VietNamNet Bridge - Five steps towards acquiring a stake in local enterprises

Thanks to his business networks, an Indian investor managed to clinch a deal under which it would acquire a 4% stake in a local joint stock firm. The contract was signed, money was transferred into the seller’s account, the buyer’s particulars were noted and the company already supplied the shares. The transaction was, in short, all but complete.

However, the company failed to touch on the issue of dividends; neither did it convene a general meeting as requested by this Indian investor. When dispute erupted and the case was referred to the Department of Planning and Investment, the deal was considered as illegal since it was not registered at this agency. Investor rights, in this case, are questionable.

This scenario reflects the problems gripping foreign investors who want to purchase shares in local companies. Trouble arises mainly from murky regulations on “freely transferrable shares” (Clause 1, Article 79 and Clause 5, Article 87 of the Enterprise Law). Contrary to popular perception, especially that among stock investors, “freely transferrable” is a problematic concept.

Some contend that “freely transferrable” means market players can trade in shares without seeking approval from the authorities or boards of directors. Those subscribing to this view tend to have scant regard for procedure for share trading and do not even register the transaction with the authorities.

However, others believe that “freely transferrable” refers to the form of transfer only. This implies stakeholders must still conform to prevailing laws and register the deal with management agencies.

In the absence of official guidelines, controversy continues to brew.

Compliance with Enterprise Law inadequate

The Enterprise Law offers a very simple procedure for share trading — the parties to an agreement negotiate and ask the company to list the buyer as a shareholder. The buyer becomes an investor when full payments have been made and his or her particulars are included in the list of investors; there is no need to register with the company (if the buyer’s post-transaction stake is less than 5% or the seller is not a founding shareholder). Pursuant to these criteria, the aforementioned Indian investor argues that it is already a shareholder.

Unfortunately, these steps prove inadequate because of the Investment Law, which considers share trading a form of investment (Article 21). In principle, investors pouring money into Vietnam in this form are to comply with regulations set by the World Trade Organization (WTO) and Vietnam (if investors come from a country under WTO or the company operates in a sector governed by WTO commitments) or by Vietnam (in other cases). The authorities will have to look through the share agreement to make sure that investors meet all the necessary requirements (for example, on their nationalities, share contributions, financial capabilities and so on). The transaction gains legal weight in Vietnam only if backed by a certificate.

Five-step guide to share purchase

In the absence of guidelines on share transfer and the disparity between the Enterprise Law and the Investment Law, investors are concerned about the procedure for stake acquisition. Below is one such procedure, which is subject to changes from province to province.

• Open an account: Foreign investors wishing to purchase a stake in a local firm must open an account (1) at a commercial bank in Vietnam and register it with the State Bank of Vietnam. Investment activities carried out by these investors, including payments, dividend receipt or overseas money transfer, must be undertaken through this account.

• Sign a stake acquisition agreement and make payments through the above account: Once their accounts have been set up and registered, investors can contribute capital or purchase shares in line with the Enterprise Law and the Investment Law. If the seller is a listed firm, it is advisable to obtain its trading code, too. Foreign stake acquisition in the stock market is also governed by the Securities Law.

• Update investor particulars in the list of shareholders and issue a share certificate: After investors have made payments, a seller is to note their particulars in the list of shareholders and issue share certificates.

• Register with the authorities: The seller has to notify the authorities of amendments to its business or shareholder list. Better still, it should register the transaction with State agencies.

• Issue investment certificates to the company: There has not been any detailed guideline on whether local firms must apply for investment certificates after selling shares to foreign investors. However, some localities require domestic firms to do so.

Source: SGT