[co-authors: Ngo Thanh Tung, Esko Cate]*
World Law Group member firms recently collaborated on a Global Venture Capital Guide that covers more than 30 jurisdictions on investment approval processes, typical investment sectors and investment structures on Venture Capital deals (and more!).
The guide does not claim to be comprehensive, and laws in this area are quickly evolving. In particular, it does not replace professional and detailed legal advice, as facts and circumstances vary on a case-by-case basis and country-specific regulations may change.
This chapter covers Vietnam. View the full guide.
In your jurisdiction, which sectors do venture capital funds typically invest in?
Due in large part to Vietnam’s fast growing, forward-looking economy, some of the most popular sectors for venture capital funds to invest include FinTech, early-stage technology, e-commerce, education, food and beverage, and green energy.
Do venture capital funds require any approvals before investing in your jurisdiction?
Yes. Under Decree No. 38/2018/ND-CP (“Decree 38”), a venture capital fund must be managed by a fund management company either established or hired by the investors. The venture capital fund’s management company must submit a dossier to the regional business registration agency within five days of formation. This dossier must include, among other things, the fund’s Charter (i.e., articles of incorporation), a service contract signed with the fund management company (if any), and the bank’s certification of paid-in capital. Upon receipt of a complete and orderly dossier, the business registration agency will send a certification of establishment to the fund management company.
Are there any legal limitations to an offshore venture capital fund acquiring control or influencing the business, operations, or governance of an investee entity?
Generally, the same prohibitions and limitations on any other offshore entity investing in a Vietnamese investee company will apply. In particular, there are notable limitations related to foreign investment into closed/restricted sectors under Vietnam’s WTO commitment, and also investment into conditional business lines as set out in the Law on Investment and its guiding documents. Some relevant examples include investment into telecommunications businesses, businesses performing media services via television or radio, and businesses providing betting and gambling services.
Would an investor be required to undertake an antitrust analysis prior to investment? When would such a requirement be triggered?
There are not any specific legal requirements that venture capital investors undergo an antitrust analysis prior to investing. However, the general antitrust regulations under the Law on Competition must be observed when applicable. If the investment could be deemed a merger or acquisition exceeding the statutory value threshold as set out in the Law on Competition, then the investor is required to submit a notification to the National Competition Commission which will then review the transaction. Additionally, if the result of the investment would cause the investor to hold an anticompetitive economic concentration, then it may be prohibited. These requirements have extraterritorial reach and apply to investments made by offshore investors.
What are the preferred structures for investment in venture capital deals? What are the primary drivers for each of these structures?
Venture capital deals are most commonly structured as private sales via stock purchase agreements. Under this structure, investors generally acquire or subscribe for ordinary shares of the investee company. Supplemented by an accompanying investor rights agreement, this structure is preferred for its straightforward simplicity and customizability.
Is there any restriction on rights available to venture capital investors in public companies?
Under Decree 38, neither venture capital investors nor venture capital investees are permitted to be public entities.
What protections are generally available to venture capital investors in your jurisdiction?
While individual venture capital investors are expressly responsible for their investments under the Law on the Provision of Assistance for Small- and Medium-Sized Enterprises, Decree 38 provides specific protections for venture capital investors. These protections include requirements that all venture capital investors enter into an agreement controlling the governance of the fund, content requirements for a venture capital fund’s charter including an explicit statement that the purpose of the fund is engaging in high-risk investment, investor consent requirements for transactions undertaken by the venture capital fund, and various fund reporting requirements. Outside of these protections, there are certain protections and tax incentives for start-up companies that indirectly help protect the venture capital investors.
Is warranty and indemnity insurance common in your jurisdiction? Are there any legal or practical challenges associated with obtaining such insurance?
Currently, warranty and indemnity insurance, also known as representation and warranty insurance or simply M&A insurance, is not a common component of transactions in Vietnam. While there are providers, they are few and have limited offerings. In large part due to the limited availability, practical challenges to using warranty and indemnity insurance come from its pricing and premiums. We expect as the Vietnamese M&A landscape becomes increasingly sophisticated, the use of warranty and indemnity insurance may become more commonplace.
What are common exit mechanisms adopted in venture capital transactions, and what, if any, are the risks or challenges associated with such exits?
Currently, the most common exits adopted in venture capital transactions are trade sales and secondary sales. These strategies are preferred for their simplicity and speed. In addition to these exit options, a put-option from the start-up is another exit method. Each of these methods depend on the financial condition of the start-up company at the time of exercise. Since many Vietnamese start-ups do not grow rapidly enough to accommodate the venture capital investment timeline, exercising and enforcing any of these methods can prove challenging and there is a risk that investors will not be able to recover their investments in these exits. Another increasingly popular exit is IPO, as discussed in Question 10.
Do investors typically opt for a public market exit via an IPO? Are there any specific public market challenges that need to be addressed?
While exit via an IPO is becoming increasingly common, it is not the typical exit for investors. An IPO continues to prove a challenging exit strategy due to regulatory hurdles and difficulty for investors to liquidate their entire holdings. In many Vietnamese companies, corporate governance-related issues are common. As a result, it is difficult to promote confidence in the public market without investors retaining a percentage of ownership.