese public and listed companies are required to disclose
annual ESG reports that comprise their efforts in reducing
greenhouse gas emissions, energy and water consumption and ensure
compliance with the law on environmental protection. A
company’s board of directors needs to prepare an assessment
report related to the environmental and social responsibilities and
the corporate objectives of the relevant company with regard to the
corporate environment, society and community sustainability.
Vietnam’s State Securities Commission (SSC), as well as
non-government organisations, have managed to introduce some
guidance and incentives to raise awareness and enhance
Vietnam’s ESG practice.
At the United Nations Climate Conference in 2021 (COP26),
Vietnam pledged to phase out coal and stop building thermal power
plants. Vietnam has committed to not develop new thermal power
plants after 2030, to stop adding new thermal capacity and to shut
down remaining old plants by 2045.
At the United Nations Climate Change Conference in 2022 (COP27),
Vietnam reiterated its strong climate commitments and sought ways
to realise its commitments. It also raised new initiatives,
mechanisms and policies to conduct a firm energy transition.
These continuous improvements in ESG legislation, policies and
corporate governance have been attracting new legions of foreign
investment into Vietnamese companies.
Merger Control and Economic Concentration
The Ministry of Industry and Trade (MoIT) is the governing
authority for merger control questions. Recent legislation joined
the Competition Investigation Agency of Vietnam, the Competition
Authority of Vietnam and the Vietnamese Competition Council into
the National Competition Committee (NCC) or Vietnam Competition
Commission (VCC). The new NCC/VCC will now be solely responsible
for monitoring and investigating breaches of competition law and
enforcing any related regulatory sanctions.
Vietnam’s Law on Competition (LoC), effective from 1 July
2019, focuses on restrictive agreements, market dominance, economic
concentration and unfair practices. Its scope now includes
acquirers of equity by way of equity subscription or purchase
(“PE buyers”) of local and foreign origin, in case their
actions have – or may potentially have – a restrictive
impact on competition in the domestic market. The threshold for
this impact is defined broadly as any kind of influence that is
bound to exclude, reduce or hinder competition in the market.
When contemplating investment, PE investors will need to
consider these new rules on economic concentration which are
unfortunately, in many respects, less concise than the previous
rules. In particular, concrete thresholds for economic
concentration have been removed under the new LoC and redefined
more vaguely, making it more difficult to predict the outcome of
merger control procedures. Moreover, investors are obliged to
report to the NCC any economic concentrations, which are subject to
thresholds based on similarly vague assumptions:
- the companies’ totals assets and turnover in the domestic
market; - the single transaction value; and
- the companies’ combined market share.
The relevant statutory instruments have enabled the NCC to grant
considerable discretion to the competent authorities in determining
these factors.
4. Due Diligence
4.1 General Information
Better Safe Than Sorry
PE investors pursuing deals in Vietnam should undertake a
thorough legal due diligence (as well as financial, tax and
operational due diligence) on the target. A prudent investor should
also be aware that comprehensive contractual protection in the form
of representations, warranties and indemnities do not negate the
need for due diligence. While dispute resolution via arbitration or
court proceedings is possible, satisfying a claim of this nature
will be tortuous.
While due diligence procedures have been relatively standardised
in recent years, acquirers of Vietnamese equity should focus on all
aspects of regulatory compliance, including but not limited to,
market access, corporate governance, tax, human resources, and
accounting. The ramifications of non-compliance can be very severe
– at best costly, at worst criminal. In addition to this,
investors should also make use of all information in the public
domain and carry out searches of the publicly maintained registers,
such as the national register for secured transactions.
Pre-deal Approval Required
In advance of any merger, acquisition or joint venture which
crosses the above thresholds, PE buyers must inform the NCC of
their transactional intentions. The NCC’s approval will have to
be obtained before starting the implementation phase of the
transaction and can constitute a temporary roadblock to envisaged
PE investments. The timeline for this procedure is proposed to be
30 days. For more complex issues, the NCC may extend its review for
some additional months, subject to its discretion.
In a wider sense, target-based due diligence in Vietnam will
also include pre-emptive engagement with the counterparties of the
transaction, as well as the governing authorities, to resolve any
preliminary issues that might arise. Working closely with the
competent agencies provides helpful guidance on specific
requirements and will bring further certainty where local codified
law remains unhelpfully vague.
