Acquisition Finance 2019

Last Updated November 07, 2019

Vietnam

Law and Practice

Authors



LNT & PARTNERS is one of the leading law firms in Vietnam. The firm is well-known in all of its six practice groups: corporate and M&A, financial services, infrastructure, real estates, disputes resolutions and TMT and IP. The firm is behind the multi-billion dollar privatisation, IPO and divestment, such as Habeco, PVPower and PVOil, as well as being lead counsels of many high profile deals such as Nghi Son Refinery, Toshin, Gemadept, Taisho-Duoc Hau Giang, and the closing of two high yield investment funds of Mekong capital. Starting in 2019, the firm is expanding into Singapore, making it the second Vietnamese law firms to have offices in Singapore.

Vietnam is in the process of becoming a mature market. According to Vietnam Report (VNR), the leaders of the market are Vietcombank (Joint Stock Commercial Bank for Foreign Trade of Vietnam), Vietinbank (Vietnam Joint Stock Commercial Bank For Industrial And Trade), BIDV (Bank for Investment and Development of Vietnam) and Techcombank (Vietnam Technological and Commercial Joint Stock Bank). Other banks to mention are MBBank (Military Commercial Joint Stock Bank), VPBank (Vietnam Prosperity Joint Stock Commercial Bank), ACB (Asia Commercial Joint Stock Bank), TPBank (Tien Phong Commercial Joint Stock Bank), SHB (Saigon Hanoi Commercial Joint Stock Bank) and Agribank (Vietnam Bank for Agriculture and Rural Development). Recently, Techcombank has skyrocketed, increasing both the capital and lending through extensive issuing of bonds and purchasing project bonds in return.

International banks are also present in Vietnam, either as 100% foreign owned banks (for example HSBC, Standard Chartered, United Overseas Bank or Hong Leong Bank) or branches of foreign banks, such as China Construction Bank, Bank of China or Citibank. Under Vietnam’s WTO commitments on services and Circular No.40/2011/TT-NHNH, to establish a foreign bank in Vietnam, the foreign bank must have at least 10billion USD in total assets and apply in two steps: obtaining in principle approval from the State Bank of Vietnam (SBV), and registering the operation at the local branch of SBV.

Debt funds are so far limited. Some funds are established by the Government to purchase debts, such as VAMC (Vietnam Asset Management Corporation) who purchased bad debts from banks in exchange for a five-year bond, and if after five years, the assets cannot be sold, the banks must repurchase the debts. Debt funds as a real market force are yet to develop in Vietnam.

Companies in Vietnam are governed by the Law on Enterprises 2014, and divided into three categories: partnership, limited liability company, and joint stock company (or shareholding company).

A partnership can be either a limited liability partnership (LLP) or a normal partnership. A normal partner bears unlimited liability to the performance of the partnership. However, under Article 172.1 of the Law on Enterprises 2014, partners in an LLP only have liability to the extent of their capital contribution.

A limited liability company (LLC) consists of members and has no shares (only capital contribution). Members in an LLC bear liability only to the limit of their capital contribution. The LLC is governed by the Members Council (MC), in which its members have votes pro rata to their capital contribution to the total charter capital of the company. The day to day operation of the LLC is governed by a General Director. The MC majority vote to pass a resolution is 65% unless the Charter provides otherwise.

A joint stock company (JSC) consists of members and can issue shares. The shareholders in the JSC only bear liability to the limit of their subscribed share capital. Under Article 114 of the Law on Enterprises 2014, a JSC is governed by the General Shareholders Meeting (GSM) in which its shareholders have votes pro rata to their common shares (or preferential voting shares). Shareholders at GSM also vote to select a Board of Directors (BOD). Each director will have one vote. Under Article 149 of the Law on Enterprises 2014, the required BOD majority to pass a resolution is normally a simple majority. At equal voting, the Chairman of the BOD will have a casting vote. Under Article 144 of the Law on Enterprises 2014, the majority to pass a simple resolution at the GSM is 51% voting rights and the super majority is 65%, unless the Charter provides otherwise.

A leverage buyout (LBO) occurs when the acquirer of a company uses a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. LBO in Vietnam is more popular in asset deals, especially acquisition of a real estate project. For example, the seller of a real estate project may accept a deposit in advance, and on closing receive the remaining purchase price on the condition that the land use right certificate (LURC) of the real estate (equivalent to the title of the assets) will be mortgaged to the bank that finances the acquisition.

