Vietnam's new regulation to widen legal path for unlisted enterprises to sell shares to foreign investors

Foreign investors who purchase shares of Vietnamese unlisted enterprises are currently subject to the relevant provisions set forth in different legal regulations, depending on the areas of business.

Generally, if shares of Vietnamese enterprises engaging in non-banking and insurance business sectors are purchased by foreign investors, provisions of the Investment Law, Enterprise Law, the Vietnamese Government’s Decree 139, and the Prime Minister’s Decision 88 shall generally apply. If shares in an enterprise operating in the banking service sector are purchased, the sale to foreign investors shall be subject to the government’s Decree 69.

If shares are purchased of businesses operating in the distribution, wholesale and retail service sectors, the sale to foreign investors shall be subject to the government’s Decree 23; and Circular 09, Circular 05 of the Ministry of Industry and Trade (MOIT).

This column limits discussion of the legal framework applicable to the purchase by foreign investors of shares issued by Vietnamese unlisted enterprises engaging in general business sectors, other than banking, insurance, securities business sectors.

Weaknesses and shortcomings of the existing legal framework
Vietnam has been a member of the World Trade Organisation (WTO) since 2007 and is obliged to open its market to foreign investors in accordance with its specific commitments in services. Foreign investors are encouraged to invest in Vietnam through either direct investment (by establishing their factories there) and/or indirect investment (by purchase shares of Vietnamese enterprises).

However, there are weaknesses and shortcomings in the existing legal framework recognising and validating foreign investors’ indirect investments through purchasing shares of Vietnamese unlisted enterprises engaging in service activities or production operations. One of the reasons is that under the Investment Law, foreign investors who invest in Vietnam must have an investment project. This requires the investor to prepare and submit their project documents as required under law to the relevant Vietnamese authority, to be issued with a certificate of investment.

Another reason is that if foreign investors who are purchasing shares of a Vietnamese enterprise become a founding shareholder (named in the business registration) of the enterprise, the change in the business registration must be registered with the relevant Vietnamese authority. However, procedures for registration of these changes are currently deadlocked.

Despite numerous guiding regulations issued by authorities, validation of foreign investors’ share ownership in Vietnamese enterprises remains unclear on the procedures required, list of documents to submit and what authority will be in charge for such validation. These issues have contributed to very few share-related transactions between foreign investors and Vietnamese enterprises in Vietnam, making its market less attractive to foreign investment.

New legal path for offer for sale of shares to foreign investors
A recent promulgation of the Government’s Decree 01/2009/ND-CP on the private offer of shares of Vietnamese unlisted enterprises (“PSO Regulation”), which takes effects from 25 February 2010 provides more tools and widens the legal path for businesses to sell shares to foreign and domestic investors.

As defined under the Regulation, PSO would be understood as an offer by an enterprise for sale of its shares, or a right to direct purchase of its shares (not via mass-media) to one of the following types of investors:

(a) Professional securities investors, 

(b) Less than 100 investors other than professional securities investors.

Under the Regulation it seems that foreign investors purchasing and holding shares in enterprises may not be required to register their ownership with the relevant Vietnamese authority. In other words, there would be no paper, license or registration which would be granted in respect of the foreign owner’s share ownership.

To some extent, this may conflict with other legal regulations (mentioned above) that require foreign investors to obtain a certificate of investment for their purchase of shares of Vietnamese enterprises, or to register their share ownership in Vietnamese enterprises.

The main provisions of the PSO Regulation are outlined below. Foreign investors should be aware of these when purchasing shares of Vietnamese enterprises under the Regulation. 

1. Conditions to be satisfied
To purchase shares of a Vietnamese enterprise offered under the Regulation, foreign investors should be aware of the following conditions:

