Vietnam - Foreigners to take stock of draft decree

A draft decree which introduces certain strict requirements and conditions for share acquisitions may raise concerns to foreign investors who are interested in buying shares in credit institutions in Vietnam, write Dang Duong Anh, executive partner and Nguyen Vu Quynh Lam, senior associate of Vilaf law firm.

Firms looking to sell shares to foreign parties will be putting the draft decree under the microscope

The State Bank of Vietnam has recently proposed the third draft decree on foreign investors acquiring shares in Vietnamese credit institutions to collect comments from the public. If approved by the government, the draft decree will replace Decree 69/2007/ND-CP of the Government dated April 20, 2007 on foreign investors’ acquisition of shares in Vietnamese commercial banks (“Decree 69”).

Share acquisition transactions to be approved by the Governor of the SBV

Article 4.1(c) of the draft decree provides: “1. The Governor of the State Bank shall issue written consent on the acquisition by foreign investors and their related persons of shares in Vietnamese credit institutions in accordance with this decree and the relevant regulations in the following circumstances: ..(c) A foreign investor who has already owned 5 per cent or more of the charter capital of a Vietnamese joint stock credit institution acquires additional shares”.

Article 29.1(dd) of the Law on Credit Institutions provides for the changes which must be approved in writing by the SBV: “Transfers of equity capital by equity owners; transfers of shares by major shareholders; or transfers of shares resulting in a major shareholder becoming an ordinary shareholder and vice versa;”. Under this provision, if a foreign investor being a major shareholder (holding more than 5 per cent of the charter capital) acquires more shares (rather than selling or transferring shares to a third party), such acquisition is not required to have the SBV’s consent. The stated provision of the draft decree is not consistent with this Article 29.1 (dd) of the Law on Credit Institutions.

On the other hand, in order to hold 5 per cent of the charter capital of a Vietnamese credit institution, the foreign investor has already obtained the consent from the Governor of the SBV in accordance with Article 4.1(a) or 4.1(b) of the draft decree. The requirement that a foreign investor who holds 5 per cent of the charter capital must seek an additional consent from the SBV to acquire more shares will result in excessively unnecessary administrative procedures.

Therefore, we recommend to delete Article 4.1(c) of the draft decree or to amend this provision to state that a foreign investor who owns 5 per cent of the charter capital and intends to purchase more shares shall notify the SBV on their proposed transaction.

Lock-up period required for share transfer

Article 9.2 of the draft decree provides: “2. A foreign investor who holds more than 10 per cent of the charter capital in a Vietnamese credit institution shall not be permitted to transfer their shares to other organizations or individuals within three years since the date on which they own more than 10 per cent of the charter capital of such credit institution.”

Under the Law on Enterprises, only shall the founding shareholders be subject to three years’ lock-up of share transfer from the company’s establishment, except for otherwise as resolved by the General Shareholders’ Meeting. If a shareholder holding more than 10 per cent of the charter/share capital is not a founding shareholder, it should not be subject to the three years’ lock-up period under the draft decree.

The SBV should only impose the long lock-up period, if any, to strategic investors, rather than non-strategic shareholders, of credit institutions since long investment is attributable to strategic investment. The position of major shareholders must be treated by the relevant credit institutions differently from strategic investors, in which the major and non-strategic investors should be given more flexible divestment or quick liquidation of their investment capital. Thus, there should be no reason for imposing three years’ lock-up period to the major and non-strategic shareholder.

The stock exchange situation in the world and in Vietnam is very pessimistic. The requirement for three years’ lock-up period will undoubtedly worsen the bad situation of the stock exchange in Vietnam because the major shareholder of more than 10 per cent cannot divest his investment flexibly and timely, which will discourage them in investing in listed credit institutions in Vietnam.

