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Market access conditions of investors participating in M&A

One of the issues that investors need to consider before conducting M&A activities is maximum share ownership/contribution ratio in the acquired enterprise after the M&A transaction. This depends on market access conditions for foreign investors corresponding to the business sector of the acquired enterprise.

According to the Investment Law 2020, market access conditions applicable to foreign investors are the same as those applicable to domestic investors, except for prohibited business lines or restricted business lines. Current Vietnamese laws also specify 25 prohibited business lines and 59 restricted business lines subject to conditional market access for foreign investors.

In principle, foreign investors must not invest in the prohibited business lines. For restricted business lines, foreign investors shall fulfill the conditions prescribed by the Vietnamese law. Market access conditions applicable to foreign investors include the percentage of charter capital owned by foreign investors in the acquired company, investment method, scope of investment, capacity of the investor and partners participating in the transaction, and other conditions under Vietnamese law.

For business lines that are not accessible for foreign investors, Vietnamese law (if any) shall be applicable. Otherwise, foreign investors shall be treated like Vietnamese investors.

In practice, the competent authority may determine the status of a foreign investor at its discretion and apply the corresponding investment conditions and restrictions to modify the M&A transactions of foreign investors.

Anti-competitive practices in M&A transactions

Another important aspect of M&A transactions is anti-competition and economic concentration. In essence, mergers are a form of economic concentration, which involves concentration of the size and market share of one company that could cause unfair competition towards other companies. In certain cases, M&A activities could disrupt the competitive structure in the market, resulting in economic concentration that is likely to effect or significantly reduce competition in the Vietnamese market and threaten the interests of consumers/clients. Therefore, the government always regulates the competition aspect of such transactions.

According to the current competition law, in principle, if an M&A transaction is under the control threshold, the parties shall proceed without any formalities relating to competition law. However, if the M&A transaction falls under the control threshold, the parties are required to notify the competent authority. The competent authority decides at its own discretion whether the transaction can be carried out with or without conditions or prohibited.

The notification threshold shall be determined based on one of the following criteria:

– Total assets of the enterprises engaging in the economic concentration in the Vietnamese market.

– Total turnover of enterprises engaging in the economic concentration in the Vietnamese market.

– Total transaction value of the economic concentration.

– Combined market share of enterprises engaging in the economic concentration in the relevant market.

Financial due diligence and legal due diligence

Due diligence is a comprehensive assessment of a business including its commercial and financial assets, capacity, and operational efficiency. It is also a basis for the buyer to decide whether to proceed with the M&A transaction or not. It also helps in negotiating the M&A transaction price. The most indispensable types of due diligence are legal due diligence and financial due diligence.

Normally, due diligence covers aspects such as establishment process, capital and capital structure, assets, material contracts/agreements, projects, labor and personnel, legal compliance, litigation, etc. Due diligence often coordinates with the financial party to evaluate the source of revenue and financial statements of the target enterprise.

As a buyer, investors need to observe due diligence aspects of the goal of the M&A transaction. For example, if the target of an M&A is a property, the investor needs to consider the legality of that asset (the asset’s possession). If the target is business license of the acquired company, the legality and ownership conditions of the business licenses must be considered.

Building agreements for M&A transactions

Due to the complex nature of M&A activities, the parties to the M&A transaction need to build a clear and complete M&A agreement to facilitate the execution of the transaction and to resolve disputes (if any) in connection to the M&A in the future.

Normally, an M&A Agreement is built with a specific objective and is in line with the strategies of the involved parties. In addition to the basic stipulations of a contract, the parties should develop detailed provisions on (i) the object of the transaction, (ii) prerequisites, (iii) mechanism for determining and adjusting M&A prices with prerequisites and payment methods, (iv) measures to guarantee and secure the M&A transactions, (v) details of rights and obligations of the parties before, during and after the transaction, (vi) conditions for completing the transaction, (vii) seller’s indemnification liability to the buyer, and other standard terms. Along with the M&A agreement, the parties may consider drafting an exclusive non-disclosure agreement, memorandum of understanding, term sheet, letter of intent, and other agreements to fulfill each purpose of the M&A transaction.

Completion of procedures related to M&A transactions before the competent authorities

Normally, completing an M&A transaction requires completion of many legal procedures as well as compliance with the law in many aspects. Therefore, when carrying out legal procedures for M&A transactions, investors should pay special attention to the requirements, licenses, approvals, procedures to be carried out for the transfer, regulations on control and foreign exchange management, regulations on payment and money transfer for M&A transactions, transfer of contributed capital in domestic companies, collection and use of dividends and distributed profits, purchase of foreign currencies to transfer money abroad, and other related activities.

In short, for a successful M&A transaction and achievement of the common goal, investors should have deep knowledge of the nature of M&A and must pay close attention to the basic legal issues related to the M&A transaction to ensure effective implementation of the M&A transaction.