Market Trends & Economy Outlook
In comparison to its neighboring countries, the mergers and acquisitions (“M&A”) culture is a fairly nascent concept in the Lao PDR. However, there has recently been an increase with the advent of being the Lao Securities Exchange (“LSX”), which is the newest securities exchange in the world.
The LSX is a joint venture between the government of the Lao PDR (the “GoL”) and the Korean Exchange. EdL Generation (the state owned power company) and Banque pour leCommerce Exterieur Lao (the largest state owned bank) were the first companies to have conducted an initial public offering (“IPO”) and be listed on the LSX. Although the trading has been limited, liquidity may soon improve as there appears to be a number of additional state owned companies that are considering also listing on the LSX. For example, it is rumored that Lao Telecom, Enterprise of Telecommunications and Lao Airlines are also considering an IPO.
The more common and core M&A activity in the Lao PDR is the acquisition of equity in Lao PDR limited companies by foreign based companies. Apart from various joint ventures (including public-private) and acquisitions in the mining and hydro sector, a recent high profile M&A has been in the telecommunication sector with the acquisition of Millicom International Cellular S.A. by VimpelCom Ltd, at the local as well as the offshore level.
Law related to mergers and acquisitions
A. The Enterprise Law
The Enterprise Law1 is the key legislation regulating M&A’s in the Lao PDR. The Enterprise Law provides the basic legislative framework for companies such as types of enterprises that can be formed in the Lao PDR, the rights and benefits of the owners/shareholders of such enterprises, capital contribution requirements, type of shares and share acquisitions (including transfer of shares, transfer restrictions, notifying and filing requirements as a result of change of shareholders, directors and officers and change of name of a company).
The key provisions relating to the M&A’s are as follows:
· Mergers: The Enterprise Law recognizes the concept of merger in four scenarios: (i) Merger of general partnership enterprises; (ii) Merger of limited companies; (iii) Merger of public companies; and (iv) Merger of state-owned companies.
(i) Merger of General Partnership and Merger of limited companies
Subject to the condition precedents provided for in the Enterprise Law, including unanimous consent of all partners, publication of merger in mass media, etc, a general partnership enterprise may merge with one or several other general partnership enterprises into either one of the original partnership enterprises or into a new general partnership enterprise. In case of such merger, if a creditor objects to the merger of a general partnership enterprise, the general partnership enterprise cannot merge, unless all debts have been settled. A merger of general partnership enterprises does not result in the dissolution of the enterprises or the lapse of previous rights or responsibilities. Similarly, with the same procedure and effect, a limited company may merge with another company to become either one of the original companies or establish a new company. However, in case of merger of a limited company, prior approval of the shareholders through a special resolution is required.
(ii) Merger of public companies
Public companies may merge with another company to become either the original public company or a new company. However, in the event that shareholder(s) of a public company oppose the merger, the public company shall be required to purchase the shares held by such opposing shareholder(s) at the prices appearing at that time on the stock exchange. In the event that there is no reference price on the stock exchange, the price to be applied shall be assessed by independent appraisers appointed by a special resolution of a shareholders’ meeting. In the event the opposing shareholder(s) still refuse to sell its shares, the relevant public company may carry out the merger regardless of whether the shareholder(s) opposing the merger agree to the estimated prices or not and such shareholder(s) shall become de facto shareholders of the merged company. A merger of public companies shall be completed within 150 days from the date all the companies to be merged pass resolutions of the merger.
(iii) Merger of state-owned companies
A state-owned company at the central level shall obtain approval from the GoL, and a state-owned company at the provincial level shall obtain approval from the provincial governor or city mayor for a merger among state-owned companies, or a merger of a state-owned company with other types of enterprises to become a state-owned company
· Acquisitions: Existing shareholder(s) have pre-emptive rights in respect of a transfer or sale of shares by a shareholder to a third party. In case of an investment through subscription, the Lao accounting rules do not recognize the issuance of “no par” shares, “low par” shares, “additional paid-in capital”, “capital surplus” or “share premiums”. Any sale or transfer of all or a substantial part of the business of a limited company to another person, or any purchase or acceptance of a transfer of the business of another enterprise would require a prior approval from other shareholders by way of special resolution.