For equity deal, however, the seller often requires the buyer to have financial capacity, either as a deposit (normally 20% of the Purchase Price) of the buyer vis-à-vis a bank guarantee from the seller, or an escrow account at 100% of the Purchase Price. At closing, the seller shall transfer all shares and the buyer will release the Purchase Price. The parties may agree that the seller may use the shares as security for the buyer to borrow funds from banks to support the acquisition, and under Articles 335 and 336 of the Civil Code 2015, the borrower is allowed to use third-party assets (ie, the seller’s assets) as security for a loan. Under Article 128 of the Law on Credit Institutions 2010, the credit limit applicable to a bank is that a corporate loan must not exceed 15% of the bank's own capital.

Under the Basel II regulation that Vietnam also applies and Article 6.2 of Circular 41/2016/TT-NHNN, the bank must maintain a minimum equity ratio of 8% including the calculation of required capital for credit risk, market risk and operational risk. These regulations should be taken while taking into account the LBO. The biggest LBO happened in Vietnam is the acquisition of Saigon Brewery at USD5 billion by ThaiBev.

The governing law for corporate loan is Circular 39/2016/TT-NHNN dated 30 December 2016. the starting point is the line of credit (LOC), which is an arrangement between a bank and a customer that establishes the maximum loan the latter can borrow. The borrower can access funds from the LOC at any time as long as they do not exceed the maximum amount (or credit limit) set in the agreement and meet any other requirements such as making timely minimum payments. Under Article 19 of Circular 39/2016/TT-NHNN, a condition to grant a corporate loan is that the bank rates the customer to be capable of fully repaying the loan principal and/or interest within the adjusted repayment period or within a specified period following the loan term.

Please note that lending from a local bank has to be in VND. Under Article 3.1.c Circular 24/2015/TT-NHNN, lending in foreign currency is only available to short-term trading loans or long-term asset acquisitions signed before 30 September 2019.

There is no specific regulation for acquisition financing. Acquisition financing is the capital that is obtained to buy another business. Of course, a reputable buyer may establish a LOC that allows them to meet their current acquisition aspirations, but we have also advised clients on a number of other ways to obtain acquisition finance.

The first option is share swap. Under Article 35 of the Law on Enterprises 2014, capital contribution can be in the form of convertible foreign currencies, gold, value of rights to use land, value of intellectual property rights, technologies, technical secrets, and other assets that can be assessed in VND. Therefore, according to Article 126 of the Law on Enterprises 2014, shares can be considered assets for purposes of capital contribution, and share swap is allowed. In addition, when companies own publicly traded stock, the acquirer can exchange its stock with the target company. An issue in share swap is the valuation of shares. Article 37 of the Law on Enterprises 2014 allows the relevant parties to sign valuation minutes and be responsible for such valuation. However, if the shares are of equitised (privatised) state owned enterprises, they have to be valued by valuation companies certified by the Ministry of Finance.

The second option is equity funding. Under this structure, the seller may set up a holding company for the target, and the seller buy shares in the holding company. This way of funding is risky in the sense that the holders of the shares in the holding company do not directly control the ownership of the target company. Having said this, this funding is useful when the target companies operate in retail business, and direct ownership may lead to difficulties in expanding the retail network. Under Article 23 of Decree 09/2018/ND-CP, foreign investors when investing in a retail network may not extend its network freely, and the establishment of every new retail shop is subject to the so-called economic need test (ENT) which includes:

  • the scale of relevant geographic market being affected by to-be-established retail outlet;
  • the number of existing retail outlets in the relevant geographic market;
  • impact of the retail outlet on the market stability and operating activities of other retail outlets and traditional markets in the relevant geographic market;
  • impact of retail outlet on traffic density, environmental hygiene, fire safety in the relevant geographic market; and
  • potential contribution of the retail outlet to the socio-economic development of the relevant geographic market.

Equity funding is also used in offshore funding for tax purposes. Recently, however, the Government has taken the position that even offshore acquisition is also subject to Vietnam tax(es) if the assets and the business are ultimately located in Vietnam. One of the most well-known offshore funding is the acquisition of the retail chain Casino group by the Thai Central Group at the price of EUR1 billion. The shares to be acquired are of a Netherlands company that in turn own series companies in Vietnam.

The third option is cash back funding. This often occurs in real estate project acquisition. For example, if the value of the land is USD100 million and the buyer wants to buy 80% shares in the new project, the seller would usually establish a target company with the share capital of USD100 million contributed by the land use right. The seller then sells 80% shares to the buyer (usually at a premium) and receives cash back from the share sold (USD80 million) and the premium. Often the construction costs at the time of closing are also included in the sale shares.

The fourth option is debt financing, in which LBO is one of them. Under debt financing, the buyer will seek funds to acquire shares from banks, with the hope that the cash flow and profits from the target company will suffice to repay the debt. Before giving out funds for the acquisition, the bank usually analyses the target company’s projected cash flow, profit margins, and liabilities. Analysis of the financial health of both the acquiring company and the target company is a pre-requisite. Local lawyers are usually engaged for the purpose of due diligence and issue of legal opinion to assess the legal risks. Commercial risks are assessed by the other experts.