Accordingly, the provision on the lock-up period for share transfer by shareholders holding more than 10 per cent of the charter capital should be deleted. Otherwise, the SBV may consider proposing more flexible and less strict solutions. Particularly, instead of requesting for three years’ lock up for the entire share capital of the investor in Vietnam, the draft decree should either reduce the lock-up period to one year or require the minimum investment of the shareholder in the credit institution, e.g. at least 3 per cent or 5 per cent instead of all 10 per cent. The SBV is recommended to consider having a provision that if the foreign investor and the relevant credit institution agree in writing on a lock-up period share transfer, the restriction provided in the draft decree shall not apply.

An inconsistency exists between the draft decree and Decree 69. The restriction in Decree 69 applies to “A foreign credit institution and the related persons who hold 10 per cent of the charter capital.” Meanwhile, the restriction in the draft decree applies to “A foreign investor who holds more than 10 per cent of the charter capital.” Will foreign investors who hold square 10 per cent of the charter capital not be subject to this restriction?

Although the SBV in the draft proposal lodged with the Government explained that there is no change in the content of this provision in the draft decree (compared to Decree 69), the draft decree should refer to square 10 per cent as a threshold, rather than “more than 10 per cent” as current version.

Conditions for acquiring shares to own 5 per cent or more of the charter capital.

- Three consecutive profit - making years

Articles 10.1(a) and 10.2(a) of the draft decree require the foreign investors to “earn profits for at least three consecutive years immediately prior to the year of registering for share acquisition.”

The requirement for three consecutive profit-making years is too stringent because the economy of the world has recently undergone a number of financial crises. Many well-established financial corporations and banks have incurred losses. However, those losses would not necessarily mean that those financial corporations and the banks are currently operating ineffectively. By contrast, it does not necessarily mean that others which make profits for the latest three consecutive years can become the best candidate investors for acquiring shares in Vietnamese credit institutions.

Under Vietnam’s WTO commitments, there is no requirement on profit-making years for foreign investors to acquire shares in Vietnamese credit institutions. The requirement for three consecutive profit-making years would therefore be considered as being inconsistent with Vietnam’s WTO commitments.

Furthermore, whilst this requirement has not existed under Decree 69, the foreign investor community would raise question as to why the Government of Vietnam makes its regulations on market accession even stricter after joining WTO.

Under Circular 10 dated April 22, 2010 of the SBV on criteria for selection of strategic investors in equitized state - owned commercial banks, foreign investors are not required to meet this requirement in order to become even strategic investors in equitized state-owned banks. This requirement in the draft decree would create inconsistence within the stated banking regulations.

This provision should be removed from the draft decree. The draft decree should rely on other more practical and reliable factors to allow the foreign investors to become the major shareholder in credit institutions in Vietnam (such as the provision on the total asset value of the foreign investors). Alternatively, the SBV may consider reducing the profitable period from three years to one or two years or include in the draft decree the exception where the SBV may consider approving the share acquisition proposed by an investor who does not meet the stated requirements on an ad-hoc basis in certain special circumstances.

- International rating level

Under Articles 10.1(b) and 10.2(b) of the draft decree, the foreign investors must “have international operation experiences, and be rated at the stability level or a higher level by international credit rating organizations, at which level the investor will be capable of performing its financial commitments and carrying out normal operations even when the economic condition and situation changes to the unfavorable trend.”

This requirement is still general, which has not specified what institutions are considered as “international credit rating institutions”, and which rating level is considered as being “from the stable level upward”. The draft decree needs to have specific provisions on: (i) international credit rating institutions, and (ii) specific rating levels as required by Articles 10.1(b) and 10.2(b) to serve as grounds for foreign investors to apply for approvals for share acquisition.

- No adverse effect on the credit institution system in Vietnam

Articles 10.1(dd) and 10.2(dd) of the draft decree require that the relevant investor’s share acquisition must “not cause effect to the safety and stability of the credit institution system; not create monopoly or competition restraint or unfair competition in the credit institution system.” This requirement is still general and of qualitative nature, which would likely result in inconsistent application to foreign investors in different share acquisition transactions.