• Such enterprise must be a joint stock company or a company converting into a joint stock company.
• The availability of an approval on PSO Plan and PSO Proceeds-Using Plan. This is to be issued by the general meeting of shareholders (GMS) or the board of management (BOM) if it is permitted in the charter; or under authorisation given by GMS; or by the BOM or the owner of the enterprise (if such enterprise is a limited liability company converting into a joint stock companies); or by the owners of the 100% foreign-owned company; or the BOM of the foreign-invested JV company (if such enterprise is a JV company converting into a joint stock company). It should be noted that foreign investors must be clearly described in PSO Proceeds-Using Plan as the types of investors to be offered sale of shares.
• Proof that such enterprise has registered PSO documents with the relevant Vietnamese authority, no later than 20 days prior to proposed PSO date.
• An explanation or demonstration on foreign ownership cap and foreign investment form in the PSO Plan, PSO Proceeds-Using Plan or other documents submitted by such enterprises to the relevant Vietnamese authority. Foreign ownership cap and foreign investment form shall comply with Schedule CLX - Vietnam, Part II – Specific Commitments in Services (WT/ACC/VNM/48). This can be found at http://www.wto.org/english/thewto_e/countries_e/vietnam_e.htm.
• If such enterprise is engaging in any conditional business area, foreign investors should check to ensure that it has satisfied the requirements of law governing the conditional business area for PSO.

2. Selection of strategic partner
Foreign investors wanting to become a strategic partner of a Vietnamese enterprise by purchasing its shares must make sure that specific criteria for selection of strategic partners are established by the enterprise. General criteria set down by the PSO Regulation are that the strategic partner must be in good financial health and with appropriate corporate governance; are undertaking the transfer of new technologies, providing materials and developing markets for the sale of goods/services to the enterprise; or must have strong attachment to the enterprise.

3. Restriction of share assignment
Foreign investors should be aware that when they hold shares under the PSO Regulation they will be restricted to assigning such shares within a time limit given in the approved PSO Proceeds-Using Plan. In any case this will not be less than one year from the completion date of the PSO tranche. Such restriction of share assignment would be deemed contrary to the Enterprise Law, vesting rights on shareholder to freely transfer their shares.

Further, note that assignment of shares is also restricted under the following terms. During the time the enterprise proceeds with registration as a public company with the relevant Vietnamese authority, if (after completion of the PSO tranche or due to assignment of shares among shareholders) the number of shareholders exceeds 100. 

4. Obligations of offering enterprise
Foreign investors should be aware of the obligations on the offering enterprise before, during and after the PSO tranche, listed for the following time periods. 

4.1 - Obligations before and during PSO tranche implementation:

• Such enterprise must be a joint stock company or a company converting into a joint stock company.
• Within 90 days prior to and during PSO implementation, the offering enterprise is not permitted to place PSO advertisements and invitations in mass media, except to publish information as required by the Securities Law. It should be further noted that published information must not comprise content of any PSO advertisement and/or invitation. How to differentiate published information from PSO advertisement or invitation remains unclear, as no criterion for is provided in the Regulation.
• Offering enterprise has submitted proper PSO documents to the relevant Vietnamese authority for registration, and is only permitted to carry out PSO if the PSO documents are registered or it does not receive any feedback from the authority within 15 days from submission.
• Offering enterprise is required to provide PSO information (in required form Appendix II of PSO Regulation) to investors.
• Proceeds gained from each PSO tranche must be remitted to escrow account opened at a merchant bank until such PSO tranche is completed.
• If the enterprise is a public company, apart from complying with the above obligations it shall have to comply with the laws on public companies when making the PSO.

4.2 - Obligations after PSO tranche completion

• Offering enterprise must submit to the relevant Vietnamese authority the following documents:
  (a) Report on PSO Results and Shareholder List (in required form Appendix III of the PSO Regulation) to authority within 10 days from its completion of each PSO tranche;
  (b) Financial Annual Report (FAR), however the Regulation does not clearly stipulate when FAR is submitted;
  (c) Report on Published Information.
• Offering enterprise must use PSO proceeds in accordance with the approved PSO Proceeds-Using Plan. If the purpose of using PSO proceeds is changed, both the changes and the reasons for the changes must be published, with approval of changes by GMS/BOM. However, the Regulation is unclear as to whether such changes are required to be registered with the relevant Vietnamese authority before implementation.
• After PSO tranche offering is made, if the enterprise becomes a public company (having more than 100 shareholders), it must proceed with procedure for registration as a public company in accordance with the Securities Law.
• If the offering enterprise becomes a public company due to share assignments among shareholders, it is obliged within seven days from the date on which it has more than 100 shareholders as result of share assignment, to:
  (a) notify (in writing) all shareholders of it becoming a public company and the plan of registration of the public company;
  (b) submit plan of registration of public company and newest shareholder list to the relevant Vietnamese authority;
  (c) proceed with registration as a public company within 90 days, as required in Articles 25 and 26 of the Securities Law.