Structure Is Key
In some cases, restructuring a company to suit the needs of an
international investor may require flexibility and creativity on
the implementation side. Vietnamese laws do not allow many
statutory options to streamline company management or introduce
international corporate standards. Corporate governance is,
however, particularly important for those investors who wish to
have a close grip on the company’s operations and maximise the
effect of foreign expertise, experience and entrepreneurship in the
Vietnamese target.
4.2 Vendor Due Diligence
The practice of vendor due diligence tends to be a question of
deal size in Vietnam. For smaller deals, typically growth capital,
buy-side due diligence is the standard. However, for larger
transactions usually in the form of trade sales, majority deals or
buyouts, and where a sell-side financial adviser has been appointed
to run a competitive process, it is very common to have a vendor
due diligence report. Without this, it can be difficult for the
sell-side advisers to maintain deal momentum.
In auction sales, sell-side legal advisers typically just
provide a legal brochure containing general legal facts and details
pertaining to the target company and its assets.
5. Structure of Transactions
5.1 Structure of the Acquisition
In Vietnam, PE investors generally acquire capital contribution
(share capital) in limited liability companies or shares in joint
stock companies by way of a capital contribution assignment
agreement or share purchase agreement (SPA). Vietnamese PE
transactions may take the form of either primary or secondary
sales. Many PE buyers also choose to obtain a minority position
first, while securing an option to acquire more shares at a later
stage, subject to pre-agreed valuations.
Since these agreements must be submitted to the competent
authorities as part of the licensing process, in practice, such
agreements will be often supplemented by the parties with more
detailed terms. An auction sale is not a form of investment in
Vietnam, therefore, the nature of the acquisition in an auction
sale is different.
5.2 Structure of the Buyer
PE investors are a sophisticated investor class often preferring
more complex and financially engineered investment structures, such
as convertible loans or preference shares, to straight equity.
Other investors seek to structure their shareholdings via
interposed regional or offshore special purpose vehicles (SPVs) to
optimise tax and benefit from flexible legal systems. In addition
to this, the bigger buyout funds will utilise internal rates of
return (IRR)-enhancing multi-layered offshore structures to allow
for various levels of debt and inter-creditor subordination.
5.3 Funding Structure of Private Equity
Transactions
Equity or Debt?
The most common deals are minority investments usually sub-USD20
million, which are growth capital-driven deals funded by
unleveraged equity, mainly because (i) onshore acquisition finance
is unavailable; and (ii) smaller offshore PE funds are seldom in a
position to leverage their balance sheets or cross-collateralise
their existing portfolios to raise cheaper offshore debt. Larger
buyout funds (for deals usually in excess of USD100 million) tend
to leverage their equity through multiple layers of structurally
subordinated debt.
Minimum Share Quotas
In some cases, a foreign PE investor may be compelled to
co-invest with a local company because the investment sector is
restricted. Normally, PE investors will attempt to secure the
largest stake possible, and will sometimes attempt to use loopholes
in the investment law to structure around any restrictions.
5.4 Multiple Investors
Given the relatively small size of PE deals in Vietnam, it is
not common for multiple PE investors to invest in the same deal. In
some cases, where local or regional funds identify a deal that is
too big for them, the fund may invite their limited partners to
invest directly into the deal, which may appeal to a limited
partner from the same industry sector.
Consortia comprising a private equity fund and a corporate
investor are not common.
6. Terms of Acquisition Documentation
6.1 Types of Consideration Mechanisms
Consideration structures vary from deal to deal in Vietnam and
locked-box, completion accounts and fixed-price structures are all
common.
Earn-outs and deferred consideration are also common features of
PE transactions. Generally, earn-outs are preferred, as PE buyers
tend to link the valuation to future target performance.
6.2 Locked-Box Consideration Structures
In Vietnamese PE transactions, whether interest will be charged
on leakage will mainly depend on the deal, but it is generally
possible.
It is not typical to charge (reverse) interest on any leakage
that occurs during the locked-box period but it can nevertheless be
agreed among the parties.