The fifth option is mezzanine debt. Mezzanine or quasi-debt is an integrated form of financing that includes both equity and debt features. In nature, it is comparable to subordinate debt although it comes with an option of being converted to equity. An example is the acquisition by Mekong Capital of a chain of pharmaceutical outlets – Pharmacity. Part of the acquisition was by way of share acquisition and funded by convertible bonds. According to Article 6.3 of the Law on Securities 2006, convertible bonds are recognised in Vietnam as a debt funding. When a certain condition happens, the debts will be converted into equity at the discretion of the buyer (option), or as an obligation to convert (future transaction). Mezzanine financing is suitable for target companies with a strong balance sheet, as well as steady profitability, though they may lack a strong asset base.

The option of LBO has been analysed above. LBO is one of the options of acquisition finance and more popularly used for asset finance than equity finance.

Last but not least, Vietnam is experiencing the rise of seller’s financing or vendor take back loan. This is where the acquiring company’s source of acquisition finance is internal, coming from the target company. The financing may be through delayed payments, seller notes, earn-outs. An example of earn-out financing is the acquisition of Sojitz in one of its distribution companies in Vietnam, where 70% of the price was paid at the closing, and the remaining 30% payable conditional upon performance of the target. For the seller note, the target company will loan money to the buying company to finance acquisitions, in which the buying company pays a certain amount of the transaction at a future date. This has been performed in certain real estate financing transactions.

Banks in Vietnam use their own form in making corporate or project loans. Thanks to assistance from their legal advisers, banks are now familiar with, for instance, LMA (Loan Market Association) or APLMA (Asia Pacific Loan Market Associations) forms. APLMA’s forms are more common than LMA’s, as the former are simpler and more pro-bank than the latter. Even when using their own forms, banks are familiar with the general concepts, such as drawdown of facility, conditions precedent, representations and warranties, covenants (information, financial and negative pledges), events of default.

As to legal requirements, Article 23.1 of Circular 39/2016/TT-NHNN requires a loan agreement to consist of the following:

  • name, address and corporate identity code of the lending credit institution; name, address, number of identification card or citizen identification card or passport of the customer;
  • loan amount; loan limit for a line of credit loan; provisional credit limit for a provisional line of credit loan; overdraft limit for a current account overdraft facility;
  • loan purposes;
  • currency unit used for extending a loan or repaying debt;
  • lending method;
  • loan term;
  • agreed lending interest rate and interest rate converted into percent/year;
  • loan disbursement and use of payment instrument for disbursement of borrowed funds;
  • loan principal and interest repayment, and priority order of recovery of loan principal and interest; early debt repayment;
  • debt rescheduling; delinquency of the principal amount
  • responsibilities of a customer
  • cases of loan termination; collection of debt prior to the due date; delinquency of the principal amount
  • loan debt treatment; penalty for loan default and compensation for any loss incurred; rights and liabilities of parties involved;
  • entry into force of a loan agreement.

The difficulties of the standard loans are often in the security documents, whether it is necessary to engage local lawyers to check, notarise and register with the competent registrars. The loan is not safe until all securities are registered and can be simply enforced. LMA’s and APLMA’s forms however do not deal with the link between the loan and the enforcement. As such, the enforcement of the loan is not a simple task if the interface between the loan and the securities were not designed smoothly.

As for security, the Law on Credit Institutions requires each loan to have appropriate securities. In particular, Article 94 provides that credit institutions shall request clients to provide documents proving the feasibility of their capital use plans, their financial capability, the lawfulness of capital use and loan security measures before deciding on credit extension.

There is no requirement relating to the language used in documentation, except that any loan agreement signed with a Vietnamese licensed bank must have a Vietnamese version. In addition, the finance documents that need to be notarised have to be in Vietnamese. If the parties choose Vietnamese courts to be their venue of dispute resolution, the only language used in court will be Vietnamese (Article 20 of the Law on Civil Procedures 2015). The language of the contracts would therefore also be Vietnamese. To avoid this problem, most transaction documents have an arbitration clause, and the language of arbitration can be stipulated to be English or another language.

In addition, the seller may require the transaction documents to be translated into Vietnamese for their understanding or for tax audit purposes. The translation, however, is not considered equivalent to the original. The parties may agree that, in case of discrepancy, English is the prevailing version.

Legal opinions in acquisition finance transactions often consist of two types. The first is a due diligence report that records the risks of the target and the acquisition transaction. The typical risks to be recorded are ownership of shares and the quality of the target company, breach of guarantees and warranties, purchase price and price adjustment.