5. Registration before PSO implementation
If the offering enterprise wants to conduct PSO it must register the following documents with the relevant Vietnamese authority prior to the proposed PSO date:

• Report on PSO;
• Approval of PSO Plan
• Proceeds-Using Plan
• Approval of GMS/BOM on list of strategic partners/employees (if PSO is made to them)
• Documents on publication of information to investors
• Documents on foreign ownership cap and form of foreign investment (if PSO is made to them)
  If the PSO documents satisfy requirements the relevant Vietnamese authority will notify the offering enterprise of its acceptance and publish this on their website.

6. Cases where foreign investors will be required to obtain approval/registration from the relevant Vietnamese authority for their share ownership
In view of the different and possibly overlapping legal frameworks governing the purchase by foreign investors of shares in Vietnamese enterprises, clarification is required. Will the PSO Regulation apply in all cases of foreign investors’ purchase of shares of Vietnamese unlisted enterprises without registration of their share ownership in such enterprises?

The answer is definitely not. Only the purchase of shares under the Regulation, issued by Vietnamese enterprises engaging in business sectors other than conditional business (distribution, wholesale, retail services; banking, insurance, and securities business sectors) won’t require approval from the relevant Vietnamese authority. However, for purchases of shares in Vietnamese enterprises operating in conditional business cases, foreign investors will have to obtain approval from the authority for registration.

For example, if purchasing shares in a Vietnamese enterprise engaging in distribution, wholesale or retail services, both the foreign investor and the enterprise will have to prepare and submit project documents to the authority to obtain a certificate of investment, before the share purchase can take place. A guide to the relevant project documents is provided in a recent Directive issued by the Ministry of Industry and Trade.

Relevant Vietnamese authorities
In summary, banks and credit organisations undertaking PSO report to the State Bank of Vietnam (Central Bank). Securities, fund-management and public companies (other than banks, credit organisations and insurance companies) undertaking PSO report to the State Securities Commission.
PSO insurance joint stock companies report to the Ministry of Finance. All joint stock companies other than the above, banks and credit organisations will report to the Department of Planning and Investment (DPI), Management Board of Industrial Zones (MBIZ), Export Processing Zones (EPZ), Hi-Tech Zones (HTZ) or the Economic Zones (EZ) in the location where their head office is registered.

DPI or MBIZ is authorised to receive, appraise, grant or refuse to grant an investment certificate to new foreign investment projects in Vietnam, including to foreign investors purchasing shares in Vietnamese enterprises engaging in distribution, wholesale, retail, advertisement, etc. The central ministries in Hanoi are in charge of appraisal of project/share documents submitted by investors through municipal authorities.

Implementation of the Regulation will be guided by the Ministry of Finance, and it is expected that those unclear issues surrounding this issue as outlined above will be clarified.

bizconsult law LLC
Law and Intellectual Property
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20 Tran Hung Dao Street
Hanoi - VIETNAM
Tel: 84 4 3933-2129
Fax: 84 4 3933-2130
Email: tuan.na@bizconsult-vietnam.com
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About the author

Tuan Nguyen is the managing partner at bizconsult law LLC. He has been practicing business law since 1988, focusing on Foreign Investment, Corporate & Commercial, M&A, Real Estate, Banking & Finance, Contracts, Employment, Construction, Intellectual Property & Franchise. He has long-standing experience and skills in advising, drafting documents and representing both foreign and Vietnamese investors to obtain necessary approvals and permits required under the laws of Vietnam for incorporation and operation of their companies, business transactions and investment projects in Vietnam and other regional countries. He represented foreign and Vietnamese corporate clients in the contractual negotiation with their partners in business cooperation, joint venture transactions as well as business deals.

Tuan Nguyen is admitted to Hanoi Bar Association, Vietnam Bar Federation. He is also admitted to New York State Bar Association (NYSBA) and member to International Bar Association (IBA), Anti-Counterfeiting Committee of International Trademark Association (INTA) and Anti-Counterfeiting Committee of Asian Patent Attorneys Associations (APAA). To see more information on Tuan Nguyen, please visit the firm's website at www.bizconsult-vietnam.com.