6.3 Dispute Resolution for Consideration
Structures
Both locked-box and completion accounts consideration structures
are commonly supported by appropriate dispute resolution
mechanisms. Such clauses are usually included in the documentation
of PE transactions with Vietnamese targets.
6.4 Conditionality in Acquisition
Documentation
In common with other jurisdictions, in Vietnam, equity purchase
or subscription agreements are subject to conditions. Aside from
the usual conditions precedent (eg, the PE buyer being satisfied
with the due diligence, the disclosure letter being agreeable, the
PE buyer securing the requisite acquisition financing or the seller
procuring the repayment of shareholder loans and release of other
security), Vietnamese transaction documents will often allocate the
regulatory transactional risk via conditions precedent or
subsequent to, or post-closing, undertakings. As more particularly
described in 3.1 Primary Regulators and Regulatory
Issues, the mechanics of closing will be the subject of
negotiation, and they are often built into both the SPA or share
subscription agreement (SSA) and the escrow agreement. In some
cases, parties agree, sub-optimally, to settle the purchase price
by way of staged milestone payments linked to the completion of
certain licensing steps. Typical conditions subsequent to or
post-closing undertakings would be the rectification of minor areas
of regulatory non-compliance flagged during the legal, financial or
tax due diligence.
Material adverse change (MAC) clauses are built into most SPAs
between signing and closing, which is advantageous for the investor
since the period between signing and closing can be lengthy, given
the protracted licensing periods required to update the
investor’s ownership.
6.5 “Hell or High Water”
Undertakings
“Hell or high water” undertakings are not common in
Vietnam and PE buyers resist these very strongly.
6.6 Break Fees
Break fees are not the norm, but they are agreed for some
transactions. Reverse break fees are even less common.
Despite a limited body of precedent on this matter, Vietnamese
courts have been known to reject the enforcement of break fees in
transaction documents. Investors wishing to introduce break fees
should draft them carefully so that they are constructed as fair
and reasonable, and not punitive.
6.7 Termination Rights in Acquisition
Documentation
Vietnamese PE buyers and sellers are generally highly focused on
deal certainty, and termination rights are typically heavily
resisted. As is common practice in other jurisdictions, SPAs
normally contain a long-stop date by which the closing conditions
must be fulfilled. If a deal does not close by an agreed long-stop
date, the agreement will terminate, unless otherwise agreed between
the parties to extend such long-stop date. However, a long-stop
date needs to be very carefully worded, as in reality, once an
application dossier has been submitted to the competent authorities
to effect the registration of the change of ownership, it would be
difficult to unwind, if the long-stop date was to expire during the
long-stop time window.
Rights afforded to PE buyers for breach of pre-closing
undertakings or representations/warranties would generally be
heavily resisted by sellers, and if accepted, linked to some
clearly defined material thresholds.
Typically, long-stop dates are about three to six months from
signing or longer, depending on the specific transaction.
6.8 Allocation of Risk
All deals are different, and risk allocation is ultimately
determined by negotiation. A highly sought-after company in an
attractive sector with growing EBITDA margins, being sold in a
competitive process, will simply not give the same contractual
protections as offered by a company in trouble. In most
jurisdictions, risk allocation is mostly based on certain
indemnities granted to each of the parties by their respective
counterpart(s). This is always subject to party negotiations and
therefore very deal-specific. Generally, indemnities will include
any damages arising to one of the parties due to the untruthfulness
of representations and warranties, certain other target or buyer
characteristics, and other industry-specific aspects.
6.9 Warranty and Indemnity Protection
The sellers’ warranties are contractual statements regarding
the company’s assets, typically contained within the SPA or the
SSA, which are used as tools for allocating risk between the PE
buyer and the seller and adjusting the price retrospectively.
Generally, representations (reps) and warranties are given by
sellers, and these days most PE buyers will require reps and
warranties to be given by the seller on an indemnity basis; this is
a US standard which has crept into mainstream M&A, although it
should be resisted wherever possible. As a general rule, indemnity
protection should be reserved for specific and identifiable issues.
A well-advised management team will not give any warranties.
