In brief 9 min read
The new Vietnam merger control regime prescribed under the new Law on Competition and Decree 35/2020/ND-CP dated 24 March 2020 will take effect from 15 May 2020. This new regime will have a significant impact on M&A transactions in Vietnam, as it substantially expands the scope of transactions subject to the compulsory pre-closing merger filing requirement. In this Insight, we discuss the new merger control regime and the relevant issues that investors may need to consider when conducting M&A transactions in Vietnam.
Forms of economic concentrations
The new merger control regime captures 'economic concentrations', which include:
- joint ventures of enterprises, and
- any other kind of 'economic concentration' provided by the law.
Each of the types of economic concentration has a detailed definition in the law.
An economic concentration that 'has or potentially has a significant competition restraining impact in the Vietnamese market' is prohibited under the new merger control regime. Under the old law, merger control was driven by market share thresholds, but this new law adopts a more nuanced approach and requires an assessment of the impact of the economic concentration on relevant markets in Vietnam. There are a number of specific criteria to be considered that include market concentration, impact on the chain of production, and ability to increase prices to exclude or hinder others from participating in the market. This change brings Vietnam in line with a number of other international jurisdictions, including the EU, US and Australia.
While it was not entirely clear under the previous law, the new Law on Competition (the Competition Law) now clearly provides for extraterritorial jurisdiction. Foreign-to-foreign or offshore transactions conducted outside Vietnam can also be captured and prohibited if they are found to have, or potentially have, a significant competition-restraining impact in the Vietnamese market. Transactions that have bodies corporate incorporated in, carrying on business within or having sales to, Vietnam should be assessed. A case-by-case analysis of whether an offshore transaction needs to be notified in Vietnam will be required.
Acquisitions of shares or assets, and the concept of control
In practice, acquisitions of shares or assets are the most common form of economic concentration conducted by foreign investors in Vietnam. These include acquisitions (by way of shares or assets) of a business from a Vietnamese counterpart, or investments into a Vietnamese business by strategic or financial/ private equity investors.
However, not all acquisitions are caught under the new merger control regime and require a merger notification. Instead, only 'control' acquisitions will be captured. 'Control' is considered to be conferred and present in one of the following cases:
- ownership of more than 50% of the charter capital or voting shares, or assets during all or one business line of the target; or
- having the right to:
- directly or indirectly appoint or dismiss a majority or all members of the board of management, chairman of the members' council, director or general director of the target;
- amend the charter of the target; or
- decide important matters during the business operation of the target, such as business lines, geographical areas and forms of business, adjustment to the scale of business; and the form and method of raising, allocating and utilising business capital.
The above 'control' test does not appear to capture the 'negative control' that foreign investors often obtain as a part of their acquisition of a minority stake in Vietnamese targets (such as veto rights for important corporate decisions). However, a case-by-case analysis should be conducted on the basis of the specific set of rights conferred to the investors, to determine whether a merger filing is required for an acquisition.
The law does not have any specific exception for intra-group 'economic concentrations' (ie transactions conducted within the same group for internal restructuring purposes). Therefore, technically these transactions may still be caught and a specific analysis would be required.
Merger filing thresholds
Under the new regime, the combined market share of the parties to the transaction is no longer the only test for merger filing. An economic concentration is generally notifiable if it meets any of the following thresholds:
Total assets or total turnover
Total assets or total sales turnover or input purchase turnover in the Vietnamese market of the enterprise or group of affiliated enterprises that the enterprise is a member of in the previous financial year.
VND3 trillion or more (c. USD128.7 million or more)
The transaction value (for onshore transactions conducted in Vietnam only).
VND1 trillion or more (c. USD42.9 million or more)
Combined market share
Combined market share of the parties to the economic concentration in the relevant market in the previous financial year. In many cases, there will be multiple markets to consider.
20% or more
Different thresholds apply in the case of economic concentrations involving a credit institution, an insurance company or a securities company.
Compared with the thresholds prescribed in other jurisdictions, the above filing thresholds appear to be at the lower end. This may result in a substantial increase in the number of filings under the new regime and create an additional administrative hurdle for M&A transactions in Vietnam.
