In accordance with the global situation, the M&A market in Vietnam has been affected by COVID-19. In 2020, Vietnam’s total M&A transaction value fell by over 50% and by 2019 it was calculated at approximately USD3.5 billion only.
Strict COVID-19 measures imposed by the government such as quarantine, social distancing and stay-at-home orders, have brought difficulties in deal assessment, decision-making, contract negotiation, and performance of M&A parties. According to a study of Vietnam’s Institute for Corporate Investment and M&A (CMAC Institute) on Vietnam’s M&A market 2019-2021, the main negative factors which led to pending or broken transactions in 2020 included:
Regardless of the above, Vietnam is considered the country wherein M&A activity has been the least affected of the South East Asia region. The market still witnessed remarkable acquisitions and restructuring deals in various sectors, as described in this article.
With regard to the method of acquisitions, top trends were as follows.
In terms of the location of acquisitions and nationality of the investors, the top trends were as follows.
Industries which experienced significant M&A activity in 2020 were those of real estate, banking and finance, pharmaceutical, and retail.
On the contrary, hospitality, F&B and education were unsurprisingly some of the industries most affected by COVID-19, with very few successful deals recognised.
The primary legal means for acquiring a company in Vietnam are share purchase, and business or asset purchase.
Share Purchase
Share acquisition is the most popular means and can be induced by way of private placement (purchasing newly issued shares from a company), purchase from existing shareholders, purchase on stock exchange, or share swap.
With a share purchase, the buyer can take control of the target’s management, subject to its shareholding, and enjoy all licenses already obtained under the name of the target for its business. However, the buyer must take all responsibilities within the shares it owns, should there any issue affect the company before or after the acquisition.
Business or Asset Purchase
Business or asset deals allow the buyer to cherry-pick the assets they deem necessary and in good condition (legally and commercially). However, the buyer cannot gain control over the target’s management and must be aware of possible complicated tax and procedures for the transfer of assets.
The primary regulators for M&A activity in Vietnam are:
There are many forms of restrictions on foreign investment in Vietnam. These vary from a foreign ownership limit (FOL), restrictions on the form of investment and the investor’s access to specific licenses in certain regulated sectors. However, not all investors or sectors are pertain to these restrictions.
See 4.3 Hurdles to Stakebuilding for more details on FOL of public companies.
Antitrust in business combination, ie, economic concentration, is primarily regulated in the Law on Competition 2018 and its guiding Decree No 35/2020/ND-CP.
An economic concentration is defined as a merger, consolidation, acquisition, joint venture or other as stipulated under law.
Companies in an economic concentration must, in advance, file a notification of economic concentration to the NCC if the following situations applies:
The above thresholds are different for credit institutions, insurance companies and securities companies. In case an economic concentration is conducted outside of Vietnam, only the third threshold (ie, transaction value) can be disregarded.
Economic concentration is prohibited if it causes or is likely to cause substantial anticompetitive effects on the Vietnamese market. While the law and its guiding decree has established criteria of substantial anticompetitive effects, this criteria can be difficult for companies to assess themselves and is highly subjective to the NCC.
In case of a business combination, one circumstance of several which affect the employment of many employees — the employer must prepare a labour usage plan in accordance with the Labour Code 2019. This requires a discussion with the labour union. It is the responsibility of the current employer and the succeeding employer to implement the approved labour usage plan.
Employees that have worked on a regular basis for the employer for at least 12 months are, if made redundant, entitled to a redundancy allowance of at least two-month's salary. Each working year will be entitled to a month salary.
For foreign investors, one of the conditions of share acquisition in Vietnam-based companies is that of ensured national security and defence in accordance with the Law on Investment 2020.
Specifically, foreign investors who intend to acquire shares of target companies located on islands or coastal or frontier areas of Vietnam must obtain an M&A approval from the DPI for reasons of national security and defence. The DPI will then obtain opinion from the MPI, possibly the Ministry of Police and the Ministry of Defence to decide whether the investor is approved for said share acquisition.
In the past three years, four primary laws governing M&A transactions were promulgated to replace the former versions.
These include the Law on Competition 2018, Law on Securities 2019, Law on Enterprise 2020 and Law on Investment 2020. These last three laws have been in effect since 1 January 2021. Some of the most significant changes to each law are as follows.
