How to truly understand and correctly apply procedures for acquiring 100% charter capital in a local company?

Lawyer Pham Quoc Tuan

Lawyer Nguyen Huu Viet - Paralegal Pham Thi Ha

DIMAC Law Firm

With its “open” policies in the field of investment together with a large potential market, Vietnam has attracted many foreign investors in the world (“Foreign Investors”) to come and invest in business. In order to conduct their business, one of the options that the Foreign Investors choose to enter the Vietnamese market is the acquisition of a whole 100% shares, capital contributions (“Charter Capital”) in a target company which has been established in Vietnam (“the Company”).

 

Such approach helps the Foreign Investors save time and costs to develop the initial market, find human resources or build facilities in Vietnam as compared with the form of investment in establishment of a new business organization.

Pursuant to the provisions of the current 2014 Law on Investment[1] (“LOI”), for the form of investment in acquiring the Charter Capital in the Company, the Foreign Investors will carry out the following procedures: (i) to register replacement of members/shareholders at the Business Registration Authorities, for acquisition of less than 51% of the Charter Capital in the Company which does not have a conditional business line for the Foreign Investors (“Replace Members”); or (ii) register subscription of the capital contributions/shares in the Company if acquiring more than 51% the Charter Capital or acquiring the Charter Capital in the Company which has a conditional business line for the Foreign Investors (“Register the Purchased Capital” ) before proceeding with the Replace Members procedures.

Under the above provisions, it can be seen that the LOI details the investment procedures applicable to the Foreign Investors upon acquiring the Charter Capital of the Company under different circumstances. However, in reality, there are various interpretations of the Licensing Authorities in cases where the Foreign Investors acquire all (100%) of the Charter Capital.

 

Actual solutions of the Licensing Authorities

In the course of advising and supporting our clients to carry out procedures for acquisition of 100% of the Company's Charter Capital, we see that currently there are two (02) understandings and procedures in the application for investment procedures by the licensing authorities in various areas, specifically:

(i) The first viewpoint reckons that acquiring the whole Charter Capital of the Foreign Investors is subject to the case of acquiring more than 51%  the Charter Capital and the Foreign Investors are required to conduct the Register Purchased Capital procedures before the Change Member procedures; and

(ii) The second viewpoint holds that acquiring the whole Charter Capital of the Foreign Investors is regarded as a form of investment in establishment of a business organization upon investing in Vietnam resulting in owning 100% of the Charter Capital by the Foreign Investors. As a result, the Foreign Investors must carry out the procedures for acquiring the Investment Registration Certificate and conduct the Change Members procedures afterwards.

The different views and applications of these procedures by the local Licensing Authorities have caused many difficulties to the Foreign Investors wishing to invest in Vietnam. This may affect the investment environment of the country in general and the localities in particular.

 

How to truly understand and apply these procedures…..

The first point is realize that the procedures for investment in new establishment and Register Purchased Capital are applicable to two different and independent forms of investment. Specifically, the form of investing in establishment of a new project and the new enterprise is a new legal entity while acquiring the Charter Capital is applicable solely to an existing Company already established and legally operational.

In respect of the right to acquire the Charter Capital of the Foreign Investors[2], the Foreign Investors have the right to buy the stake, shares of members of limited liability companies, joint stock companies to become members, shareholders of the company. Thus, the charter capital rate owned by the Foreign Investors in the company will be dependent on Vietnam's commitments to join the World Trade Organization and other international agreements to which Vietnam is a member (“International Commitments”). In cases where the International Commitments do not restrict the ownership rate of the Charter Capital of the Foreign Investors, they are entitled to purchase 100% of the Charter Capital in the Company to become the sole owner of the Company.

Semantically speaking here, the provisions of acquiring the shares, capital contributions leading to the Foreign Investors holding more than 51% of the Charter Capital of business organizations in Article 26.1.b of LOI can be understood as acquiring from 51% to maximum 100% of the Charter Capital. Therefore, properly speaking, when buying 100% of the Charter Capital, the Foreign Investors and the Company are entitled to conduct the procedures applied to the case of purchasing more than 51% of the Charter Capital. In order to clarify this provision, Decree No. 118/2016/ND-CP (“Decree 118”)[3] also affirms that the Foreign Investors who invest in the form of acquiring the capital contributions, shares in the business organizations are not required to conduct the procedures for obtain the Investment Registration Certificate.

To sum up, based on the above analysis, we find that the first viewpoint has more proper points than the second one. However, due to the different understandings by the Licensing Authorities, it is thought that the competent authorities at the ministerial level should issue guiding documents in order to consistently apply the procedures, process conducted for the Foreign Investors acquiring all the capital contributions, shares in the business organizations established legally in Vietnam. This will help the local Licensing Authorities have a legal framework for guiding the Foreign Investors to consistently conduct the investment procedures, at the same time also facilitating the decisions to be made by the Foreign Investors wishing to invest in Vietnam.

 


[1] Article 26 of the LOI 2014

[2] Article 22.3, Article  24.1 and Article 25.2 of the LOI

[3] Article 46.2 of Decree 118.