Here is a helpful post from the authors of ULaw’s Reporters, Mr. Pham Minh Tien and Ms. Le Ngoc Bao Trang. I have their kind permission to share it here.
Chapter I – Incorporation Matters
To complete the merger and acquisition transactions, the parties often have to go through many processes in which the legal due diligence (LDD) is one of the first and most essential processes in merger and acquisition transactions. LDD is a process of legal examination to identify material legal issues, non-compliance matters of the target enterprise (the Target), based on such, to determine conditions precedent, conditions subsequent, representations and warranties in capital transfer/ sale and purchase agreements of capital contribution or share (Share). At the same time, LDD also plays a vital role in making investment decisions and determining the value of enterprises in merger and acquisition transactions.
In order to conduct an LDD, both enterprises and lawyers need to evaluate and review information and documents, in each legal aspect of the Target based on a comparison between the laws and the Target’s current situation.
One of the first aspects to examine when conducting an LDD is to answer the question: have the Target and its affiliates such as branches, representative offices, and business locations (if any) been registered in accordance with the laws yet? Vietnamese laws require that establishment of enterprises must be validly registered, and enterprises must notify or register some fundamental changes in their corporate information with the competent authorities. To confirm and verify this information, the lawyers need to study the enterprise registration certificate (ERC), investment registration certificate (IRC) (if any), operation registration certificate of branches/ representative offices/ business locations (ORC) (if any) and compare the information therein with the actual operation of the Target (such as head office’s address, charter capital, legal representative, head of representative offices/ business locations). Besides, based on these documents, the lawyers can obtain necessary information about the Target such as enterprise form, type of capital sources, and business lines. This information will be a foundation for the lawyers to analyze the Target’s obligations, for example, business lines subject to foreign ownership limits, report obligations of foreign-invested enterprises, and the statutory organizational structure of a joint stock/ limited liability company.
In tandem with checking the provided certificates, the lawyers need to collate with the corporate information of the Target posted on the national business registration portal (http://dangkykinhdoanh.gov.vn) (NBR Portal) and the portal for taxpayer information search on the website of the General Department of Taxation (http://tracuunnt.gdt.gov.vn/). This collation is to examine the consistency of corporate information posted on such pages and with information in the Target’s certificates.
If the Target cannot provide these certificates in full, or the lawyers insist on further information about Target’s corporate history, the lawyers may purchase latest enterprise registration information or history information of the Target for the last three years at the NBR Portal. Of note, some enterprises or branches established before 1st July 2015 (the effective date of the Law on Enterprises 2014) may still be operating under the investment certificate concurrently with the business registration certificate. Therefore, it will be challenging to conduct LDD in these enterprises because the comparison with information on the NBR Portal will be impossible.
Registration of business lines is a mandatory requirement for every enterprise in Vietnam. The business lines of enterprises can be found on the NBR Portal. The laws on enterprises prescribe the sanctioning of administrative violations for the failure of enterprises to notify changes in their registered business lines (for example, where the registered business lines of enterprises are not shown correctly and in full, compared with the actual business activities of enterprises). Notably, such violations will be more complicated if such business activity falls within the scope of conditional business activities. The first typical instance is when some enterprises sub-lease unused land or offices to a third party, which can be considered as a real estate business (a conditional business line). The second instance is where foreign-invested enterprises carry out retail activities for end-customers during the provision of services. Though carried out neither often nor continuously, this activity may be considered a retail activity of foreign-invested enterprises. Such enterprises may be required to obtain a business license (issued by the Department of Industry and Trade) for their retail activities. In practice, many enterprises are still not aware of this business license and confused with the ERC or IRC. These violations will lead to administrative sanctions and may adversely affect the reputation of the violating enterprises if the incident is made public. Therefore, on this point, the lawyers need to understand the business activities of the Target both in terms of registration on paper and in practice (through discussions and interviews with the authorized person of the Target, or through agreements showing the Target’s transactions with third parties) and examine whether the registered business lines have correctly and fully demonstrated the actual business activities of the Target.
Besides, a typical legal issue in merger or acquisition transactions is that after the completion of such transactions, the Target becomes a foreign-invested enterprise, or the existing foreign capital contribution in the enterprise increases significantly. In this case, the lawyers need to review the business lines of the enterprise carefully. Firstly, do any business lines of the Target fall in the list of business lines subject to foreign investment limitations? For example, if the Target provides road transport services, the foreign investor’s contribution capital will be capped at 51% of the Target’s total contribution capital. Secondly, the Target (especially domestic enterprises) often register many business lines under the “too much is always better than not enough” rationale. This situation will prolong and complicate the registration process of Share contribution/ sale and purchase because the competent authorities will have to consider the market opening regulations of many business lines before approving Share contribution/ sale and purchase agreements. Notably, if some business lines are not listed in Vietnam’s Schedule of Specific Commitments on Services of Accession to the World Trade Organization (WTO), the competent authorities will have to seek the opinions of the competent authorities in higher levels (for example, Ministerial level) before making a decision and this process prolongs the merger and acquisition process.