The second type of legal opinion is one relating to the loan that finances the acquisition. A legal opinion of this type typically consists of the following:

  • legal status of the parties;
  • powers and authorities;
  • validity, legality and enforceability;
  • conflicts;
  • consents;
  • stamp duties;
  • choice of law;
  • dispute resolution;
  • jurisdiction; and
  • immunity.

As in other countries, Vietnam also recognises the concept of senior debts, mezzanine (subordinated debt), convertible loan (or preferred equity) and common equity as methods of acquisition finance.

Under senior loan structure, money is owed to the lender who has first claim on the target company’s cash flows. Most corporate loans adopt this structure. The lenders almost always request the borrower or the target company to open a business bank account at the lenders’ agent. All of the cash flow from the target company (or the borrower) must go through that bank account, which is pledged at the agent. When the loan is not repaid, the account will be seized for debt repayment. Another covenant under Senior Loan is that the cash flow must be used to repay the debts before any other expenses (or a minimum fund be reserved to repay the debts). Senior loans are, however, insufficient to cover the lender's credit risks if the cash flow of the target or the borrower is not steady, or the project would be under construction for a while. Therefore, lenders may request parent’s corporate guarantee to cover the credit risks of the borrower.

The structure of mezzanine loan includes a senior loan (usually from the banks) and subordinated debts (usually from the shareholders of the borrowers). Under a mezzanine loan, the lenders fix a ratio between lenders' loan and shareholders' loan. In terms of priority, the shareholders' loan is subordinate to the senior lenders. The laws of Vietnam accept the concept of subordinated debt under Article 1.24 of Circular 19/2017/TT-NHN. In case of repayment, the law accepts that the parties may agree on the order of principal collection and the loans without securities would be repaid in advance.

A bridge loan is a short-term form of financing which is used to meet current obligations before securing permanent financing. It provides immediate cash flow when funding is needed but not yet available. An example of a bridge loan is corporate finance (backed by corporate guarantee), whereby the borrower needs funds to acquire an asset (eg, an oil tanker) and converts it into a floating production and storage oil tanker (FPSO). The acquisition is backed by a bridge loan, whereby the conversion is backed by a project finance loan. While waiting for the conditions of a project finance loan to be fulfilled, eg, steady cash flow from a charter party contract, the lenders would consider providing a short-term loan called a bridge loan.

Bridge loans have been used widely by companies in oil and gas industries, as well as energy sector, while waiting for a steady cash flow contract to be signed. The issue of a bridge loan is usually the enforceability of the corporate guarantee which, in case of guarantee for overseas entities, may be subject to the Prime Minister’s approval under Article 19.2 of the Ordinance on Foreign Exchange Control 2006, whereas the process to obtain such approval is not clear. Recently, these difficulties have been relaxed by Article 23.3 of Decree 124/2017/ND-CP which allows oil and gas enterprises to provide guarantee to offshore subsidiaries up to their shareholding ratio in the subsidiaries.

Issuing bonds has recently been used as an alternative to extending loans. First of all, to extend a loan, the bank’s credit committee must assess risks of the project and approve the term sheet. For bond acquisition, however, the lenders' conditions are more relaxed. Bonds are also attractive to smaller bond holders.

The issuance of corporate bonds is regulated by Decree 163/2018/ND-CP, under which a company may issue bonds when it meets the following conditions:

  • have operated for the minimum of one year after first issuance of the Business Registration Certificate;
  • have the financial statement of the year preceding the year of corporate bond issuance;
  • ensure compliance with the limit on the number of investors upon issuance and transaction of bonds;
  • have the plan for issuance of bonds approved by competent authorities; and
  • make full payments of both principal and interest for a period of three consecutive years prior to the issuance of bonds (if any).

Corporate bonds, however, may not be easy if the bond issuer is newly established and does not have profit track records. In this case, project bonds may be considered.

An example of project bonds are the VND150 billion bonds issued by Quan Minh Company Limited, which were entirely purchased by Seabank. With the growth of real estate market and private public partnership projects, issuing project bonds will surely be preferred to raising funds. The risks of project bonds are, however, the default of payment of coupon or insolvency of the bond holders. It is unclear how regulations will handle this risk.

While waiting for the regulation of project bonds to be developed, real estate finance in Vietnam is booming with a new concept of condotel funding, which is the structure of capital mobilisation by the developer whereby the condotel’s owner is promised to receive a fixed interest rate (often higher than bank loan). No title deed or LURC is given to the owner of the condotel. The exchange for the purchase price of the condotel is often simply a promise to pay certain interest rate in ten years. The risk of this structure ie, the insolvency of the developer is not yet addressed. The government has not delivered condotel regulations as promised.

