In this article, our Managing Partner Nguyen Van Phuc and Lawyer Nguyen Nhat Duong will mention some existing problems in the process of carrying out registration of capital contribution, shares and capital contribution purchase by foreign investors. The article was published in Legal Electronic Magazine on January 23, 2024. Below is the English version:
Registration of capital contribution, shares and capital contribution purchase by foreign investors (hereinafter collectively referred to as "M&A approval procedures") is a prerequisite procedure that economic organizations (hereinafter referred to as "Companies") must complete in some cases before receiving capital from foreign investors. Nowadays, it is a popular procedure. However, many enterprises and foreign investors still face difficulties and obstacles in implementing this procedure in practice. There are many reasons for this, including different ways of understanding and applying legal regulations between companies and relevant authorities. In this article, we will mention some existing problems in the process of carrying out M&A approval procedures of Companies.
Cases where M&A approval procedures are required
Pursuant to Clause 2 Article 26 of the Law on Investment 2020, foreign investors are required to conduct M&A approval procedures prior to the change of members or shareholders if they fall into any of the following cases: a) the capital contribution, share purchase or capital contribution purchase results in an increase in the percentage of foreign investors' ownership in enterprises engaged in businesses with conditional market access for foreign investors; b) the capital contribution, share purchase or capital contribution purchase results in foreign investors and enterprises referred to in items a), b) and c) of Clause 1 of Article 23 of the Investment Law holding more than 50% of the charter capital of enterprises in the following cases c) foreign investors contribute capital, purchase shares or purchase contributed capital in enterprises that hold land use rights certificates in islands and border municipalities, counties and cities; coastal municipalities, counties and cities; other areas affecting national defense and security.
It can be seen that this regulation clearly and specifically lists the cases in which M&A approval procedures must be conducted. However, in practice, M&A approval procedures are often conducted even if they do not fall under the above-mentioned cases. In order to illustrate this content, we cite a real case in which we provided services to our client, which is as follows:
Company A is a single-member limited liability company owned by individual investor X (nationality M). Company A is located on an island in Vietnam, but Company A does not have a certificate of land use rights in this area. Y is an individual investor (nationality M) who wishes to receive the transfer of a part of the capital contribution corresponding to 40% of the charter capital of X in Company A. Based on the provisions of Clause 2 Article 26 of the Law on Investment 2020, it can be seen that the purchase of Y's capital contribution does not fall under the listed cases requiring M&A approval procedures. However, in reality, when we contacted the relevant agency that handles investment and business documents, we received a request to conduct M&A approval procedures in this case. In addition, our client was actually forced to go through this process.
If, based on the provisions of Clause 2 Article 26 of the Law on Investment 2020, for point a, Company A is currently 100% owned by foreign investor X. Therefore, the transfer of capital from X to Y does not increase the ownership ratio of foreign investors (still 100% of the charter capital of Company A). Meanwhile, unlike point a, point b refers to the case of capital increase of a specific foreign investor instead of all foreign investors. This capital increase must be from less than or equal to 50% to more than 50%, or increase the charter capital ownership ratio of foreign investors if foreign investors already own more than 50% of the charter capital of the company. Compared with the case we've encountered, although Y is a new investor in company A, Y's capital is expected to be only 40% of company A's charter capital. Therefore, it cannot be considered as a case requiring M&A approval procedures.
Our case is just one of many cases that have occurred in reality, where the understanding and application of legal regulations differ among relevant authorities in different localities. Therefore, in order to save time, companies need to contact the relevant authority where the company's head office is located from the very beginning to find out whether this procedure needs to be carried out or not, so as to implement the procedures in a way that is appropriate to the actual practices of the relevant authorities.
What entities are required to submit documents to carry out the M&A approval process?
It may seem to be a simple issue, but determining the entities that must submit the documents for M&A approval procedures is also a problem in reality. Clause 2 Article 26 of the Investment Law 2020 stipulates that "foreign investors shall carry out procedures for registration of capital contribution, acquisition of shares, acquisition of capital contribution of economic organizations before changing members or shareholders if they fall into one of the following cases...". This regulation may cause confusion about the subjects who must submit documents to carry out M&A approval procedures, if in many cases it is determined that foreign investors must submit this application.
However, according to Clause 2 Article 66 of Decree 31/2021/ND-CP on the Investment Law, "economic organizations" in which foreign investors contribute capital, purchase shares, purchase capital contribution is the subject that must submit documents to conduct M&A approval procedures.
It is necessary to have a clear provision, as usually the submission of documents is authorized to a person other than the foreign investor and the legal representative of the company. If the authorizing party is not the subject that must submit the application for M&A approval procedures, the application may be rejected.
Important note about dossiers components
In principle, M&A approval documents are not too numerous and complicated in terms of quantity and components. However, companies and investors should pay special attention to the preparation of these documents.
According to the applicable law, one of the documents that enterprises are required to submit to the relevant authorities is a written agreement in principle on capital contribution, share purchase, and capital contribution purchase between foreign investors and enterprises with foreign investors contributing capital, purchasing shares, and purchasing capital contributions, or between foreign investors and shareholders or members of the enterprise.
Normally, for capital contribution, share purchase and capital contribution purchase transactions, the parties involved often go through many steps, from sending letters of intent, signing memoranda of understanding and basic agreements, deposit agreement, then proceed to sign the capital contribution, share purchase or capital contribution purchase agreement. However, for small transactions or transactions between parties that have had a cooperative relationship before, the parties often skip the above steps and go straight to signing a share purchase or capital contribution purchase agreement. Although the parties have mentioned in this agreement that the completion of M&A approval procedures is a prerequisite for the contract to become effective, the competent authorities have rejected this document in many cases. Some competent authorities consider that the parties can only agree on the principles of capital contribution, share purchase and capital contribution purchase at the time of filing, without specifically agreeing on other terms of the transaction, because the transaction still needs to be approved by the competent authority. This explanation of the competent authority does not seem to be really reasonable if the parties have stipulated that the implementation of M&A approval procedures is a prerequisite for the agreement to become effective. However, from the point of view of the submitting company, if this situation can be anticipated from the beginning, the company can find a suitable handling plan to save time in carrying out administrative procedure.
The above are some practical backlogs that companies need to keep in mind when carrying out M&A approval procedures. Given the characteristics of a more or less local procedure, in our opinion, when encountering cases of capital contribution, share purchase or capital contribution purchase by foreign investors, in addition to checking the legal regulations, it is a step for companies to consult the local investment agency in advance about the possibility of having to conduct M&A approval procedures, as well as how to submit the application and the components of the dossier, in order to save time and costs in conducting the procedures.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