As a procedure, to effect the revised shareholding or the purchase of shares, a company/existing shareholder will be required to complete the following actions: (i) existing shareholder(s) to pass appropriate shareholder resolutions regarding the share transfer, (ii) amend the company’s Articles of Association (“AoA”) to reflect change in shareholding, (iii) submit the share purchase agreement and amended AoA to the Investment Promotion Department (“IPD”) for approval and accordingly – IPD will issue a certificate acknowledging the change in shareholding (alternatively may also amend the Foreign Investment License) and issue a certificate approving the amended AoA, (iv) cancel previous share certificates and issue new share certificates representing the paid and unpaid proportions of the shareholders new shareholding, (v) amend the company’s Shareholders Registry and submit the same to the Enterprise Registry Office.
B. The Decree on Securities and Exchange
The Decree on Securities and Exchange2 provides that the supervising authority for securities in the Lao PDR is the Securities and Exchange Commission of Lao PDR (“SEC”), which was established in late 2009, and sets out the preconditions for what type of company is permitted to list its shares on the LSX.
The procedures for an IPO in the Lao PDR are gener
ally similar to those in other countries. First, the issuing company must obtain approval from the SEC. Once approval has been obtained, a prospectus for potential investors must be prepared and publicly advertised within 60 days from the issuance of the SEC’s approval to issue securities. Securities may then be issued for sale by brokers licensed by the SEC. The public offering must be closed within 90 days of the issuance of SEC approval, although with SEC approval it can be extended by 30 days. A share offering must not exceed 10 times the company’s registered capital.
Currently, securities may be bought, sold and transferred at the LSX only in Lao Kip however the SEC appears to be leaning towards the possibility for such transfers to in the future occur in other currencies. The par value of shares bought, sold or transferred must not exceed 100,000 Lao Kip (approximately US$12.50), while the par value of debentures or bonds must not exceed 1,000,000 Lao Kip (approximately US$125). Both individual and juristic persons can trade securities on the LSX. Foreign investors are entitled to purchase securities however for some companies the following restriction may apply: individual investors do not hold more than 10 percent of the total shares of a single listed company, and that a group of investors together do not hold more than 49 percent of the total shares of a single listed company. The SEC has stated that as long as there are no industry restrictions (e.g., media industry), listing companies may allow any percentage of foreign ownership.
C. Other Laws
The GoL recognizes the importance of foreign investment into the Lao PDR. As such, the GoL continues to work towards the evolution of the Lao legal system.
Investment Law: The investment by foreigners, including foreign owned companies, are generally governed by the 2009 Investment Law3 which recently superseded the Foreign Investment and Domestic Investment Laws. The harmonization of the Foreign and Domestic Investment Laws represents a significant change from the previous investment regime which provided different incentives to domestic and foreign investors. The 2009 Investment Law will apply to both foreign and domestic investors. The 2009 Investment Law and its implementing Decree outlines the sectors that are open to investment, the forms of investment available, the incentives available to investors, the rights and duties of investors, and the investment licensing process.
Secured Transactions Law: Shares are considered to be a movable property and are transferable in the manner provided by the AoA of the company and subject to applicable laws. Any creation of a security interest on such shares is regulated by the provisions of the 2005 Secured Transactions Law4. The following types of security are permitted in the Lao PDR: (i) security agreements (covering immovable assets [including land use rights, leases, and fixtures] and movable assets); (ii) pledges (of movable assets, documents, shares, contractual rights, receivables, bank accounts, intellectual property rights, licenses, and future assets or gains from projects or activities certain to occur in the future); (iii) mortgages (of movable assets); and (iv) guarantees (personal or company).
The current economic growth in the Lao PDR may be attributable to the structural market economic reforms and the continued introduction of a market economy. Such reforms include focusing on corporatization and privatization of public enterprises; enforcement of the tax system; commercial liberalization and openness to foreign investment. These reforms have resulted in improved development indicators and accordingly in 2010, the annual GDP growth rate was 7.8 percent (as reported by World Bank). Despite being a small market, the Lao PDR’s geographic proximity to larger markets in Thailand, Vietnam and China offers significant opportunities for the country’s future development.
by William D. Greenlee, Jr. and Vinay Ahuja