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Key Laws to Bring New Momentum

 

According to LNT Law Firm, Vietnam Government reviewed and implemented several new policies to bolster the economy in last year of 2014.


The new raft of laws will significantly improve the Vietnamese investment climate and boost inward investment

In November, the National Assembly passed 18 new laws that take effect from July 2015. These new laws are supposed to represent a paradigm-shift in the business environment allowing foreign investors to conduct more successful business practices in Vietnam. Noticeably, the laws on Investment, Enterprises, and Real Estate are expected to be lauded by foreign investors and foreign enterprises since it can bring benefits to foreign investors.

Concept of foreign investors redefined

In the past, an FIE with foreign ownership of less than 51 percent would be treated as a foreign company even if it was established in Vietnam. Under the new Law on Investment, foreign enterprises are those which established abroad or a local company that has foreign shareholders over 51 percent or more. The article 23 of the Law on Investment presupposes that FIEs are treated as “foreign enterprises” only if foreign investors own directly or indirectly through an FIE [owned directly by foreign investors of up to 51 percent (F1 level)] at least 51 percent of the equity (F2 level). This is an important principle because an FIE will be treated as a domestic investor so long as it satisfies these requirements and receives the same treatment as a domestic company. This will also lead to various forms of industries and projects that were previously reserved only for domestic companies, by restructuring to obtain domestic companies' shares involved in projects and industries being mentioned above.

Abolition of investment certificates for M&As

When a foreign investor or an FIE (at least 51 percent of foreign ownership) conducts an M&A transaction in conditional investment projects or, as a consequence, holds more than 51 percent equity of a target, then such M&A activity must be registered with the local Department of Planning and Investment where the target is located. If these conditions are absent, the M&A deal may be conducted solely under the Law on Enterprises, thereby avoiding the requirement of obtaining an Investment Certificate to close the M&A deal, which was the most troublesome condition under the former law.

Even when registration is required, the process will be simple, straightforward and reviewed by the Authorities within 15 days of submission. This change, together with the redefinition of foreign investors, will make M&A investments easily conduct.

Reduction in majority voting threshold for JSCs and LLCs

Unlike other countries, the concept of majority voting under Vietnam’s current enterprises law required 65 percent voting rights, not 51 percent. The law brings Vietnam’s Joint Stock Companies back in line with the rest of the world (where a majority vote means 51 percent and super-majority voting means 65 percent). Please also note that a shareholder holding less than 51 percent equity could hold more than 51 percent voting rights if he/she has shares with preferential voting rights. With respect to limited liability companies the default majority rule is still 65 percent “unless otherwise provided by the charter”.  That effectively means a simple majority voting in a limited liability company could be as low as 50.01 percent if the charter so stipulates.

The quorum for a board meeting for Limited Liability Companies or Joint Stock Companies will be reduced from 75 percent to 65 percent. While this change may not affect existing companies with their current charters depending on how those charters were drafted, it opens up opportunities to renegotiate the charter for the benefit of some of the shareholders, as well as allows more investors to buy shares in a company.

Derivative actions - a boost for minority shareholders and private equity

Although the old enterprises law introduced the concept of fiduciary duty, it did not provide for an implementation mechanism to protect minority shareholders if fiduciary duties were violated. For the first time, the new law introduces the concept of derivative actions, which allows shareholders hold at least 1 percent of the total shares to launch derivative actions against board members, directors and controllers for violating their duty to put their own interests before the company’s interests and the duty not to abuse their powers. The cost of derivative actions will be borne by the company. This can be considered good news for private equity funds or minority investors who currently hesitate to participate in the equitisation programmes of state owned enterprises.

Easing of the Acting Ultra Vires doctrine and HS code requirements

While the Law on Investment reduces bureaucracy in the investment certificate registration process, the Law on Enterprises reduces delays in the Enterprise Registration Certificate (ERC) issuance process. The business lines are no longer recorded in the ERC. In doing so, an enterprise may have as many business activities as it wishes, provided that they are not prohibited or restricted by law. Trading and Distribution Companies will not need to supply thousands of Harmonised System (HS) Codes for traded products (and for products they anticipate in the future). This pre-empts the previous common complaint that Licensing Authorities frequently posed irrelevant questions delaying the incorporation process due to the HS Code requirements.

The relaxation of the HS Code system and the list of business activities during the ERC issuance process may lead the way to the loosening of the acting ultra vires doctrine – that is, an enterprise may only conduct business if such is allowed and stated in the ERC. This, again, will provide more certainty and relieve apprehensions over the legal capacity of companies who do business with each other.

Restriction of cross-shareholding

The Law on Enterprises does not allow a subsidiary to hold shares in a parent company, or a cross-shareholding in between two subsidiaries of the same parent company.  While this general obligation still waits for explanation in the implementing the Decree of the Law on Enterprises, this may affect a holding structure to the extent as cross-shareholding is concerned. It is unclear whether an F1 company holds share in an F2 company (but not vice versa) would fall into this prohibition if both F1 and F2 are members of an F0 group (see the graph in section 1 above).

Easier property acquisition by foreigners

Property laws historically prohibited foreigners from acquiring property, the new law on Residential Housing will ease this measure by allowing foreigners to purchase and own residential properties. Although this is not the first time it allows foreigners to own residential properties, the previous law gravely limited the right to exercise ownership such as the ability to obtain a mortgage or use the property as collateral, or to pass on property as an inheritance. As a result, the new law that allows foreigners to exercise ownership is expected to lead to some more property sales.

Another change in the law is that FIEs are allowed to acquire property for whatever purpose they wish. The previous law limited FIEs to purchasing residential properties only for employees as a place of domicile. However, starting from July this year, FIEs can purchase residential properties to be leased out. Again, coupled with foreign individuals purchasing housing properties, this new law is expected to provide some momentum to the housing market. “This recently passed law makes the market more attractive to Vietnam-based expats seeking an investment in residential properties in Vietnam, and clears away the initial barriers to create a level playing field,” said CBRE Vietnam.

Vietnam is looking forward to signing some Free Trade Agreements. Together with the many law enforcements related to business and investment, 2015 is expected to bring new vitality to the economy.

(Source: vir.com.vn)

 

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