Vietnam watchers have argued since mid-2010 that it was again “safe to go back into the water” following Vietnam’s mid-2007 M&A wave “crash” caused by heart-stopping inflation, constricted credit markets, plunging securities exchanges and debilitating trade deficits." Rajah & Tann Partner Christopher Muessel shares his insights.

By Christopher Muessel

After a few quiet years, Vietnam's M&A sector is back.  Even before Rajah & Tann (R&T) opened the doors to its new Ho Chi Minh City (HCMC) office in March, client interest in M&A was on the rise.  But it was particularly “piqued” in April when KKR announced its US$ 159 million investment in the Masan Group for a 10% stake, which many viewed as a "validation" of Vietnam's renewed M&A potential.  More fundamentally, Vietnam watchers have argued since mid-2010 that it was again “safe to go back into the water” following Vietnam’s mid-2007 M&A wave “crash” caused by heart-stopping inflation, constricted credit markets, plunging securities exchanges and debilitating trade deficits.  And as if that wasn’t enough, the Vietnam M&A market was further bludgeoned by the 2008-2009 global financial crisis.

So after attending an M&A conference in HCMC in early June, along with 500 M&A "enthusiasts," we were pleased to find our private equity (PE) clients were eager to receive  our updates on the "hottest" M&A sectors and prospective targets.  And although we “get” the euphoria created by resurgent M&A markets (especially when the target country can boast nearly 7% GDP growth in 2010), as legal advisers who know Vietnam well, we are compelled to interject a “measure of caution" into this rising M&A tide.

For example, we must repeatedly remind clients about the famed "3 Rs” when it comes to the three sets of books in Vietnam – i.e., the set for the tax authorities ("ruined"), the set for the local owners ("real”) and the set for the foreign investors ("rosy").  So to accurately assess a Vietnam target's value, thorough independent financial due diligence (DD) is needed.   Only then can clients determine which set of books the target has provided.

For the legal practitioner operating in Vietnam, the first major challenge is the legal DD.   Firms like R&T Vietnam must sift through data rooms full of docs (many of them in Vietnamese) to ferret out the possible liabilities, but due to the Government’s extensive regulatory framework and its nascent archival and reporting regimes, DD reports are invariably replete with qualifications and disclaimers.   But luckily for foreign investors, even the most “material” of perceived liabilities uncovered during legal DD can usually be remedied by time-honored mitigation strategies.

The legal practitioner’s next hurdle is to sew up the deal with a comprehensive binding Term Sheet (or Sale & Purchase Agreement, or SPA) that satisfactorily addresses the foreign investor’s concerns about perceived liabilities, with adequate “security” to cover post-closing exigencies.  (Where IP licensing is involved, we typically advise clients to prepare a “stand-alone” IP Agreement, with the intent to have it registered with the NOIP in Hanoi after the transaction has been approved, which adds a measure of security when it comes to IP enforcement in Vietnam.) 

Upon finalizing the Term Sheet (or SPA), the practitioner’s next challenge is procuring the requisite local approvals for the deal.  In this phase, a target that was previously 100% Vietnamese-owned must undergo a complete “overhaul” of its legal structure, taking the company from a “registered” indefinite-term entity to a “licensed” limited-term company -- customarily, either a “limited liability company” (LLC) or “joint stock company” (JSC).   An important part of this phase involves amending the target’s Charter (or substituting it entirely with an updated version), which can be a pain-staking process. But it is critical to get the Charter “right,” since it becomes the “all-controlling” document when it comes to important issues such as corporate governance, share transfer, dispute resolution, repatriation of dividends, etc. 

Finally, long after the champagne glasses have been drained, press-releases issued and the clients  returned to their regional or global HQs, the legal practitioner’s ongoing challenge is keeping the M&A target “compliant” with Vietnam’s ever-changing legal framework.  This is especially true as it relates to taxation, competition, anti-corruption, transfer pricing, environmental issues, employment, customs and sector–specific regulations.   So while M&A waves may come and go, for the legal practitioner operating in Vietnam, advising on M&A target compliance is ultimately the only “constant” that withstands the test of time.ALB