Law on Investment 2020
Business lines or sectors that are limited to foreign investors’ market access are classified into two lists: (i) those not yet accessible to foreign investors; and (ii) those accessible on conditions. Accordingly, if a business line is opted out of the lists, foreign investors are, in principle, allowed to apply market access conditions similar to those applied by local investors.
Notably, if a foreign shareholder owns more than 50% in a company, any investments of that company are subject to foreign investment restrictions. Previously, the foreign ownership threshold was 51% or above, which is more in favour of foreign investors. This tightening affects M&A by way of holding company.
Law on Enterprises 2020
A shareholder or a group of shareholders only needs to hold from 5% of the total ordinary shares at any current time, or a lower ratio if specified in the company’s constitutional document, to call for an extraordinary general meeting of shareholders (GMS) or to nominate candidates for the board of management (BOM).
In addition, preference shareholders can now vote on matters which could adversely affect their rights and obligations. A GMS resolution on such matters is only passed if approved by shareholders attending the GMS meeting and representing at least 75% of the company’s total preference shares of the same type.
Law on Securities 2019
Only strategic investors and professional stock investors are allowed to acquire shares of a public company via private placement.
Furthermore, a buyer contemplating the acquisition of voting shares of a public company must conduct a tender offer, if such acquisition leads the buyer to directly — or ‘indirectly’, as newly added by the law — own 25% or above of the total voting shares of the public company.
Law on Competition 2018
The criteria and requirements for compulsory merger filing are stricter. See 2.4Antitrust Regulations for more details.
Previously, a merger filing was not required if the combined market share of enterprises participating in the economic concentration was lower than 30%.
There is no separate takeover law under the Vietnamese laws. Instead, M&A activity is governed by various laws, primarily those presented in 3.1Significant Court Decisions or Legal Developments.
Building a stake in the target before launching an offer can happen, though it is not very common due to some limitations provided under the law. See 4.3Hurdles to Stakebuilding for more details.
Public Companies
Within five working days from the date of the following events, the following person must disclose their shareholdings to the public company, the SSC and the stock exchange where the company’s shares are listed:
However, the disclosure obligation does not apply to the change of shareholding due to the company's redemption of its own shares or issue of additional shares.
Private Companies
There is no requirement on material shareholding disclosure obligations. Nevertheless, a joint stock company must notify the DPI of any change in its foreign shareholding, regardless of the shareholding being major or not.
A company cannot introduce different thresholds for disclosure or filing obligations.
FOL may be a major hurdle for stakebuilding in Vietnam-based public companies, specifically in the following forms:
Moreover, stakebuilding at a certain level will trigger the material shareholding disclosure and mandatory offer. See 4.1Material Shareholding Disclosure Threshold and 6.2 Mandatory Offer Threshold for more details.
Dealings in derivatives are permitted in Vietnam and are mainly regulated under the Law on Securities 2019 and guiding Decree No 158/2020/ND-CP.
Foreign investors are allowed to invest in derivatives without limitation, unless otherwise stipulated by other relevant regulations.
Derivatives may be traded on either regulated stock exchanges or the over the counter (OTC) market, ie, where derivatives are traded directly, as agreed, between parties.
For transactions made on regulated stock exchanges:
For OTC transactions:
Vietnam’s Law on Competition does not govern filing/reporting obligations for derivatives.
In the tender offer registration dossiers – to be submitted to the target and the SSC – shareholders must disclose the purposes of the tender offer and their plan for business and activities of the target after the tender offer.
For M&A deals involving public companies, the target’s disclosure obligations may be triggered if falling into one of the following circumstances, which also leads to the disclosure of the deal:
As public companies are subject to strict disclosure obligations, they must follow the disclosure timing as stipulated under the laws. For private companies, parties to M&A transactions tend to disclose a deal after definitive agreements are signed or after closing.
Overall, the scope of due diligence on a target usually includes the following:
The scope of due diligence has been impacted by the pandemic, especially in that stricter requirements have been introduced to check conditions for the termination or renewal of contracts, and solutions in case of unexpected events or hardship situations like COVID-19 have become necessary.
Standstills
Standstills are uncommon in practice for the following reasons:
Exclusivity
Exclusivity provision is common in Vietnam’s M&A transactions, which may safeguard the buyer from other potential buyers. On the other hand, the seller may use this provision to speed up the negotiation phase with the buyer and the due diligence process.
Tender offer terms and conditions are usually documented in the bidder’s registration dossiers to the target and the SSC, as is the offer announcement.
