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IMPORTANT NOTES WHEN PREPARING DOCUMENTS FOR M&A APPROVAL

The registration procedure for approval of foreign investors contributing capital, purchasing shares, or acquiring capital portions of economic organizations (referred to as the “M&A Approval procedure”) is a mandatory administrative procedure in cases specified in Article 26.2 of the Law on Investment 2020. In M&A transactions under the aforementioned provisions, the M&A Approval document is one of the prerequisites for a transaction to proceed and be considered completed.

 

The M&A Approval procedure is specifically guided in the Decree No. 31/2021/ND-CP of the Government dated March 26, 2021, detailing and guiding the implementation of certain provisions of the Investment Law (“Decree No. 31/2021/ND-CP”). In fact, this is one of the administrative procedures raising difficulties for foreign investors, especially in certain sectors or businesses that have market access conditions or restrictions for foreign investors, and projects or constructions located in areas related to security and defense.

 

During the process of providing services related to M&A transactions over the last time, Lawlink Vietnam has successfully supported numerous investors in completing the M&A Approval procedures. Most recently, these transactions have involved various sectors and industries including solar power generation, real estate business, education services, information technology services, healthcare, pharmaceuticals, entertainment services, sports, transportation support services, trade promotion and introduction organizations, as well as F&B-related industries.

 

The experience has taught us that at the current context, achieving M&A Approval, especially in sectors or industries with market access conditions, or within economic organizations in restricted foreign investment areas, requires thorough preparation in various aspects due to cautious scrutiny from the competent authorities.

 

In this article, Lawlink Vietnam presents the fundamental issues regarding this procedure as well as shares our experiences in preparing documentation and working with relevant state authorities. Our aim is to provide foreign investors with additional reference materials and ensure to have the best preparation on possible documentation to achieve successful outcomes in M&A Approval. Additionally, it also supports to plan timelines and budgets effectively to avoid any delays.



1. Related legal regulations

When is M&A Approval required?

Pursuant to Article 26.2, the Law on Investment 2020, a foreign investor shall carry out procedures to register M&A Approval before carrying out procedures for change of members, partners, or shareholders if falling into one of the following cases:

Case 1: The capital contribution or purchase of shares or capital contributions LEADS TO AN INCREASE in foreign investors’ holding rate in the concerned economic organization, in case the economic organization operates in a sector or trade in which foreign investors are subject to conditional market access;

  Case 2: The capital contribution or purchase of shares or capital contributions leads to a situation whereby the foreign investors or economic organizations specified at Points a, b, and c, Clause 1, Article 23 of the Law on Investment 2020 hold over 50% of charter capital of the concerned economic organization in either the following cases: increasing foreign investors’ capital holding rate to over 50% from 50% or a lower rate; increasing foreign investors’ charter capital holding rate in case foreign investors’ holding rate in the concerned economic organization is already higher than 50%;

         Meanwhile, pursuant to Article 23.1 of the Law on Investment 2020, the following economic organizations shall meet conditions and invest under regulations for foreign investors when investing in establishing other economic organizations, contributing capital, purchasing shares, or acquiring capital portions of other economic organizations, including:

  • Having over 50% of their charter capital held by a foreign investor/foreign investors (F1);

  • Having over 50% of their charter capital held by F1;

  • Having over 50% of their charter capital held by foreign investor/foreign investors and F1.

Case 3: The foreign investor contributes capital to, or purchases shares or capital contributions at, an economic organization having a certificate of the right to use land on islands or in border communes, wards or townships, coastal communes, wards or townships, or other regions with effects on national defense or security.


Licensing Conditions

Pursuant to Article 24.2 of the Law on Investment 2020, Foreign investors’ contribution of capital to, or purchase of shares or capital contributions at, economic organizations must comply with the following regulations and meet the following conditions:

  • Condition 1: The market access conditions applicable to foreign investors specified in Article 9 of this Law;

  • Condition 2: Assurance of national defense and security in accordance with this Law; and

  • Condition 3: Provisions of the land law regarding conditions for receiving land use rights and conditions for use of land on islands and in border communes, wards or townships and coastal communes, wards or townships.