Private placement is a funding round of securities which are not sold through a public offering. The laws of Vietnam regulate private placement under Decree 58/2012/ND-CP, according to which the conditions for private placement and steps to be taken are as follows:

  • For non-public Joint Stock Company: obtain decision of the General Meeting of Shareholders on the plans of individual stock offering and use of money obtained from the offer and other conditions as prescribed by the specialised law.
  • For conversion from Limited Liability Company into Joint Stock Company: the owner’s decision or the Board of Members adopting the plan of individual stock offering for conversion.
  • For public company: obtaining a decision of the General Meeting of Shareholders on the plans of offer and use of money obtained from the offer, identifying the subjects and the number of investors and other conditions as prescribed by the specialised law.

Under Article 8 of Decree 58/2012/ND-CP, the issuer shall send the registration dossier of individual stock offering to the competent authority, which within 15 days shall notify the issuer and publish on its website the individual stock offering of the registering organisation. Within ten days from the date of completion of the offer, the issuer shall send a report to the competent authority.

Syndicated loan is governed by Circular 42/2011/TT-NHNN. Under this Circular, the lenders must enter into an intercreditor agreement (ICA) which consists of the following clauses:

  • name, address of members participating in the loan syndication; of the customer, project and main information of the project;
  • head member in the provision of the loan syndication;
  • head member in the arrangement of the loan syndication, in the payment, in the receipt of secured assets, if any;
  • form of credit extension, total amount of the loan syndication; participation proportion of the members in the provision of loan syndication to the project; entitled interest amount of each member and expenses arising in granting loan syndication in accordance with provisions of applicable laws;
  • method of disbursement, collection of principal and interest debt;
  • secured assets and management of secured assets; regime on the disposal of secured assets where the customer is in default;
  • compensation for head members, if any;
  • rights and obligations of members and head members;
  • method of dealing with risks during the process of granting loan syndication, settlement of disputes arising among the members participating in the loan syndication;
  • inspection regime during and after granting loan syndication;
  • regime on the supply of information for the grant of loan syndication; and
  • agreement on the appointment of member acting as the representative of finance leased asset's owner to the customer in the finance leasing syndication operation.

In addition, if the parties use APLMA or LMA forms, other elements to be regulated in an ICA are:

  • credit adjustment;
  • mitigation by the lenders;
  • change to the parties;
  • disclosure of information;
  • representative and warranties of the parties;
  • effectiveness and termination; and
  • dispute resolution.

Bank or bond deals are the most common forms of acquisition finance in Vietnam. When a bank is approached by a borrower, it must consider the reputation of the borrower first, together with the feasibility of the project in question. The cash flow of the project (eg, the target company) will be assessed, together with the liquidity of the security. Once the risk is analysed, the bank will propose to the credit committee, who will meet and consider the loan proposal, and if they approve, issue a term sheet for the loan or the bond. The negotiation of the term sheet is the most important part of the transaction.

Once the term sheet is confirmed, the loan or the bond circular will be drafted and negotiated. The extent of the negotiation depends on the risk appetite of the lenders. However, most banks follow international standard approach under LMA, APLMA or ISDA, GMRA standards. They do not divert or reduce the risks. Other risks mainly stay with security and enforcement of securities, which will be discussed in 5 Security.

Against the risks of foreign exchange, there is always a hedge structure. For example, the Ordinance on Foreign Exchange Control 2006 requires that, in the territory of Vietnam, all transactions shall be made in VND. Circular 32/2013/TT-NHNN generally requires, subject to certain exceptions, that all transactions, payments, listings, advertisements, quotations, pricing, prices in contracts, agreements of other similar forms (including conversion or adjustment of prices of goods and services, the value of contracts and agreements) in the territory of Vietnam of residents and non-residents are not allowed to be conducted in a foreign currency. Therefore, in an acquisition finance, while the buyer often wishes to value the project in USD, they must receive payment in VND. The hedge the foreign exchange risk of fluctuation to the purchase price in VND between the contract date and the closing date, the buyer usually shall pay the foreign exchange loss, based on a separate Side Letter.

In intercreditor agreements, the lenders and the agent usually place all the risks on the borrower, such as the tax gross up, currency risks, conversion risks, tax indemnity risks. Such are standard provisions under LMA and APLMA. As to non-transferable risks, they may enter into hedging transactions such as ISDA forex swap agreement.

The types of securities most commonly used in acquisition finance are shares, property rights, inventory, bank accounts, receivables, intellectual property rights, real property and moveable assets.

Bank account is the most commonly acceptable security, as "cash is king". In Vietnam, banks normally set security at 80-90% if the debt is secured by cash in a nostro account. In reality, however, this security is rare as the borrower may not have sufficient cash for it.

