During the 6 years since the enactment of the Law on Enterprises No. 60/2005/QH11 dated 29 November 2005 and the Law on Investment No. 59/2005/QH11 dated 29 November 2005 (Law on Investment), DFDL has assisted a large number of foreign clients in the establishment of foreign invested enterprises in Vietnam as well as in the acquisition of shares or contribution of capital in previously 100% owned local Vietnamese companies. In the process of advising our clients as to the official licensing regulations and procedures, we, and of course our clients, have been confronted with several inconsistences in the interpretation and application of the relevant licensing regulations.
In this article, we will discuss some of the practical issues surrounding the licensing regulations pertaining to foreign investment in local companies. Based on our experience, such issues have and will continue to disadvantage foreign investors whose objective is to invest in Vietnam in the form of an acquisition of shares in, or a contribution of capital to, an established local company.
Specifically, pursuant to the Law on Investment and Law on Enterprises, a wholly Vietnamese owned company is issued with a business registration certificate (BRC) upon its establishment. In contrast, a company with any degree of foreign ownership is issued with an investment certificate (IC). However, in circumstances where a foreign investor contributes capital to or acquires shares in a previously wholly Vietnamese owned company, the regulations do not clearly address the question as to how the foreign investment is to be recorded and thus officially recognized on the IC.
Accordingly, there have been various interpretations adopted by the licensing authorities, typically, the Department of Planning and Investment (DPI) of Ho Chi Minh City and of Hanoi respectively;
(a) In Ho Chi Minh City, where a foreign investor contributes capital or acquires shares in a local company, the current practice, based on an interpretation of the regulations, is as follows:
- The local company is required to amend its BRC in order to record the new investor at the business registration office of the DPI (except in circumstances where the law does not require any approval of the licensing authority for the registration of the investor’s ownership of shares, such as where the acquisition of shares in a joint stock company takes place after the first 3 years of the company’s operation). At Article 46.1, the Law on Investment provides “With respect of foreign invested projects which have an invested capital of below three hundred (300) billion Vietnamese dong and which are not included in the list of sectors of investment subject to conditions, the investors shall perform the procedures for investment registration at a provincial State administrative body for investment for issuance of an investment certificate.”
- Subsequently, such local company, having complied with the relevant procedures for registration and now being comprised in part by foreign ownership, will be issued with an IC, and thereafter must comply with the regulations and procedures pertaining to IC’s, engaging in its investment project(s) in accordance with the terms and spirit of the Law on Investment.
- However, pursuant to the current practice of the DPI of Ho Chi Minh City, the BRC of the now foreign-invested local company will not expressly be replaced, and consequently that company will possess two different kinds of licence, namely the BRC and the IC. Importantly, an IC issued to a local company by the DPI of Ho Chi Minh City records the name of such local company as the sole investor in the investment project even though ownership of the local company is shared between both local and foreign parties.
(b) In Hanoi, where a foreign investor contributes capital or acquires shares in a local company, the current practice, based on a different interpretation of the same regulations, is as follows:
- The local company is required to submit an application dossier to the Foreign Investment Office of the DPI for the issuance of a consolidated IC recording in addition the details of the foreign investor;
- The new IC once issued will replace the current BRC of such local company. In this way, the local company will operate under only one license, being an IC which is not simply a certificate to record information on the investment project(s) of the company, as is currently the case in Ho Chi Minh City.
Practical consequences and impact of this issue on the legal rights of foreign investors
The disparate approaches adopted by the DPIs of Ho Chi Minh City and of Hanoi naturally present some practical issues for foreign investors seeking to acquire shares in or to make a contribution of capital to a local company. The varied interpretation of the current legal framework inevitably impacts on the rights and obligations of foreign investors in relation to such indirect investment activities.
The most obvious practical issue confronting prospective foreign investors is the currently adopted practice of the DPI of Ho Chi Minh City to issue ICs that do not recognize or record the details of the participation of the foreign investor in the company. Ostensibly therefore, such a foreign investor has no proprietary interest in the company in which it has invested, and must rely on an executed share purchase or capital contribution agreement in protection of its interests. Another obvious issue is the practical outcome that upon completion of the required licensing for acquisition of shares/contribution of capital by a foreign investor, the domestic company will possess two licenses, the BRC granted to the company on its formation, and an IC relating to the project(s) undertaken by the company. Maintaining two licenses for the operation of one enterprise would seem an unnecessary and confusing encumbrance on the administration of the company and concerned stakeholders, in addition to the licensing authority itself.
Possible resolution of this issue?
It seems that Vietnamese law makers have recognized the inconsistent application of the regulations by the various licensing authorities, and hence have published the Draft Decree Implementing the Law on Investment (Draft Decree) in order to collect opinions with the intention of clarifying the applicable laws and thereby removing the many inexplicit issues arising therefrom.
In order to resolve the issue of non-uniformity amongst the various licensing authorities, the recent Draft Decree has proposed explicit procedures for the licensing of foreign investment in local companies. Pursuant to the latest Draft Decree, the relevant procedure for the approval of an acquisition of shares/contribution of capital by a foreign investor more reflects the approach as adopted and implemented by the DPI of Hanoi.
The Draft Decree has proposed that a local company operating under a BRC proposing to either sell shares or receive capital from a foreign investor must submit to the licensing authority (the Foreign Investment Office of the DPI) two sets of an application dossier comprising the following documents:
- A request for issuance of an investment certificate under which the satisfaction of the various conditions on the foreign acquisition of shares or contribution of capital is demonstrated;
- A legally executed share purchase agreement or an agreement on the contribution of capital, certified by the legal representatives of the company;
- Current Charter or proposed amended Charter of the local company;
- The BRC of the local company;
- A resolution of the Member Council or Board of Management of the local company, accepting the investment of the foreign entity and resolving
to apply for the IC.
The licensing authority after consideration and acceptance of the above dossier will then issue a new IC for the local company, in which the details of the foreign investor will be officially recognized. Accordingly, there will be only one consolidated IC issued to the local company in replacement of the BRC. Ostensibly, the Draft Decree provides the uniformity required to resolve the issues in question, but there remains a lack of regulation dealing with the original BRC as granted to the local company, such as whether the local company is legally required to continue carrying-out the procedures for amendment to the BRC, and to comply with the annual reporting requirements under the BRC.
Summarily, it must be said that the issuance of the Draft Decree has sounded a welcome note for foreign investors in particular and for the legal-investment environment in general. We will keep a close eye on the progress of this innovation in the following months.
For any further advice, please contact:
Mr. Jerome Buzenet
Partner, Managing Director, Vietnam
Tel.: +84 8 3910 0072
Mr. Huynh Dai Thang
Partner, Senior Legal Adviser
Tel.: + 84 904 178 704
Mr. Matt Matheson
Tel.: +84 8 3910 0072
Ms. Tran Thi Than Niem
Junior Legal Adviser
Tel.: +84 908 893 987
Ms. Nhu Nguyet Nguyen
Tel.: +84 904 155 754