The following terms and conditions must be specified in the offer announcement:
A share acquisition by tender offer will take at least four months from the date the tender offer is submitted. A private placement by public companies will generally take around three months from the date of the SSC’s approval of a private placement.
For M&A of private companies, there is no fixed length of process for the acquisition or sale of business. It depends on many factors, eg, the scale of the deal, cooperation of the involved parties, due diligence process and other licensing procedures with the authorities. In practice, it should take at least five months to close a deal.
Governmental measures taken to address the pandemic have certainly caused huge impacts on physical meetings, particularly GMS meetings to approve an M&A transaction. Nevertheless, parties to M&A transactions have managed to organise virtual GMS meetings and are familiarising themselves with an entire online deal process, including the conduct of an online closing date.
Mandatory offer thresholds are only applicable to public companies. Unless falling into exceptional cases, a tender offer is mandatory when:
There are seven exceptions where an investor is not required to conduct a tender offer. These include:
Cash and shares are lawful consideration under Vietnamese laws, though cash is more commonly used.
In order to bridge value gaps in a COVID-19 environment or in an industry with high valuation uncertainty, parties to the transaction tend to apply the following tools: contingent consideration (such as earn-outs), equity retention, the seller's financing a part of the purchase price by becoming the buyer’s lender, representation and warranty insurance, and price adjustment, among others.
However, these tools are usually associated with accounting, tax and even legal issues, which should be consulted with relevant advisors in advance.
Offer conditions are subject to the transaction parties’ discretion, provided they do not breach the laws and public morals. Regulators do not restrict the use of offer conditions.
In practice, transaction parties usually provide the following offer conditions:
Minimum Acceptance Conditions
A bidder may set out a minimum acceptance condition in the registration dossiers and offer announcement. In case the condition is not met, ie, the number of shares issued by the target does not reach the minimum acceptance condition set out by the bidder, the bidder can withdraw its tender offer.
Unless limited by the FOL, the minimum acceptance conditions of a bidder are usually at a material shareholding threshold, to ensure the bidder and its related persons in the target:
Relevant Control Thresholds
Unless the target’s constitutional document stipulates a higher threshold, at least 65% of the target’s voting shares represented by shareholders attending the GMS meeting is required to pass a GMS resolution on the following matters:
At least 50% of the target’s voting shares represented by shareholders attending the GMS meeting is required to pass a GMS resolution on matters other than the above.
At least 75% of the target’s preference shares represented by shareholders holding the same preference shares attending the GMS meeting is required to pass a GMS resolution on matters resulting in any MAC to the preference shareholder’s rights and obligations.
A private business combination may depend on the bidder obtaining financing if required by the seller/ target, but not required under the law.
On the other hand, a public business combination can be conditional on the bidder obtaining financing in the following cases:
A bidder can seek the following types of deal security measures:
With the outspread of COVID-19, MAC clause — though not new — became a more critical contractual consideration for M&A parties. See 10.3“Broken-Deal” Disputes for more details.
Despite the government’s social distancing and stay-at-home orders, the length of interim periods have not been excessively impacted as parties are getting used to conducting the entire deal process remotely via the internet.
If a bidder does not seek 100% ownership of a target (ie, does not fully gain control of the GMS decision-making), the bidder may enter into a shareholder’s agreement with the target’s existing shareholders for the following additional governance rights:
Voting by proxy is allowed under the law. A shareholder is allowed to authorise one or more individuals or organisations to present and vote at GMS meetings on its behalf. Such authorisation must be in writing.
A bidder and their related persons, who have just gained 80% or more (but not all) of the target’s voting shares from a tender offer, is required under the law to reopen the tender offer to acquire the remaining voting shares from existing shareholders within 30 days of the previous tender offer, with the same terms and conditions as the initial one.
However, the laws stay silent on further actions in case the minority shareholders continue to reject the tender offer.
Irrevocable commitments to tender or vote by principal shareholders of the target can be performed under the nature of a civil transaction. Since these are not required to be disclosed, there is no survey or study to show if irrevocable commitments are commonly used by the parties.
If applied, irrevocable commitments should be made prior to the bidder’s formal tender offer.
A bid is made public as per the bidder’s intention, ie, voluntarily, or when the bidder falls into the categories of mandatory tender offer.