Another popular form of security is real estate. Banks in Vietnam practically take security as real estate up to 70% of the total loan. For real estate to be mortgaged, the borrower must first obtain its LURC, which can be difficult to do in major real estate projects where the owner of the real estate needs to transfer the project in order for the borrower to become the LURC holder. In this situation, the lender may need to consider another form of security, that is property right over the project.

Property rights are considered a type of assets under Articles 105 and 295 of the Civil Code 2015. In practice, lenders often describe property rights as rights derived from a land lease agreement, rights to own any assets developed on the land, or rights to compensation or insurance over such assets or exercise of property rights.

Receivables are another popular form of security if there is a contract that guarantees the receivables. The problems with receivable lie in the accuracy of valuable and risk of termination of the underlying contract that forms the receivable.

Inventory and moveable assets are also considered a form of security. Unlike the fixed assets which may not be transferred, inventory is goods in trade, where the values and quantity may change from time to time, rendering valuation a major issue. Inventory charge is similar to the concept of floating charge in the UK, whereby the value of the assets are only crystalised at the time of enforcement. A difficulty may arise if many lenders have charge over the inventory, and no one is able to ascertain which part of the inventory can be taken for enforcement.

Shares are usually pledged by the shareholder. The lenders, although accepting share pledges, usually prefer concrete assets. This is because attached to shares are the liabilities of the target companies or the borrowers. Shares are not the only security, but rather an additional security to cover the credit risks, apart from other property as mentioned above.

There is no particular form for a pledge or mortgage agreement. Under Article 167.3 of the Law on Land 2013, mortgage agreements involving real estate have to be notarised to be valid. As for other assets, a written agreement would suffice.

Under Article 4.1 of Decree 102/2017/ND-CP, to perpetuate the security and secure the priority right as well as the right to pursuit the secured assets, the security document must be registered. Accordingly, mortgage or pledge over the following assets must be registered at the National Agency for Registry of Secured Transactions (NRAST):

  • land use rights;
  • property on land whose ownership has been stated in the certificate of rights to use land, ownership of house and property on land (hereinafter referred to as "land use right certificate");
  • aircrafts; and
  • mortgage of seagoing ships.

Mortgage or pledge over land use rights or assets attached to land must be registered at the provincial Land Registration Office are.

Article 297.1 of the Civil Code 2015 defines priority of registration as: the security shall take effect against a third party from the time of registration of such security or the secured party keeps or possess the collateral. The meaning of right to pursuit is defined under Article 297.2 Civil Code 2015 as follows: when the security takes effect against a third party, the secured party is entitled to reclaim the collateral and payment.

As to restrictions on upstream security, there was a debate in court as to whether a guarantee backed up by assets is considered a pledge or a guarantee. Banks argue that the guarantee is to cover all obligations of the beneficiary by all assets of the guarantor. But the assets secured in the guarantee by no means limit the obligation of the guarantor. The court, however, held that the security is limited to the extent of the secured assets.

Financial assistance in law refers to assistance given by a company for the purchase of its own shares or the shares of its holding companies. Article 30 of the Law on Enterprises 2014 allows each company to acquire its own shares only up to 30% of the paid-up capital. In addition, there is also a prohibition of cross ownership. In particular, Article 189 of the Law on Enterprises provides that Subsidiaries must not contribute capital to or buy shares of the parent company. Subsidiaries of the same parent company must not contribute capital or buy shares of each other for the purpose of cross ownership.

In addition, Article 9.4 of the Law on Securities 2006 also prohibits insider trading, which includes related party transactions that continuously buy shares of related companies to create an artificial price hike.

There are corporate benefit tests under the Law on Enterprises 2014. In particular, Article 71 provides that in exercising its power, the directors must act in a way they believe to be in the best interests of the company and not just in the best interests and for the benefit of the group as a whole. Article 72 provides that if the group abuses its power and causes prejudice to the company, a shareholder is authorised to take a derivative action against the group to cover damages to the company. This derivative action has been taken where:

  • there are violations of Article 71;
  • there are failures to adhere to legal regulations or the company’s charter on given rights and obligations;
  • failure to implement or adequately, promptly implement Resolutions of the Board of members; or
  • Other cases defined by law and the company’s charter.

In addition, the Law on Securities 2006 and its regulations provide further restrictions on insider trading. In particular, Article 9 prohibits and restricts the following activities:

  • directly or indirectly tricking, swindling, fabricating untruthful information or omitting necessary information, thus causing serious misunderstanding which badly affects the public offering of securities, securities listing, trading or investment, securities and securities market service provision;
  • disclosing misleading information in order to entice and instigate others to buy or sell securities, or disclosing untimely and insufficient information on occurrences which greatly affect securities prices on the market;
  • using inside information to buy or sell securities for oneself or for others; disclosing or supplying inside information or advising others to buy or sell securities based on inside information; and
  • conniving in buying or selling securities in order to create sham supply and demand; trading in securities by mode of colluding with or enticing others to continuously buy and sell securities back and forth to manipulate securities prices; combining or employing other trading modes to manipulate securities prices.