The Target may have dependent units such as branch, representative office, and/ or business location. The lawyers need to examine the ORCs of such dependent units (if any) and interview with the Target for the quantity of such dependent units and other details both in terms of registration on paper and in practice. In case the Target fails to provide sufficient information for this collation purpose, the lawyers may look for such information through the latest enterprise registration information or history information of the Target for the last three years purchased at the NBR Portal.
The operation scope of the branch and business location is limited to the Target’s registered business scope. For the representative office, it can only perform the authorized representative operations for the enterprise. Accordingly, the lawyers must examine compliance with the operation scope of the dependent units by making the comparison between the actual operation of the dependent units (through discussions and interviews with the authorized person of the Target) and operation scope of the Target. For the business location, currently, several licensing authorities may view the warehouse leased by the enterprise as its business location and request an ORC for such warehouse. Therefore, the lawyers need to check whether the Target has any warehouse and whether it must register such a warehouse as a business location. The latter concern can be resolved by consultation with the local authorities where the warehouse is located. The failure to register or notify on changes in the dependent units’ information may lead to administrative sanctions on planning and investment.
The current laws on internal documents remain few, unclear, and general. However, ensuring compliance with internal documents of the enterprises is vital in terms of both legal compliance and corporate governance efficiency. Common internal documents of enterprises include charter, internal management regulations, shareholders’ agreement/ joint venture agreement/ investment agreement, share certificate, registry of shareholders/ members, meeting minutes, and resolutions.
Charter is a critical document and also a must-have in the application dossier for establishment of any enterprise. As required by laws, enterprises must retain charter and its amendment(s) at the head office or other places as prescribed by the charter. The lawyers should initially examine the validity of the charter by checking whether the charter was signed by the Target’s competent person(s). For instance, if the Target is a multi-member limited liability company, the charter should be signed by all individual members and the legal representatives/ authorized representatives of organizational members at the time of establishment. After the validity check, the charter’s contents should be reviewed to determine whether such contents comply with applicable laws and reflect the latest factual information of the Target (such as regulations on organizational and management structure, head office address, number of each type of shares, and the legal representative’s information).
The laws specify that the charter and its amendment(s) be retained by enterprises and updated in accordance with the applicable laws and status of such enterprises. However, enterprises are not required to notify or register with the competent authority about changes in the charter’s contents (except in some instances such as charter capital adjustment or change of the legal representative). Consequently, in practice, enterprises frequently fail to comply with this retention obligation and to update the charter’s contents. These non-compliances will adversely affect the corporate governance efficiency of the Target, as they burden the acquiring enterprise (Acquirer) with gaining thorough knowledge about the Target’s corporate governance status.
Shareholder agreement and joint venture agreement
Shareholder agreement and joint venture agreement are not laid down in the laws on enterprises. However, such agreements are commonly used in practice, especially by foreign-invested enterprises. Such documents not only contain agreements among shareholders/ members on the establishment and management of the enterprise but also provide the undertakings among the shareholders/ members relating to re-organization of the enterprise or the Share transfer, such as right of first refusal, tag-along right, and non-transfer commitment. Therefore, the shareholder agreement and joint venture agreement entered into by shareholders/ members of Target should be reviewed carefully to identify any condition required for the proposed transaction (for instance, written consent of all shareholders/ members prior to the share transfer, principle on determination of transfer price, or tag-along rights).
Other internal documents
In addition to the documents described above, the Target must prepare and retain other internal documents, including share/ capital contribution certificate; registry of shareholders/ members; meeting minutes and resolution of the competent body of the Target (such as general meeting of shareholders, board of management, members’ council). The lawyers should inspect whether the information stated in such documents is consistent with the Target’s public information (such as information of founding shareholders/ members). In case of any inconsistency, the lawyers must raise the questions to the Target for its clarification and confirmation. Furthermore, the lawyers should check the validity of landmark decisions of the Target because the Target must seek prior approval from its competent body (such as general meeting of shareholders, board of management, or members’ council) for certain operation changes (such as establishment of a subsidiary or purchase/ sale of valuable assets).
Particularly for registry of shareholders/ members, under the laws, the Share purchasers will officially become the shareholders/ members of enterprises when they are recorded in this registry. In addition, for recognition of the ownership of the Share, enterprises are obliged to issue the share ownership/ capital contribution certificate to their shareholders/ members. Therefore, share ownership/ capital contribution certificate, and registry of shareholders/ members are the most transparent documents to prove Share ownership of shareholders/ members in the Target. However, in practice, these documents are not well prepared/ retained/ updated by enterprises. These non-compliances may lead to administrative sanctions imposed on the enterprises and affect the rights of shareholders/ members.