Shareholders partnering with PE investors should be aware that most
PE funds will take a reduction on valuation if it means a reduction
of post-closing liability, as the PE investor needs to return funds
to LPs and, in doing so, stop the IRR clock. This may not be
aligned with incumbent shareholders who do not need to return funds
to limited partners (LPs) and who may have a more intimate
knowledge of the company. These shareholders are usually less
concerned about the indemnity risk. For this reason, many outgoing
PE firms prefer to pay warranty and indemnity (W&I) insurance
premiums, to allow them to return funds to LPs and to crystallise
carried interests.
6.10 Other Protections in Acquisition
Documentation
Escrow Arrangements
Closing of equity purchases in Vietnam is problematic, since
there is no clean and clearly defined closing mechanism. In most
common-law jurisdictions, closing can occur on the same day.
Purchasers are able to make same-day payments (especially when
accompanied by an MT103 swift message) and share transfers can be
effected by duly executing a stock transfer and updating the
relevant statutory registers. In Vietnam, however, settlement
cannot occur contemporaneously, which, in turn, creates a
settlement risk. In particular, investors are reluctant to fund
acquisitions until licences have been updated with the PE buyers as
the new shareholders. On the other hand, however, sellers are
reluctant to submit application dossiers to the competent
authorities to effect the change of ownership until they have
received the purchase consideration. This issue has been largely
resolved using escrow arrangements with local banks, but this, too,
comes with a panoply of issues.
Warranty and indemnity insurance is common in PE transactions in
Vietnam.
State Bank Registration of Loans
In a restrictive foreign exchange (FX) environment, in which the
SBV controls and monitors all offshore loans and transactions,
lengthy registration and approval procedures can slow down
transactions. However, with an increasing number of such
transactions, the procedures become more predictable and do not
pose major obstacles to PE deals into the country. Foreign loans
do, however, require detailed planning and feasibility checks, as
well as a good relationship with the respective credit
institutions. Doing business in Vietnam has a reputation for being
restrictive and local partners may take cover behind onerous
enforcement procedures. For these reasons, foreign banks may be
reluctant to lend to their usual partners during inbound PE
deals.
6.11 Commonly Litigated Provisions
Litigation in connection with PE transactions is not common in
Vietnam, but it does happen. The forum for dispute resolution and
the choice of law are critical to the success of a claim.
When weighing up the relative merits of transparency versus
enforceability, many PE investors have concluded that, while
foreign law and jurisdiction may provide a higher degree of legal
certainty and procedural transparency, the Vietnamese courts or
arbitration provide the most practical route to enforcement.
7. Takeovers
7.1 Public-to-Private
Public-to-private transactions are uncommon in Vietnam. It is
important to note the distinction between a public company and a
listed company, as they are not synonymous – a public company
need not be listed, but a listed company must be a public
company.
Joint Stock Company
According to enterprise law, the only form of publicly traded
company known to Vietnamese law is the joint stock company (JSC). A
JSC is a commercial enterprise with assigned charter capital that
is divided into equal portions (shares). There can be no less than
three shareholders, whereas the maximum number of shareholders in a
JSC is not limited by law. A JSC can – with limitations in
specific business lines on the investment law’s negative list
– be solely owned by foreign shareholders. Ownership can also
be split between local and foreign investors, to represent a
cross-border partnership. A Vietnamese JSC may issue shares and
publicly list them on the Vietnamese stock exchange, subject to
eligibility and fulfilling the conditions for an initial public
offering (IPO).
Public Company
A public company under Vietnamese law qualifies as such if it
has a contributed charter capital of at least VND30 billion
(roughly USD1.3 million) and at least 10% of the voting shares are
being held by at least 100 non-major shareholders, or if it has
successfully carried out the registration of an IPO with the
competent authority. There are restrictions on the capital of local
companies held by foreign investors in certain sensitive sectors,
which are enumerated in Vietnamese investment law. In addition, the
law does not give any specific guidance on the acquisition of
assets or merger transactions to which a foreign investor is a
party.
Land-Use Rights
More specific restrictions that need to be considered from the
perspective of Vietnamese law are all transactions that relate to
the acquisition of a company that holds Vietnamese real estate (ie,
land-use rights). In this regard, to align the PE deal with the
mandatory stipulations of Vietnamese civil law, foreign ownership
rights will be restricted according to real estate laws.