A bidder is required to conduct a tender offer if it meets the mandatory offer threshold, as provided in 6.2Mandatory Offer Threshold, unless an exemption stipulated under the Securities Law 2019 applies.
A bid is first made public at registration stage, where a bidder must submit an application dossier to the target and the SSC, who must then publish their receipt of the dossiers on their websites.
Upon the SSC’s publication of their receipt of the bidder’s duly submitted dossiers, or an approval for the bidder to issue additional shares for swap with the target’s shares, the bidder must disclose its approved prospectus on the websites of the bidder, the tender offer agent and the SSC.
For the issuance of shares in a business combination, the following types of disclosure are mandatory for public and listed companies.
In the case that bidders offer cash consideration, they are not required to produce financial statements in their disclosure documents.
If bidders intend to offer share swap with shares of unknown shareholders of the target, bidders are required to submit:
Financial statements must be prepared under the form of Vietnamese Accounting Standards (VAS).
No transaction documents are required to be disclosed in full. However, bidders must disclose main terms of the offer in the prospectus or registration form, including bid price, bid size, sources of funding and the purposes of the offer.
In general, BOM members and managers bear the following principal duties:
In a business combination, the above duties shall also be applied to BOM members and managers when preparing a proposal for the transaction to the GMS for approval or when implementing the transaction afterwards.
It is not common for the BOM to establish special or ad hoc committees in business combinations. The BOM itself, or the established committees under the BOM – such as the strategy and investment committee – will directly handle relevant works in business combinations.
Business judgement rule has not been established under Vietnamese jurisdiction. If the BOM members or managers are sued for breaching fiduciary duties, Vietnamese courts will judge them on a case-by-case basis.
The BOM usually seek independent legal, financial, tax and commercial advisors for professional advices in relation to the business combination.
Conflicts of interest in transactions between a company and its BOM members, other managers, shareholders or their related persons are the subject of scrutiny in Vietnamese jurisdiction.
A company must make and archive a list of related persons and their related interests. BOM members and other managers must disclose, among others, information on enterprises that they or their related persons own or have controlling rights. They must also update this information periodically.
Related-party transactions with a company must be approved by either the BOM or the GMS, depending on the contract or transaction value:
The related BOM members, managers or shareholders are not allowed to vote for the BOM or GMS approval on such transaction.
For public companies, related-party transactions with subsidiaries of a public company or other companies in which a public company holds over 50% of the charter capital must also bear the same scrutiny as previously mentioned.
Transactions which are not passed and executed in accordance with the above rules will be declared null and void by the courts. Parties to such transactions must jointly be liable for the incurred damages and must return to the company all benefits occurred from implementing such transactions.
Neither hostile takeover nor hostile tender offer is defined or regulated under Vietnamese laws. While the law does not differ between hostile and friendly takeover, in practice, most M&A transactions in Vietnam are friendly and negotiated.
Any investor contemplating the acquisition of controlling shares of a public company, whether hostile or negotiated, must conduct a tender offer as stipulated under the securities legislation, unless this falls into one of the exception cases. See 6.2Mandatory Offer Threshold for more details.
Defensive measures are not defined under Vietnamese laws. However, there are several measures and mechanisms available, or at least not prohibited, under Vietnamese laws which the BOM may adopt to prevent the company from an unwanted takeover. See 9.3Common Defensive Measures for more details.
Generally, the aim of defensive measures is to make the target becomes less attractive or more deterrent, in an attempt to prevent a takeover from the hostile acquiring company. Some of these common defensive measures include:
As a result of the COVID-19 pandemic, share repurchase has been widely applied by listed companies in Vietnam recently. It is deemed as an effective method to stabilise share prices during Vietnam’s biggest downturn in the stock market and prevent the prices from sliding any further. Accordingly, it will help a target stay safe from other potential hostile acquirers, who take advantages of the target’s plummeted share prices, to manipulate the target.
BOM members and other managers are always subject to fiduciary duties while performing their roles, including enacting defensive measures if they deem it necessary. See 8.1 Principal Directors' Duties for more details.
“Just say no” is not an applicable strategy for the BOM in Vietnam. Since BOM members are subject to a duty of care, they must always make decisions with reasonable care, skill and diligence to maximise the company’s legitimate interests. This prevents the BOM from simply refusing to negotiate and rejecting an offer straightaway.