The draft decree needs to specify in more detail each case in which share acquisition is prohibited under these provisions. In particular, it is necessary to clarify what is considered as “affecting the safety and stability of the credit institution system” and which is the level of adverse effect where share acquisition is prohibited. The draft decree needs to have specific provisions on the procedures and documents for foreign investors to prove that they meet this requirement.

Similarly, the draft decree needs to provide in more detail the cases of “monopoly”, “competition restraint”, “unfair competition” in the financial and banking sector. Those specific provisions are supposed to be in conformity with the Law on Competition.

- No violation of the laws of the home country and the laws of Vietnam

Under Articles 10.1(e) and 10.2(e) of the draft decree, the foreign investor must “not violate the laws of the country where the foreign investor is incorporated and their head office is located and the laws of Vietnam.”

The procedures to prove the satisfaction of the stated requirements that the investor does not violate the laws of their home country and the laws of Vietnam are usually complicated and time-consuming for the investor (either an institutional investor or an individual investor) in practice. The laws are supposed to provide for specific and exercisable procedures.

The draft decree needs to have specific provisions on the procedures and documents for foreign investors to prove that they do not violate the laws of the country where they are incorporated or their head office is located and the laws of Vietnam.

Approval of share sale plan

Article 11.2(c) of the draft decree provides: “c) When a joint stock credit institution in which the state holds controlling shares increases the charter capital in connection with a sale of shares to foreign investors, it shall formulate the plan for increase of the charter capital and submit the same to the representative of the state capital holder for approval before submitting the same to the General Shareholders’ Meeting (GSM) for decision.”

The requirement for prior approval by the representative of the State capital holder before submitting to the GSM for decision is contrary to the Law on Credit Institutions and the Law on Enterprises regarding the authority of the GSM. There, the GSM is the corporate body which has the highest decision-making authority over all issues of the relevant joint stock credit institution, including approval of the plan for increase of the charter capital for selling shares to foreign investors (Article 59.2(h) of the Law on Credit Institutions and Articles 96.2(b) and (dd) of the Law on Enterprises. The requirement for prior approval by the controlling shareholder being the representative of the state capital holder before submitting the plan to the GSM may be inconsistent with the stated provision.

According to Article 59.3(c) of the Law on Credit Institutions, the GSM shall approve the plan for increase of the charter capital for selling shares to foreign investors at the voting ratio of 65 per cent. To achieve this ratio, the consent of the controlling shareholder (holding 51 per cent) being the representative of the state capital holder would be required when the GSM votes on the matter in question. The stated procedure for obtaining such prior approval will delay the decision making process on the increase in the charter capital, which causes difficulties to both the Vietnamese credit institution and the foreign investor.

Given the above, the SBV is recommended to remove Article 11.2(c) from the draft decree.

Transitional provisions

After being issued, the draft decree will have significant impacts on credit institutions and existing and potential investors to credit institutions. Specifically:

*The restrictions provided in the draft decree (especially the caps on foreign shareholding ratios) which have been applicable to commercial banks only (under Decree 69), shall apply to finance companies and finance leasing companies as well;

*The draft decree introduces new shareholding ratios as compared to those provided in Decree 69; and

*The draft decree provides for new conditions, which are much stricter and more detailed than those under Decree 69, for foreign investors acquiring shares to own 5 per cent or more of the charter capital.

However, the draft decree has not had any transitional provisions to deal with the cases occurring before and after the promulgation of the draft decree.

The transitional provisions need to be added to the draft decree to deal specifically with the following cases: (a) the settlement of the cases where foreign investors currently hold shares in finance companies and finance leasing companies at ratios which are higher than those provided in the draft decree; and (b) the application of the decree (and the restrictions and conditions therein) to the cases where foreign investors have already submitted their application for share acquisition to the SBV before the effective date of the decree.

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