Licensing procedures and timeframes

Pursuant to Article 66.2 of Decree No. 31/2021/NĐ-CP, the economic organizations in which foreign investors invest in the form of capital contribution, or purchase of shares or contributed capital amounts shall send 1 set of dossier for M&A Approval to the investment registration agencies of the localities where their head offices are based.


Licensing dossier requirements

M&A Approval dossiers are specifically regulated under Article 66.2 of Decree No. 31/2021/NĐ-CP. In which, basically including:

  • A written registration for capital contribution, purchase of shares, or contributed capital amounts as regulated forms.

  • An in-principle agreement on capital contribution, or purchase of shares or contributed capital amounts;

  • Copies of legal papers of individuals and organizations making contributing capital or purchasing shares or contributed capital amounts and the economic organization;

  • Copies of the land use rights certificate of the economic organization to/of which foreign investors contribute capital or purchase shares or contributed capital amounts (if applied).


Licensing timeframe: 

Under the Article 66.3, 66.4.c of the Decree No. 31/2021/NĐ-CP, time for licensing is within 15 days since the investment registration agency received a valid dossier.

 

2. Practical Application and Key Considerations in the M&A Approval Registration Process

(i) M&A Approval Registration Cases

In principle, M&A Approval registration is only required for cases of capital contribution, share purchase, or capital portion acquisition as specified in Article 26.2 of the Law on Investment 2020. However, based on our practical experience, there have been situations where M&A Approval for foreign investors was requested even when the capital contribution, share purchase, or capital portion acquisition did not alter the ownership ratio of foreign investors in the economic organization. In other words, these situations did not fall under the provisions of Article 26.2 of the Law on Investment 2020.

For instance, in cases where an economic organization has foreign investors holding over 50% of its charter capital, if a new foreign investor acquires a portion or all of the shares or capital contribution of the existing foreign investor and does not increase or alter the ownership ratio of the current foreign investor in this economic organization, then it does not fall under the requirement for M&A Approval registration as per the regulations. However, in practice, depending on the nationality of the current and new investors as well as the perspective of the licensing authority, in some specific cases, M&A Approval registration may still be required.

Therefore, with a cautious approach, the parties involved in the transaction need to be mindful and consult with the licensing authority before proceeding with the transaction to determine whether an M&A Approval is required in the aforementioned case.

 

(ii) Determining market access conditions for foreign investors in sectors or industries with market access conditions

Pursuant to the provisions of the Law on Investment 2020 and the guiding documents, for sectors or industries with market access conditions for foreign investors as stipulated in Appendix I.B of Decree No. 31/2021/ND-CP detailing and guiding the implementation of certain provisions of the Investment Law, foreign investors must meet the market access conditions posted as per Article 18 of this Decree. Currently, market access conditions are relatively fully posted on the National Investment Portal at the link https://vietnaminvest.gov.vn/. This portal specifies the market access conditions according to international treaties and Free Trade Agreements (FTAs) of which Vietnam is a member.

The experience has taught us that the information on market access conditions posted on this portal is considered one of the bases for licensing authorities to consult and evaluate foreign investors' compliance with market access conditions when registering capital contribution, share purchase, or capital portion acquisition. Nevertheless, practically, the information on the National Investment Portal is not regularly updated and supplemented. In some cases, outdated versions from 2020 are still in use, containing information on market access conditions limited to the scope of international treaties effective at the time of update. This has led to obstacles in explaining to licensing authorities about market access conditions for foreign investors during the M&A Approval registration process.

Up to now, together with Vietnam's Commitments at the WTO on Trade in Services, Vietnam has signed an additional 15 Free Trade Agreements (FTAs) that are currently in effect, with 2 FTAs still under negotiation (according to statistics from the WTO Center - VCCI as of August 2023, link: https://trungtamwto.vn/). With this number of FTAs, Vietnam is among the top economies with the highest number of FTAs in the region and globally. Most provisions regarding market access conditions in these FTAs are directly applicable as domestic laws. However, to fully leverage the opportunities provided by these FTAs and to effectively explain to licensing authorities, it requires a thorough understanding and basic knowledge of how to apply the commitments made in these agreements.

Accordingly, when preparing the M&A Approval application dossier, foreign investors and related economic organizations should take into account consulting opinions from the licensing authority as well as seek advice from specialized consulting units to preliminarily assess the ability to meet market access conditions and choose international treaties for appropriate explanation.