Article 299 of the Civil Code 2015 provides that:

  • a security asset will be enforced if an obligator fails to perform or performs not as agreed an obligation when it falls due;
  • an obligator must perform the secured obligation before time limit due to their violation against the obligation as agreed or prescribed by law; or
  • other cases as agreed by the parties.

These principles have been elaborated under Article 303 of the Civil Code 2015, according to which the securing party and the secured party may agree on any method of realising security asset, including:

  • putting collateral up for an auction;
  • the secured party sells collateral itself;
  • the secured party accepts the collateral as substitutions for the performance of obligations of the securing party; or
  • other methods.

In a nutshell, the laws allow the parties to agree upon the mode of enforcement. The lender may stipulate in the mortgage agreement that the borrower authorises the lender to take over the assets and sell the assets at the price it deems fit and pay the leftover (if any) to the asset owner after the debt has been repaid.

According to the National Assembly’s Resolution No. 42/2017/QH14 dated 21 June 2017 on solving bad debts, banks are allowed to:

  • purchase bad debts and collateral;
  • seize collateral put up by a grantor or holder of collateral;
  • assign collateral being a real property project.

The most common types of guarantees are bank guarantee and corporate guarantee.

Bank guarantees are regulated under Circular 07/2015/TT-NHNN dated 25 June 2015, according to which the steps to be taken before a bank guarantee is issued are as follows:

  • Step one: customers sign the contract including guarantee terms;
  • Step two: customers establish and send the application for issuance of guarantees to the bank;
  • Step three: the bank appraises the legal contents. If yes, the customers and the bank will sign Guarantee Agreement and Guarantee Letter; and
  • Step four: the bank informs the Guarantor of the Guarantee Letter.

Corporate guarantees are governed by the Civil Code 2015 and Decree No. 219/2013/ND-CP dated 26 December 2013 on management of enterprises borrowing foreign loans and payment of foreign debts without government guarantee. Under the Civil Code, a guarantee could take the form of a contract, or a guarantee letter. The fundamental terms of the guarantee are as follows:

  • subject matter of the contract;
  • price and method of payment;
  • time limit; and
  • rights and obligations of the parties.

Following the guarantee, there is always the right of recourse. In particular, Article 342 of the Civil Code provides that if the guarantor performs incorrectly the guaranteed obligation, the creditor is entitled to request the guarantor to pay the value of the breached obligation and compensate for any damage.

When issuing a guarantee, if the guarantor is a shareholder of the borrower, they would also be subject to other restrictions, such as restrictions on upstream guarantees, financial assistance and corporate benefit tests that has been discussed in 5 Security.

There is no requirement that a corporate guarantee has to bear a fee. However, a bank guarantee always has a fee. The guarantee fees are regulated by Circular 07/2015/TT-NHNN dated 25 June 2015 on bank guarantees. Under Article 18, the guarantee cannot be higher than the guarantee-issuing fee approved by the obligor.

Subordinated debts are regulated under Circular 19/2017/TT-NHNN amending and supplementing a number of articles of Circular 36/2014/TT-NHNN, dated 20 November 2014, of the Governor of the State Bank of Vietnam providing for prudential ratios and limits of operations of credit institutions and branches of foreign banks. In the event of insolvency, the interests of the shareholders are subordinate to the interests of other creditors. In particular, Article 101 of Bankruptcy Law stipulates the priority of debts as follows:

  • bankruptcy fee;
  • unpaid salaries, severance pay, social insurance, medical insurance of the employees and other benefits under regulations on deposit insurance and instructions of the State Bank of Vietnam; and
  • financial obligations to the State; unsecured debts payable to the creditors on the list of creditors; secured debts that are unpaid because the value of the collateral cannot afford the debt.

The buyer may stipulate a claw-back clause in the event the acquisition contract is held invalid for any reason, or some fundamental misrepresentation was found. Considered to be a cancellation of the contract under the laws of Vietnam, claw-back clauses are valid.

For a claw back clause to be enforceable, the parties have to clearly stipulate the circumstances of claw-back in the contract. However, even if the circumstances are well stipulated, it is difficult to enforce the clause if the seller is insolvent. Therefore, claw-back clauses should be accompanied by some other credible threats, such as potential deal from another buyer, or potential IPO. A good example of enforcement of claw back clause can be found in the closure of MEF II Fund.