7.2 Material Shareholding Thresholds and Disclosure in
Tender Offers
Under the Vietnamese Law on Securities (LoS), a shareholder that
directly or indirectly owns 5% or more of the voting shares of an
issuing organisation is a major shareholder. Larger transactions
concentrating more than 10% of share ownership in the hands of a
single investor must undergo registration with the Vietnamese State
Securities Commission (SSC).
7.3 Mandatory Offer Thresholds
Vietnamese enterprise law contains mandatory offer thresholds
for tender offers, upon which minority shareholders will be made an
offer to sell in three cases:
- purchase of a company’s circulating shares that results in
a purchaser, with no shareholding, or less than a 25% shareholding,
acquiring a 25% shareholding; - purchase of a company’s circulating shares that results in
a purchaser (and persons affiliated to the purchaser) with a 25% or
more shareholding, acquiring a further 10% or more of the
circulating shares of the company; and - purchase of a company’s circulating shares that results in
a purchaser (and persons affiliated to the purchaser) with a 25% or
more shareholding, acquiring a further 5% up to 10% of the
currently circulating shares of the company within less than one
year from the date of completion of the previous offer.
In any of the above cases, after obtaining the SCC’s input
on the conditions of the offer, the initiator of the tender (the
bidder) must publicly announce its offer in three consecutive
editions of an electronic newspaper, or a written newspaper. With
regard to listed companies, an announcement of the tender offer
must also be made on the relevant stock exchange no later than a
week after obtaining the SSC’s opinion on the offer. The latter
is a prerequisite for carrying out any tender offer.
7.4 Consideration
Most Vietnamese PE deals rely on cash as consideration for the
purchase of shares. However, shares may also be traded in
consideration of land-use rights, intellectual property rights,
technology, technical know-how, gold, and other commercialised
assets, according to Vietnamese law.
7.5 Conditions in Takeovers
While there is no clearly defined legal restriction on the offer
conditions for a PE-backed takeover offer under Vietnamese law,
offers will regularly contain conditions that ascertain the equal
rights and access of all target shareholders, define the
shareholders’ rights to sell their shares, and contain
regulations, which are mandatory under Vietnamese law. Regulatory
approval and MAC clauses also play an important role in this
context.
7.6 Acquiring Less Than 100%
Vietnamese enterprise law does not define any squeeze-out rights
of majority shareholders, which would enable them to take control
of all the shares in the company against the minority
shareholders’ will. However, contrary to the absence of such
squeeze-out rights, the PE buyer does have a statutory duty to
purchase the remaining shares in the target under certain
conditions: if a bidder acquires more than 80% of the target’s
total shares, they will be obliged to buy all the remaining shares
(of the same type) from other shareholders. This is subject to the
request of these shareholders and must be executed at the same
price as the bid within 30 days of the offer.
7.7 Irrevocable Commitments
Irrevocable commitments, by which a PE buyer may gain a higher
degree of certainty about the outcome of a takeover or the voting
behaviour of other major shareholders, are not typical in the
Vietnamese PE market.
8. Management Incentives
8.1 Equity Incentivisation and Ownership
Management equity is ubiquitous to PE and Vietnam is no
exception; Vietnamese law allows for employee stock ownership plan
(ESOP) structures to incentivise key management and align them with
the PE investors’ exit timeline. Moreover, PE investors also
attempt to lock in key management so that they stay with the
company after the previous owner’s exit; this is done by
requiring the management team to roll over a certain percentage of
the proceeds from their ESOP shares into new ESOP shares.
Clearly, PE buyers are buying businesses at valuations arrived
at by analysing business plans and financial models built by the
target’s key management and based on the belief that they are
achievable. PE buyers and management are not aligned, because the
higher the forecast, the higher the price (which includes the
rollover price for the new ESOP shares), and the harder it will be
for the management to hit the KPIs to participate in the new ESOP.
In other words, if the key management are forced to roll over too
much of their ESOP proceeds, they will be incentivised to push down
the transaction.
8.2 Management Participation
The form of management participation depends on the deal, but in
most cases, ESOPs are the preferred means of equity incentive and
management shares are issued to key management.