For tender offer of public companies, it is nearly impossible for the BOM of the target to “just say no”. The BOM must state clearly in writing their assessment or recommendation of the offer and disclose this statement to shareholders and investors on the company’s website, as well as report to the SSC. In case any BOM member has a different opinion to that of the BOM as a whole, the BOM must also enclose this opinion with the BOM’s statement.
Litigation is common in connection with M&A deals in Vietnam. As per Vietnam International Arbitration Centre (VIAC)’s survey, while there were around 100 M&A disputes resolved by VIAC or Vietnamese courts in 2013, the number increased to 160 disputes in 2018, plus approximately 12 cases handled by foreign arbitration.
M&A disputes are usually relating to violation of the executed transactional documents, such as payment and guarantee obligations, shareholding and compensation. Due to COVID-19, M&A disputes arise more in relation to non-performance of call options or put options, and internal management post-M&A, among others.
M&A disputes are commonly brought after definitive agreements are signed or post-closing.
Material Adverse Change (MAC) clause
The MAC clause in M&A transaction agreements should be treated with greater care. In particular, a MAC clause should clearly express exceptions for pandemics, such as COVID-19, which will prevent the transaction from being broken by the occurrence of said pandemic.
Otherwise, parties may dispute whether more general circumstances provided in the MAC clause, such as natural disasters or socio-economic changes, are adequate for the buyer to unilaterally terminate the agreement and break the deal.
Exceptions to a MAC clause should also be applied to the seller’s undertaking that the target will keep its business operated in an ordinary course until closing. From broken-deal cases during the COVID-19 pandemic, compliance with the aforementioned undertaking by the seller has been recognised as a heavily disputed matter.
Deal Structure
As a matter of practice, parties to the transactions tend to be confident with their proposed structure and eager to implement the deal. This leads to the legal feasibility of the deal structure being disregarded until due diligence is completed. At this stage, the parties must agree on other alternatives to the deal structure, which may not be as they desired, or break the deal and incur breakup fees.
The lesson is, legal feasibility of a deal structure, especially those involving multiple layers, holding and operating companies or complicated FOL, should be duly confirmed by a legal advisor in advance of a due diligence process. This will prevent the parties from wasting time and unnecessary costs.
Shareholder activism remains an unfamiliar concept in Vietnam. It is not defined under any law and is not the main focus of shareholders in Vietnam. Shareholders would act for improvement of corporate governance or to ensure dividend distribution, rather than environmental, social, and governance (ESG) concerns.
Not many shareholder activists seek to encourage companies to enter into M&A transactions, spin-offs or major divestment. It is more popular for shareholders to turn an M&A transaction down if it is deemed as unable to add value to the company’s current business or affects the shareholders’ interests.
For example, the proposed merger between Coteccons and Ricons, both of which are well-known construction companies in Vietnam, was broken due to the objection of Kustocem – a Singaporean investor and other shareholders of its side – who together held at least 35% of Coteccons’ ownership, at Coteccons’ 2018 and 2019 annual GMS meetings (AGM).
On the face of it, Kustocem stated that the deal would bring no value to Coteccons’ then declining stock price and unstable operation. However, many believed that Kustocem was in fear of their shares being diluted and their personnel in Coteccons’ management body being replaced after the merger.
Shareholder activists may also aim at bringing a change to corporate governance of a company.
For example, Kustocem’s strong-willed actions against the Coteccons/Ricons merger and continued demands of a governance change have pressured many Coteccons’ directors and managers to resign. As a result, most of these positions were later replaced by Kustocem’s personnel, including the chairperson of the BOM and the general director cum company’s legal representative.
In another example, Sumitomo Mitsui Banking Corporation (SMBC), a strategic investor holding 15% of Eximbank, requested in writing the bank’s reform in corporate governance prior to the bank’s proposed extraordinary GMS meetings of 2019, AGM 2020 and AGM 2021. This includes decreasing the current nine BOM members to a maximum of seven, only by a vote of no confidence for each member, and dismissal of the vice chairperson of the BOM. However, the result remains unclear as these meetings have yet to be convened due to many internal reasons.
During COVID-19, the aforementioned activism should be further emphasised as shareholders may become more cautious about new transactions, expect reliable managers to keep the company safe, if not develop it.
Shareholders do not usually interfere with the completion of announced transactions. If they disagreed with the transaction at approval stage, a shareholder could have voted against the deal or, if the deal is approved by other majority shareholders, asked the company to redeem all of his/her shares and cease being a shareholder of such company.
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