Under Article 18.2 of Circular 39/2016/TT-NHNN, a borrower or a financial sponsor can conduct a debt buy-back by way of prepayment. The conditions of prepayment are as agreed by the bank and the borrower.

There is no stamp tax in relation to a loan agreement or bond issuance. Under Article 11 of Circular 78/2014/TT-BTC, the lenders or bond holders are responsible for their own corporate income tax, which is 20% of their net total income. Under Article 16 of Circular 92/2015/TT-BTC, a deemed tax of 0.1% of the transaction value applies to capital gains for bond transfer. If this exemption is released, the normal personal income tax rate would be a progressive rate ranging from 5% to 35% of the net revenue depending on the source of income.

Foreign lenders will be subject to withholding tax on interests gained, at 5% of the total interest under Article 13.2 of Circular 103/2014/TT-BTC. The interest includes arrangement fee and other service fees. To avoid that tax, most of the loan agreements following APLMA form provide for a tax gross up clause, saying that the borrower shall bear the payment of withholding tax and the risk of a tax increase.

Thin capitalisation applies in project using lands in Vietnam. In particular:

  • minimum charter capital of a real estate company is VND20 billion.
  • the minimum debt/equity ratio for real estate project is 85/15, and if the project uses more than 20 hectares or urban land, the minimum debt equity ratio will be 80/20.
  • the minimum equity in a real estate project has to be 15% of the total.

Takeover finance in Vietnam is not regulated systematically. Rather it is subject to the regulation of regulated targets, ie, targets that operate under conditional businesses. Foreigners are restricted from holding shares in certain businesses, which affect national defense and security and public interests, culture, morality, traditions and customs of Vietnam or causing harm to people's health, damaging natural resources and destroying the environment.

In addition, to take over businesses in state owned enterprises, one needs to look at the equitisation solution as approved by the Prime Minister. In the case of PV Oil, for example, the maximum controlling shares of foreigners are 36,6%. For some other cases, such as Hanoi Brewery, the maximum controlling shares of foreigners are 49%.

As to the financing of banks, the restrictions applied under Article 9 of Decree 01/2014/ND-CP are as follows:

  • being ranked by international prestigious credit-rating organisations in the stable level or equivalent or higher level;
  • having full financial source to purchase share which is defined under independently audited financial statement of the year preceding year of submission of dossier and a lawful capital source for share purchase as prescribed by law;
  • the share purchase does not affect the safety, stability of the Vietnamese credit institution system, or create any exclusivity or limit competition in the Vietnamese credit institution system;
  • not violating any law on monetary, banking, securities and securities market of country where foreign investor is headquartered and laws of Vietnam within 12 months until submission of dossier of share purchase; and
  • having total assets at least equivalent to USD10 billion for foreign investors being banks, financial companies, or finance-leasing companies or having the minimum charter capital equivalent to USD1 billion for foreign investors being other organisations in the year preceding the year of submission of dossier of share purchase.

So far, the highest controlling shares in a local bank by foreigners is 25% (TPBank).

The anti take-over concepts, such as poison pills, white knights, etc, may be imposed in the Charter of a company.

For publicly listed targets, their charters are the charters formed by the Ministry of Finance under Article 3 of Circular 95/2017/TT-BTC dated 22 September 2017. Having said this, it is possible to provide anti take over solutions to the listed companies.

Under Article 2a.2 of Decree 58/2012/ND-CP, the maximum holding shares of foreigners in a listed company is 49%, unless otherwise regulated by other regulation of laws.

© copyright LNT & Partners 2019

Please note: while efforts are made to describe and update the laws and practices in the area, this article should not be taken as legal advice. Should you have any question, please contact Net Le at net.le@LNTpartners.com.

LNT & PARTNERS

Bitexco Financial Tower,
(Room 2A, Level 18 and Room 03, Level 21),
No. 02 Hai Trieu,
Ben Nghe Ward,
District 1, Ho Chi Minh City,
Vietnam.

+84 28 3821 2357

+84 28 3910 3733

net.le@LNTpartners.com www.lntpartners.com
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Law and Practice

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LNT & PARTNERS is one of the leading law firms in Vietnam. The firm is well-known in all of its six practice groups: corporate and M&A, financial services, infrastructure, real estates, disputes resolutions and TMT and IP. The firm is behind the multi-billion dollar privatisation, IPO and divestment, such as Habeco, PVPower and PVOil, as well as being lead counsels of many high profile deals such as Nghi Son Refinery, Toshin, Gemadept, Taisho-Duoc Hau Giang, and the closing of two high yield investment funds of Mekong capital. Starting in 2019, the firm is expanding into Singapore, making it the second Vietnamese law firms to have offices in Singapore.

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