8.3 Vesting/Leaver Provisions
Vesting schedules will be negotiated, but, usually, PE investors
attempt to link vesting to “good/bad leaver” provisions
and exits.
8.4 Restrictions on Manager Shareholders
When companies want to restrict a manager’s or
employee’s right to jump ship and work for competing
enterprises, they may consider imposing a non-compete clause on
such individuals. The permissibility and enforceability of such
restricting provisions have not been definitely resolved under
Vietnamese law, either by the lawmaker or by the judiciary.
In more developed jurisdictions, practitioners are faced with an
intricate and well-balanced system of considerations that need to
be thought through when crafting or interpreting the true meaning
and enforceability of a non-compete or non-solicitation clause.
This will depend on the level of compensation the individual
receives in consideration of the restriction. Another important
aspect of such evaluation is the duration of the designated
clause.
While non-compete and non-solicitation clauses do come up in
Vietnamese drafting, there is currently no certainty about their
enforceability or legality. Interpretation will therefore depend on
the specific litigation of such clauses and will be subject to the
reading of the Vietnamese labour courts, which generally tend to
rule in favour of the employee and against the solicited
competitive restriction.
Non-compete and non-solicitation clauses are usually part of the
employment contract.
8.5 Minority Protection for Manager
Shareholders
Minority shareholders’ interests are protected by (i)
contractually agreed reserved matters (negotiated on a case-by-case
basis, and usually contained in the shareholders’ agreements);
and (ii) statutory provisions relating to the protection of
minority rights.
Management does not typically have anti-dilution protection.
This is deal-specific.
9. Portfolio Company Oversight
9.1 Shareholder Control and Information
Rights
PE buyers in Vietnam will seek as much control as possible. This
control will come in the form of reserved matters, information
rights, corporate governance, board seats and management
oversight.
9.2 Shareholder Liability
Generally, shareholders of a Vietnamese legal entity are not
personally liable for the debts of a company, aside from their
obligation to fully pay up their shares in the charter capital of
the company. In other words, shareholders can be personally liable
in cases where the target company’s share capital has not been
paid up.
10. Exits
10.1 Types of Exit
Depending on the life of the fund, which is typically ten years,
PE funds will look to exit an investment after five years.
Trade sales and secondary buyouts remain the most popular exits.
IPOs are uncommon exits in Vietnam.
Reinvestment rights will depend on the tenor and mandate of the
fund.
10.2 Drag and Tag Rights
Drag rights are commonly built into Vietnamese shareholder
documents and, in principle, they are permitted by Vietnamese law.
However, the enforcement of such rights in practice could be
challenging.
As with drag rights, tag rights are also commonly built into
Vietnamese shareholder documents and, in principle, they are
permitted by Vietnamese law. Again, the enforcement of such rights
in practice could be challenging.
10.3 IPO
Most exits in Vietnam are carried out through sales to trade
buyers and share sales after local IPOs. The latter can take time
as liquidity is not huge, so a plan for such sales, that will not
disrupt the market, has to be drawn up. Typically, listed companies
with strong corporate governance and attractive growth rates
quickly reach the foreign ownership cap (usually 49%, removable
under certain conditions), resulting in most transactions happening
in large blocks at a premium to the PE price – and most
disposals of listed shares by PE funds have occurred via these
“off-market transactions”.
There has been no strong track record of successful listings of
Vietnamese companies outside Vietnam, although some have started
setting up for such ventures. Much like an inbound investment is
restricted to foreign investors, Vietnamese companies must obtain
regulatory approval in the form of an Overseas Investment
Registration Certificate (OIRC), to be eligible to step on to the
global playing field. With such high thresholds in Vietnamese
foreign ownership, the Vietnamese regulations and lack of prior
exposure to international disclosure principles inhibit local
companies’ IPOs. The related costs also play a significant role
in the scarcity of this exit strategy.
Throughout the divesting process, some regulatory procedures
must be completed, and respective approvals obtained. This is
particularly true for cases in which the issuance of new shares is
required and in which non-cash consideration needs to be determined
and accepted.
Neither lock-up periods nor relationship agreements are common
practice in Vietnam.
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