Many foreign investors, including foreign investment funds, are currently doing business in Vietnam through ways of purchasing shares of, taking over capital assignment and contributing capital to the existing local Vietnamese companies. Many of them rely upon the capital assignment contracts, share purchase agreements signed with local Vietnamese companies and/or with its members, shareholders without proceeding with procedures for complete registration of their proprietorship in such local Vietnamese companies with Vietnam authorities. They believe that the so-called "filing" of the notification of shareholder holding 5% of the charter capital of such local Vietnamese companies with provincial Business Registry is sufficient to protect their rights and benefits in such local Vietnamese companies. Legal foundations for protecting foreign investors' rights and benefits in such cases are not strong enough.

It has been recently brought to the attention of the author of this article that foreign investors when contributing capital to an existing local Vietnamese company by way of taking over stake equity assigned from its members and wishing to register their ownership in such existing local Vietnamese company is required to obtain Investment Certificate from Vietnam authorities, on the cited legal base set forth the 2005 Investment Law and its implementing regulations, that foreign investors who first time investing in Vietnam must have investment project and register for getting Investment Certificate under the licensing procedure as currently applied to foreign investors who wish incorporating their new companies in Vietnam.

This article shares the author's experience with foreign investors who intend to do business in Vietnam through ways of purchasing shares of, or taking over stake equity assigned from Vietnamese members of a local Vietnamese company or contributing capital to the charter capital of a local Vietnamese company. The scope of this article addresses on such local Vietnamese companies which are established and operating under the Investment Law and Enterprise Law, and not the ones which are listed in stock exchange markets, not local Vietnamese companies engaging in insurance, banking, finance service industries which are mainly governed by their specialized Laws.

What are the most relevant legal regulations governing foreign investors' purchase of share of or contribution of capital to Vietnamese companies?

Many, but they are unclear and overlapping. Section §56(3) of Government's Decree 108/2006/ND-CP dated 22 September 2006 further stipulates that foreign investors who purchase shares of joint stock companies shall have to register their business in accordance with the relevant provisions of the 2005 Enterprise Law, while those who contribute capital to limited liability companies shall have to register their investment under the 2005 Investment Law. Section §50(1) of the Investment Law stipulates that foreign investors first time investing in Vietnam must present their investment project and apply for Investment Certificate for incorporation of their companies in Vietnam. It should be noted that the Investment Law does not provide any procedure for foreign investors who first time investing in Vietnam to set up their own investment projects without incorporation of their companies for operating and managing such investment projects in the country. Section §21 of the Investment Law defines "foreign investors' purchase of shares of, contribution of capital to existing local Vietnamese companies and their participation in the management of local Vietnamese companies" as one of the foreign direct investment (FDI) forms.

Who falls within the terms of "foreign investors"?

The terms "foreign investors" used in this article, as defined in Government's Decision 88/2009/QD-TTg dated 18 June 2009 promulgating the Regulation on Foreign Investors' Contribution of Capital to, Purchase of Shares of Local Vietnamese Companies, include the followings:

• Foreign corporate investors established under the laws of foreign countries and their branches operating in Vietnam;

• Foreign-invested enterprises established under the laws of Vietnam where foreign ownership exceeds 49% of the charter capital of each enterprise;

• Investment funds, securities investment companies established under the laws of Vietnam where foreign ownership exceeds 49% of the charter capital of each fund or company;

• Foreign individuals.

How foreign investors' ownership in local Vietnamese company through way of their purchase of shares of or contribution of capital to such Vietnamese company will be recognized?

Foreign investors' ownership in such local Vietnamese company is approved and recognized by the Investment Certificate granted by Vietnam authorities to them. In order to be granted Investment Certificate, foreign investors (almost Vietnamese partners related to the local Vietnamese company) are required to submit application and required documents to Vietnam authorities. The application and required documents however seems to be mainly for the purpose of incorporation of a new (joint venture) company, rather than for getting approval of the capital assignment or share purchase documents specifically.

What are the main legal concerns and difficulties that should be identified by foreign investors on the documents required and submitted to Vietnam authorities for obtaining Investment Certificate of their ownership in such existing local Vietnamese company?

Foreign investors are required to submit a long list of documents to Vietnam authorities for granting Investment Certificate to legally recognize their ownership in the existing local Vietnamese company which they purchase shares of or contribute capital to. Due to the limitation of words by the publisher, this article only addresses on the latent legal concerns from the main documents in such long list, which, in the view of the author, should be identified for consideration of every eventuality for taking appropriate precautions.

The first latent legal concern that foreign investors should beware of would come from the application form I-3 as provided for in Decision 1088/2006/QD-BKH issued by the Ministry of Planning and Investment on 19 October 2006, which is only required for obtaining Investment Certificate for incorporation of new company. The application form is absolutely not relevant to cases of foreign investor's purchase of shares or contribution of capital to an existing local Vietnamese company.