Regarding the total assets and total turnover tests, the law does not explicitly require all parties to the transaction to have assets or turnover in Vietnam. This means that a filing may be triggered even if only one (and not all) of the parties to the transaction satisfies this test.
In addition, the total assets and total turnover thresholds are determined on a consolidated group basis, and include aggregated assets and turnover of a 'group of affiliate enterprises' of the parties and not just the direct parties to the transaction.
Suspensory pre-closing clearance regime
The new regime provides for a suspensory pre-closing clearance that requires all parties to notify transactions and obtain clearance before their closing.
Merger filings under the new regime should be submitted to and will be reviewed by the National Competition Commission (the NCC), a new competition authority to be established under the Ministry of Industry and Trade. Although the Competition Law is already effective, the NCC has not yet been established. For the time being, the existing Vietnam Competition and Consumer Protection Authority is continuing to review the merger filings.
As a part of the filing, the parties must submit a draft agreement or memorandum of understanding setting out details of the proposed transaction. This requirement may give rise to confidentiality concerns that the parties should consider before making a filing.
In addition, parties will be required to prepare and submit various documents and reports (eg financial statements, a market share report and a report on the competition impact of the transaction), which could take a substantial time to compile. This should be factored into the overall timeline for the transaction.
Under the new regime, there will be two phases of review, comprising:
- the preliminary appraisal; and
- the official appraisal.
Depending on the complexity of the transaction in question, it can be cleared at the preliminary appraisal phase or required to proceed to the official appraisal phase. If an official appraisal is required, the total statutory timing for the merger review process can take up to about six months.
The new two-phase merger review process is illustrated below:
Preliminary appraisal phase
In this phase, the NCC will focus on factors such as the combined market share of the parties in the relevant market, the relationship of parties in the supply chain, and the level of concentration in the particular market before and after the transaction.
Transactions that are unlikely to have any negative impact on competition will be cleared in this preliminary appraisal phase. Examples are transactions where the combined market share of the parties in the relevant market is below 20%, the additional share increase is small, or the market is not concentrated and there are a number of strong competitors.
If the NCC does not respond to the parties within 30 days after it has received the complete submission, the transaction is deemed cleared and the parties can proceed with it.
As in many other jurisdictions, more complex transactions are likely to proceed to the official appraisal phase. These would include transactions where divestitures or other remedies may be required.
Official appraisal phase
In this phase, the NCC will focus on assessing the competition-restraining impact, as well as any positive impacts on the economy that the transaction may have, to conclude whether the transaction should be cleared.
Following its review, the NCC will determine whether the transaction in question is:
- cleared but subject to conditions; or
The NCC concludes the transaction is cleared and the parties can proceed with it without any conditions.
The NCC may clear the transaction on the basis of certain conditions/measures being undertaken (such as divestitures) to remedy any anti-competitive effect before or after the transaction. Conditional clearance is a new concept in Vietnam, and brings it in line with many other international jurisdictions.
The NCC may conclude that the transaction is prohibited on the basis that it 'has or potentially has a significant competition restraining impact in the Vietnamese market'. This significant competition-restraining impact will be determined based on various factors, as discussed above.
Administrative sanctions and other remedies are available for breaches of merger control regulations. The penalties are calculated on 'total revenue in the relevant market'. There is no specific guidance on how this will be applied, but it is likely to be interpreted as the total revenue in the market in Vietnam. In particular:
Failure to file
Each party may be subject to an administrative fine of 1% to 5% of the total revenue in the relevant market in the previous financial year if they fail to notify a transaction that should have been notified.
Gun-jumping or pre-clearance closing
Each party may be subject to an administrative fine of 0.5% to 1% of the total revenue in the relevant market in the previous financial year if they carry out the transaction before clearance is obtained from the NCC. This could include 'gun-jumping', such as taking steps to implement the transaction, transferring customers or coordinating prices before clearance is granted.
Each party may be subject to an administrative fine of 1% to 5% of the total revenue in the relevant market in the previous financial year if they carry out a transaction that is prohibited. In this case, additional measures may be applied, including de-merger or split of the merged entity, or compulsory control by the state over the prices for buying/selling goods/services, or other conditions.
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