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Navigating Legal Complexities in Vietnam's Thriving M&A Landscape: A Transactional Law Perspective

Trang M Le

Navigating Legal Complexities in Vietnam's Thriving M&A Landscape: A Transactional Law Perspective
Tong Thi Viet Phuong via Getty images

Being one of the fastest-growing economies in the world with an average GDP growth rate of 5.68% in the last five years, Vietnam has become a favored destination for foreign investors among Southeast Asian countries. As of December 2022, foreign investment capital has reached US$274 billion, constituting 62.5% of the total investment in the country. Manufacturing and processing leads in sector-wise investments, capturing 59.3% of the total investment capital, followed by real estate and energy. The Vietnamese Government aims to increase the number of Fortune 500 companies with a business presence in Vietnam by 50% by 2030.

Among several market entry options, many foreign investors opt to establish joint ventures or engage in mergers and acquisitions in Vietnam. Instead of setting up solely owned local companies, these forms of investment enable foreign investors to leverage the experience of their local partners in the Vietnamese market. When dealing with local joint-venture partners or sellers, most foreign parties rely on extensively negotiated transactional documents, i.e., joint-venture agreements, share purchase agreements, shareholders’ agreements, and similar contracts. These documents typically utilize contract templates based on common law principles. Unfortunately, using standard common law contract templates without a thorough review from a local legal perspective may make specific provisions unenforceable.

In any M&A deal involving foreign investment in Vietnam, a crucial step is for the target company to file specific reports with the competent licensing authority, notifying changes to its shareholding structure upon completing the transaction. Failure to comply with these reporting requirements may mean the Vietnamese licensing authority has not legally recorded or recognized the transaction. Problems can arise if the sell-side or local party refuses to cooperate with the foreign investor-buyer in fulfilling the necessary charter amendments or reporting/registration requirements with the licensing authority. To prevent such issues, well-advised foreign investors should be aware of licensing hurdles, make charter amendments, and complete reporting/registration requirements as conditions precedent to closing in most M&A transactions.

However, even with such conditions precedent, investors using call option, put option, or convertible loan agreements may face challenges enforcing their rights if the defaulting party refuses cooperation. Share transfers triggered by these options or conversion rights require changes to the target company’s ownership structure, involving charter amendments and notifications to licensing authorities. Unfortunately, the current Enterprise Law and related legal documents often mandate the defaulting party’s signature for these submissions to licensing authorities. Refusal to cooperate may obstruct the formal recording of the share transfers upon the investor’s exercise of call/put option or conversions of the relevant loan to shares in the target company. Although legal recourse through court or arbitration is possible, the existing law does not explicitly mandate licensing authority to change corporate registration information solely based on a court decision or arbitration award.

Setting aside licensing concerns, employing common law contract terms in M&A and joint-venture agreements in Vietnam without a comprehensive assessment from local legal perspectives may make certain contract terms unenforceable. One topic of debate among Vietnamese legal scholars concerns the use of “liquidated damages” in contracts governed by Vietnamese law. Until 2015, Vietnam’s civil code generally recognized only actual losses and did not explicitly stipulate the parties’ rights to pre-determine the amount of damages. The currently effective Civil Code of 2015 opens the doors for the legal recognition of liquidated damages by stating that “a party in breach must compensate for the entire damage caused unless otherwise agreed between the parties”. However, in practice, the enforceability of liquidated damages in Vietnam remains questionable. Recent court decisions indicate that some Vietnamese courts render liquidated damages clauses unenforceable unless the plaintiff provides evidence of the losses. This can be unfair to the aggrieved party who requires a liquidated damages provision to protect themselves from difficult-to-measure losses.

As another example of unenforceability issues, applying foreign law as the governing law of M&A and joint-venture transactions in Vietnam could face challenges in Vietnamese courts. In a recent dispute where the parties agreed on applying Singapore law to the transaction, a Vietnamese court refused to enforce a foreign arbitration award that awarded damages to the foreign investor by using Singaporean law on damages. The court reasoned that the damages provision of the M&A agreement pertains to damages arising from the parties’ ownership of shares in the Vietnamese entity and, as such, must be governed by Vietnamese law.

Challenges in the legal system and contract enforcement don’t necessarily make investments in Vietnam less attractive; foreign investors should be aware of these challenges and seek sound advice to navigate them. For instance, enforcement issues with call/put options and convertible loan agreements can be addressed by incorporating adequate guarantee measures from the counterparty, ensuring enforceability in case of default. Parties can mitigate the risk of unenforceability arising from differences between common law contract terms and Vietnam's civil law system by appropriately localizing contract terms, with careful review by local legal counsels from a Vietnamese law perspective.