[Vietnamica.net] M&A in Vietnam – Outlook of The Market and Some Hurdles to Overcome

M&A in Vietnam – Outlook of The Market and Some Hurdles to Overcome

August 18, 2011 (Vietnamica.net) – Although there remain difficulties and restrictions, a merger or an acquisition (M&A) is still an effective channel for entering Vietnam’s markets.

Market overview and legal framework
Mergers & Acquisitions (M&A) activity in Vietnam has continued to grow this year as increasing numbers of foreign investors are attracted by the country’s sizeable, dynamic, and youthful market. With a reported value of about US$1.75 billion from 345 deals in 2010, compared to US$1.1 billion and 295 deals in 2009, Vietnam has seen and is expecting to see more M&A deals this year, particularly in the areas of production, finance, banking, and consumer goods.

Under Vietnam’s laws, M&A are a form of investment and therefore governed by the Investment Law. This means extra red tape, e.g., registration or evaluation of the investment project. While the registration procedure is quite simple and much faster than in the past, evaluation is much more time-consuming and subject to the licensing authorities’ discretion.

Shareholding ratios
Vietnam restricts foreign shareholding ratio in a number of business sectors. The restrictions are determined by a number of domestic laws and the country’s commitments made when acceding to the WTO. In retail, for example, the restriction on maximum foreign shareholding was removed in 2009. However, the retail market is still subject to a number of regulations that some argue act as restrictions to market entry.

In a recent case, Mekophar Chemical Pharmaceutical Joint Stock Company (MKP), a listed pharmaceutical company, was barred from selling pharmaceuticals after a portion of its shares were acquired by foreign investors. The foreign shareholding of 4.7 percent was enough for the Ministry of Planning and Investment to categorize MKP as a foreign invested company and, as such, prohibited from selling pharmaceuticals on the retail market. Even a one percent foreign shareholding in a local company can make it a foreign invested one, and subject it to all the business restrictions Vietnam applies to foreign invested companies.

Regulatory approval in Vietnam also adds an onerous step to the M&A process. In most countries approval is required only to prevent monopolies or to protect certain sensitive industries. In Vietnam, it has become the first step in any M&A involving a foreign investor. Before anything else, confirmation has to be sought that the proposed foreign investment is feasible legally (i.e. the acquisition can eventually result in a successful business registration). Without such confirmation, all efforts and resources invested in other steps of the process could be rendered futile by the business registrar’s rejection.

Shareholding ratios
Vietnam restricts foreign shareholding ratio in a number of business sectors. The restrictions are determined by a number of domestic laws and the country’s commitments made when acceding to the WTO. In retail, for example, the restriction on maximum foreign shareholding was removed in 2009. However, the retail market is still subject to a number of regulations that some argue act as restrictions to market entry.

In a recent case, Mekophar Chemical Pharmaceutical Joint Stock Company (MKP), a listed pharmaceutical company, was barred from selling pharmaceuticals after a portion of its shares were acquired by foreign investors.

The foreign shareholding of 4.7 percent was enough for the Ministry of Planning and Investment to categorize MKP as a foreign invested company and, as such, prohibited from selling pharmaceuticals on the retail market. Even a one percent foreign shareholding in a local company can make it a foreign invested one, and subject it to all the business restrictions Vietnam applies to foreign invested companies.

Regulatory approval in Vietnam also adds an onerous step to the M&A process. In most countries approval is required only to prevent monopolies or to protect certain sensitive industries. In Vietnam, it has become the first step in any M&A involving a foreign investor. Before anything else, confirmation has to be sought that the proposed foreign investment is feasible legally (i.e. the acquisition can eventually result in a successful business registration). Without such confirmation, all efforts and resources invested in other steps of the process could be rendered futile by the business registrar’s rejection.

* Note: Adapted from the author’s article “Overcoming Hurdles” published in Asian Mena Counsel, Volume 9, Issue 5, 2011.
* Related: Mergers & Acquisitions in Vietnam’s Transition Economy 

* Author: Bui Ngoc Hong, a Partner of Indochine Counsel – a HCMC-based law firm; hong.bui@indochinecounsel.com
Update by DHVP Research, info@vietnamica.net

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