(iii) Dossier Templates

Currently, the template for registering capital contribution, share purchase, or capital contribution acquisition for M&A Approval follows Form A.I.7 as amended and supplemented in Circular No. 25/2023/TT-BKHĐT amending and supplementing several articles of Circular No. 03/2021/TT-BKHĐT dated April 9, 2021, issued by the Minister of Planning and Investment regulating templates of documents, reports related to investment activities in Vietnam, investment from Vietnam to overseas, and investment promotion.

Accordingly, since February 2024, economic organizations and foreign investors registering for M&A Approval must declare the actual transaction value of the intended transaction, instead of the projected value as before. This is a minor yet significant and noteworthy change in this new Form A.I.7.

Specifically, under this new change, parties involved in the transaction may encounter difficulties in declaring the "actual transfer price" because M&A Approval will be granted before the completion of the transaction. Besides, if the actual transfer price at the time of completing the transaction differs from the actual transfer price recorded in the M&A Approval, parties may face obstacles in working with banks or related third parties afterward, especially the bank where the DICA account in Vietnam is opened (if a DICA account is required), which may refuse to process related payments until the M&A Approval is amended to reflect the appropriate transfer price. However, there are currently no regulations regarding the procedure for amending or adjusting M&A Approval.

Thus, to comply with legal regulations and facilitate the transaction process, parties involved need to pay attention to and update each change in the licensing application dossier to have appropriate documentation.

 

(iv)    Licensing Time

The statutory processing time for license applications by the licensing authority is 15 days from the date the authority receives a valid dossier. In practice, when there are requests for opinions from the Ministry of National Defense, the Ministry of Public Security regarding compliance with national defense and security conditions, the processing time and issuance of licenses will significantly extend. The outcome of the application dossier and the deadline for resolution will depend on the opinions of the Ministry of National Defense and the Ministry of Public Security, or the Provincial Military Command, Provincial Police, depending on the specific circumstances.

Another essential point to note is that meeting security and defense conditions in M&A transactions is often perceived narrowly by parties involved, and it is understood that this condition only applies to economic organizations with Land Use Right Certificates in special areas such as islands, communes, border towns, etc., or areas affecting national defense and security. However, in a comprehensive and appropriate manner according to the provisions of the 2020 Investment Law, the obligation to meet conditions regarding security and defense is imposed on foreign investors when contributing capital, purchasing shares, or contributing capital in economic organizations, regardless of whether the economic organization holds Land Use Right Certificates in the specific areas mentioned above.

Based on some of our recent experiences, we have found that the sequence and procedures for applying these regulations and conditions will depend on the licensing practices of each locality. Therefore, in the current licensing context, before proceeding with a transaction, parties should seek appropriate advice on the local licensing practices to arrange the transaction process accordingly.


3. Experiences to be learnt

Based on current practices when applying for M&A Approval, we would like to give some notes for businesses and foreign investors in view of preparing documents for M&A Approval as follows:

  • Consult with the investment licensing authority early, preferably before proceeding with the transaction, regarding whether M&A Approval is required for the transaction or not.

  • Take reference to the provisions regarding market access conditions for the business sectors and essential business areas of the economic organization with foreign investors contributing capital, purchasing shares, or acquiring capital contributions; consult with experts to select the appropriate international treaties/free trade agreements (FTAs) for effective explanation and to leverage benefits from relevant FTAs.

  • Update the newest information related to register forms for process of transaction.

  • Review the compliance with investment requirements by the economic organization with foreign investors purchasing shares, capital contributions (taxes, social insurance, employment of foreign labor, financial reporting...), and relevant legal documents regarding the location of the main headquarters;

  • Prepare specific databases and evidence with regard to the capabilities of foreign investors, including detailed information on the nationality of the foreign investor, ownership, financial capacity, and operational status of the foreign investor (if already present in Vietnam); and

  • Consult with specialized units to ensure appropriate preparation and data for the transaction implementation process.


Article: Prepared by LLVN.

Image: Internet.

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Lawlink Vietnam (LLVN) is a business law firm providing world-class legal solutions to businesses, entrepreneurs on investment, corporate & business, Mergers & Acquisitions; Litigations and Dispute Resolution. We offer a complete range of consulting services from type of company/investment, operating models, licensing, contracts, capital structure and arrangement, and representation sevices.

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