On 26 November 2014 the National Assembly of Vietnam approved amendments to the 2005 Investment Law and the 2005 Enterprise Law to improve the legal framework for investment in Vietnam. Those amendments will be effective from July 2015 (the 2015 Amendments). In this article we look at some of the key changes introduced by the amendments.
Foreign vs. domestic investors
Vietnamese investment law maintains different requirements for foreign and domestic investors. There has been some confusion under the current 2005 Investment Law as to what level of foreign ownership will result in a company incorporated in Vietnam being deemed a foreign invested enterprise (FIE) which is subject to the more stringent licensing requirements and other restrictions that apply to foreign investors. Some Vietnamese authorities have required an FIE to have majority foreign ownership while others, more typically, have found even a 1% foreign ownership to be sufficient. This latter interpretation has had the effect of foreign investors effectively being excluded from a number of business sectors. In the retail sector, for example, when a foreign investor holds 1% or more in a local retail company, that company is deemed to be an FIE and is required to obtain approval from the local authority when opening any additional retail outlets. This approval is granted at the discretion of the local authority and so can act as a barrier to foreign investment in the retail sector.
The 2015 Amendments have resolved this issue by introducing the concept of an economic organisation with foreign investors holding 51% or more of its charter capital. Under the 2015 Amendments, FIEs shall be subject to more stringent licensing requirements and other restrictions applicable to foreign investors if:
(i) more than 51% of its charter capital (ie share capital) is held by foreign investors; or
(ii) more than 51% of its charter capital is held by foreign investors or companies in Vietnam with a foreign shareholder.
As the 51% threshold relates to the total charter capital (as opposed to voting shares) it provides foreign investors with the opportunity to structure their investment in a Vietnamese company so that they can invest in sectors that would otherwise be restricted to foreign investors, while at the same time controlling that company. This can be achieved, for example, through the company in Vietnam having both ordinary voting shares and non-voting shares, with the foreign investor owning the majority of voting shares but which represent less than 51% of the total charter capital.
Foreign ownership limit
Currently, foreign investors can hold up to a maximum of 49% of the shares in a public or listed company. Over the last 15 months, the Vietnamese authorities (including the State Securities Commission - SSC) have discussed the possibility of increasing the 49% cap to 60%. However, that proposal had been postponed pending the issuance of the 2015 Amendments. At the Vietnam Business Forum meeting held on 2 December 2014, the SSC Chairman confirmed that new legislation to increase the foreign ownership limit would be issued by October 2015 by way of a decree issued by the Government, or possibly sooner by way of a decision issued by the Prime Minister.
Holding company in Vietnam
Vietnamese law does not provide the legal framework for incorporating a holding company while all business operations to be conducted by a company must be specified in its Business Registration Certificate or, in the case of an FIE, its Investment Certificate issued by the licensing authority. To overcome this, foreign investors wishing to establish a holding company have typically been advised to set up a consulting company because of the relative ease of incorporating a consulting company and the generic nature of consulting activities. However, the use of a company licensed to carry out consulting activities as a holding company was open to being challenged by the Vietnamese authorities because purchasing/holding shares was not specified in its Investment Certificate as a permitted business activity of the company. The 2015 Amendments now appear to permit the incorporation of a holding company by providing that a company's business operations are no longer required to be specified in its Business Registration Certificate or Investment Certificate (except for companies operating in certain business sectors which are categorised as conditional sectors).
Simple majority voting to pass resolutions
Vietnamese law requires ordinary and special resolutions to be passed by a minimum 65% and 75% voting majority respectively. The 2015 Amendments have brought these voting thresholds in line with international standards by reducing the minimum voting percentages for passing ordinary and special resolutions to 51% and 65% respectively, so allowing greater flexibility for an investor to implement a controlling structure. However, this change only applies to joint stock companies with resolutions in limited liability companies still required to be passed by 65% and 75% majority votes, unless otherwise provided by the company’s charter.
Relaxation of licensing requirements
One of the key motivations behind amending the 2005 Investment Law was to revamp the licensing process and do away with the differentiation between domestic and foreign investors. Generally, under the current law domestic and FIEs operate under different licensing regimes with domestically invested companies operating under Business Registrations Certificates and FIEs under Investment Certificates. While obtaining a Business Registration Certificate is a relatively straight-forward process taking a matter of weeks, obtaining an Investment Certificate can take several months (or more).
Under the 2015 Amendments an Investment Certificate has been replaced by an Investment Registration Certificate but an FIE is only required to obtain an Investment Registration Certificate if foreign investors hold 51% or more of its charter capital or the company operates in a conditional business sector. In other words, no licensing is required for an FIE if the foreign investors hold less than 51% of its charter capital, and it does not operate within conditional business sectors.
The 2015 Amendments also streamline and shorten the licensing application process. Notably, the application process has been reduced from a specific three stage process (registration of the application, appraisal of the application and grant of the investment certificate) to a two stage process with the specific step involving an appraisal of the application eliminated. Accordingly, the time period to complete the licensing process has been reduced to 15 days, although it remains to be seen whether in practice the authorities will be able to meet such timeline.
While the licensing of foreign investment in a number of sectors has been streamlined, there are certain strategic investment projects that the Government requires greater control over. In such case, both domestic and foreign investors are required to obtain approval for the investment project. The authorities delegated with the responsibility to approve such projects range from the National Assembly to the provincial People's Committees depending on the size and type of the investment project. It is anticipated that obtaining such approval will continue to be a time-consuming process.
Conclusion
The 2015 Amendments will help clear up some of the confusion that has accompanied the 2005 Investment Law and 2005 Enterprise Law and their application and also ease and simplify the foreign investment process which, it is hoped, will promote M&A activity. The ability of a foreign investor to invest in a Vietnamese company and still, in certain situations, be treated in the same manner as a domestic investor provides an opportunity to offer clients creative structuring solutions to facilitate investment in sectors that would otherwise have been restricted or have entailed observing burdensome investment approval requirements.