The second latent legal concern that foreign investors should beware of would come from the requirement by the Vietnam authorities of a joint venture contract signed between foreign investors and members, shareholders of the existing local Vietnamese company. First, the legal ground for requiring the execution and submission of a joint venture contract in this transaction is not clearly required in the Investment Law, the Enterprise Law and their implementing regulations. The joint venture contract is only required in case foreign investors and Vietnamese partners jointly incorporate a new joint venture company. Second, it is unnecessary and unreasonable to require foreign investors to sign a joint venture company with all shareholders or all existing members (except assigning member) of such local existing Vietnamese company for establishing a new (joint venture) company when they purchase shares or acquire stake equity assigned from members of an existing local Vietnamese company. If the existing local Vietnamese company is a joint stock company having thousands or more shareholders, it would be extremely difficult for the local Vietnamese company to have the joint venture contract approved and signed by all of its shareholders. A revised charter of the local existing Vietnamese company with approval of revisions made in accordance with its internal process and the relevant provisions of the Enterprise Law is sufficient to govern all aspects of rights, interests and obligations of the parties to such company.

The third latent legal concern would come from the contents of the Investment Certificate granted by Vietnam authority. Based on application form I-3 as mentioned above, the Investment Certificate to be granted is to permit the incorporation of a new (joint venture) company by foreign investors and all members, shareholders of the existing local Vietnamese company. Only particular information on foreign investors, all Vietnamese members, shareholders of the existing local Vietnamese company (it should be noted that information on the existing local Vietnamese company is also not described in it), on the new (joint venture) company with charter capital, ownership structure, etc. is described in the Investment Certificate. It does not describe or even refer to the capital assignment contract, share purchase agreement, information on the assignment of capital or shares between the assigning members or assigning shareholders and foreign investors. The Investment Certificate in this respect only simply stipulates that the new (joint venture) company shall take over all rights, interests and obligations of the existing local Vietnamese company with unclear reference.

The forth latent legal concern would come from the unclear legal relation between the new (joint venture) company and the existing local Vietnamese company which foreign investors purchase shares of or contribute capital to. From our review of the recent Investment Certificates granted in Vietnam, it is easy to identify that a new (joint venture) company is established with requirement on it to take over all rights and obligations of the existing local Vietnamese company. The new (joint venture) company has the same legal form as of the existing local Vietnamese company but has new number of business registration, new corporate seal and new tax code number. The existing local Vietnamese company then no longer exists upon the issuance of the Investment Certificate. It seems that the existing local Vietnamese company under the Investment Certificate is converted, transformed into such new (joint venture) company with a new legal coat when it sells shares or assigns capital to foreign investors. As such corporate conversion or transformation is not specifically stipulated under the laws of Vietnam, including the Investment Law and the Enterprise Law, except such corporate conversion, transformation is applicable to the equitization of the state-owned enterprises, it is legal concern on the legal foundation of the contents described in the Investment Certificate.

The next but not the last latent legal concern that foreign investors should beware of is how disputes between foreign investors and assigning members, assigning shareholders of the existing local Vietnamese company or between foreign investors and the existing local Vietnamese company (as to case foreign investors purchase new shares issued by such company) on the implementation of the capital assignment contract or share purchase agreement will be resolved and enforced under the existing laws of Vietnam, especially those related to disputes arising from claims on the proprietorship over and in connection of the shares or stake equity assigned to foreign investors after the Investment Certificate is granted, since the Investment Certificate and the laws of Vietnam are silent on such issues.

What procedure that foreign investors are required to undertake for obtaining Investment Certificate certifying their ownership in an existing local Vietnamese company?

Both foreign investors and Vietnamese members or local Vietnamese company shall submit application dossier to the Department of Planning and Investment of province where such local Vietnamese company is located for Investment Certificate. The application dossier consists of two main types of documents: one is for incorporation of a new (joint venture) company ("Incorporation Documents") and one is capital assignment or share purchase documentation ("Share Purchase Documents"). All documents shall be well designed in a complete set of documents for once time submission to Vietnam authority.

Of the above documents, foreign investors should note documents describing their investment project in Vietnam. As they will do business in Vietnam under the umbrella of a new (joint venture) company which is converted from the existing local Vietnamese company, their investment project means the current business project which is undertaking by the existing local Vietnamese company. It is therefore advisable that foreign investors must well understand the current business of the existing local Vietnamese company and must work closely with them for well preparation of the investment project.

It should be noted that, if the existing local Vietnamese company engages in import, export, distribution, wholesale, retail services, description of its current business activities is one of the most important documents to be appraised by Vietnam authorities for Investment Certificate. The investment project of the foreign investors shall be deemed as a Demonstration of Satisfaction by foreign investors of the laws of Vietnam and its Schedule of Specific Commitments in Services to WTO. The existing retail outlets, distribution networks, warehouse, modality of business, etc. of the local existing Vietnamese company shall be an important part of such Demonstration of Satisfaction.

What would be happened after the issuance of the Investment Certificate? What foreign investors should do after such issuance?

Nothing will be happened right after the issuance of the Investment Certificate. As mentioned in this article, the legal concerns are latent. Foreign investors are advised to contact their counsels for clearing off such legal concerns. Since the new (joint venture) company is established from the conversion of the existing local Vietnamese company, its tax and accounting regime must be declared and completely registered with local tax authority. Foreign investors should ensure that tax declaration and registration must be recognized by local tax authority.

Conclusion

Notwithstanding the legal concerns identified in this article, finally it is no doubt to acknowledge that the Investment Certificate, certifying legitimate proprietorship of foreign investors in the existing local Vietnamese company is a good legal tool of protecting their rights when doing business in Vietnam. But the Investment Certificate, to some extent, may be beyond expectation of the Vietnamese members, shareholders of the existing local Vietnamese company.

Published on Asian Legal Business online Article | April 2010