MERGERS AND ACQUISITIONS IN VIETNAM (M&A)
Despite the negative impacts of the COVID-19 pandemic and political conflicts in the Middle East region between Russia and Ukraine on the global economy in general and Vietnam in particular, in Vietnam, the mergers and acquisitions (M&A) market continues to thrive. The M&A market in Vietnam remains an attractive market, garnering the trust of investors both domestic and international. Therefore, it cannot be denied that there is potential for M&A in the Vietnamese market today. To better understand M&A, let’s follow the article below.
1.What are business mergers and acquisitions?
Mergers involve the combination of businesses of the same scale to create a new legal entity. All assets, shared interests, rights, or obligations of the merged or acquired enterprise will ‘transfer to’ the merging enterprise. In the case of a merger, it entails the fusion of businesses of the same scale and the formation of a new legal entity. The merged enterprise will assume ownership of all assets, benefits, as well as rights and obligations of the merged enterprise. Two businesses come together for mutual benefits.
Acquisitions is a form in which a large business will buy smaller and weaker businesses and the purchasing business still retains its old legal status. The acquiring business is legally entitled to own the acquired business.
Business mergers and acquisitions, also known as M&A are a model of business reorganization with the purpose of gaining control of the business to a certain extent, not simply owning a portion of capital contribution or shares as retail investors do. Therefore, companies participating in M&A will have the opportunity to expand market share and achieve better business performance. This will minimize the difficulty of staying in the market or going bankrupt.
M&A is always associated with parallel concepts, but it encompasses different natures. In a “Merger” the acquired company ceases to exist as it is entirely absorbed by the acquiring company. In contrast, with an “Acquisition” the two parties agree to merge into a new company, instead of operating and owning separately. Within the realm of “Acquisition” there are numerous rich variations, including horizontal mergers, market expansion mergers, product expansion mergers, segmented mergers, mergers and acquisitions, and mergers and consolidations
2.Conditions for a Business Merger:
According to the provisions of Clause 1, Article 201 of the Enterprise Law 2020 concerning business mergers, one or more companies (hereinafter referred to as the merging companies) may merge into another company (hereinafter referred to as the receiving company) by transferring all assets, permissions, legal obligations, and benefits to the merging company. Simultaneously, the existence of the merged company shall be terminated.
In the case of a merger in which the merging company holds a market share of 30% to 50% in the relevant market, the company’s legal representative must notify the competition management agency before proceeding with the merger. Companies engaging in mergers must ensure compliance with the provisions of the Competition Law regarding company mergers, and the merged company will cease to exist.
It is prohibited to merge companies in which the merged company holds a market share of over 50% in the relevant market, except in cases specified by the Competition Law, such as when one or more businesses participating in the merger face the risk of dissolution or bankruptcy, or when the merger has the effect of expanding exports, contributing to socio-economic development, or advancing technology.
A typical case of merger violations that was flagged by regulators is Grab’s takeover of Uber’s market share in Vietnam. Although both of these businesses have parent companies abroad, in Vietnam, they are the two businesses with the largest market share and directly compete in the high-tech taxi industry. However, the merger was later approved, with Uber retaining a portion of shares in Grab’s parent company and withdrawing from the Vietnamese market. In this case, the management agency and the Competition Authority were unable to file a complete protest due to various reasons, including the lack of agreement on the specific definition of the technology taxi sector, as it had to be compared to traditional taxis. Therefore, Grab was not found to be in violation of the regulations, as neither Uber nor Grab individually accounted for a large share of the overall taxi industry. However, at that time, these two companies collectively held more than 50% of the technology taxi market share. Furthermore, both parent companies are headquartered abroad, and they could negotiate with each other regarding Uber’s withdrawal from the Vietnamese market. Uber’s decision to exit the Vietnamese market could not be obstructed because it is within their business’s right to make that decision. This represents a new form of business merger, especially involving multinational companies.
3) Types of company mergers:
a) Horizontal merger: This occurs when a business acquires or merges with another business in the same industry, for example, when one bank acquires another bank in the same area. This is a typical type of M&A used when a business aims to expand its market share, gain a stronger market position, and eliminate competitors. However, as mentioned above, this merger process must not result in the combined entity holding more than 40% of the market share; otherwise, it will need to be reported to the regulatory agency and approved by the regulatory agency for the merger process to be considered valid.
b) Vertical merger: This type of merger involves merging two companies within the same production value chain but at different production stages. Characteristics of vertical M&A activities are designed to ensure control and improve the quality of goods and product output. Through vertical M&A, companies can also regulate their competitors’ output, leading to reduced production costs.
Example 1: A steel manufacturing company can acquire an iron ore mining company. The acquisition helps the steel company secure a stable supply of raw materials for its production process.
Example 2: Masan’s acquisition of Vinmart’s supermarket chain, Vinmart+, ensures that Masan’s products will always be available in this prominent supermarket chain, reducing the influence of competitors in the same field.
c) Merger and Combination (M&A Combination): This is a form of merger and acquisition aimed at creating larger businesses and corporations. This type of merger occurs between companies that cater to the same customer group within a specific field but do not offer identical products. These products can complement each other and work together to serve customers, enhance service quality, and improve business reputation.
This form of M&A offers several benefits, including diversifying products, increasing profits, reducing risks for businesses, and gaining access to available customer resources.
An example of this form is Mobifone’s acquisition of AVG television. Clearly, Mobifone stands to gain natural advantages when expanding into the pay television and internet sector. However, the deal ultimately collapsed due to issues unrelated to the merger.
4.Form of Implementation
For mergers, all assets of the merged enterprise will be transferred to the receiving enterprise. On the other hand, in acquisition activities, not all, but sometimes only a part of the assets of the acquired enterprise must be combined with the assets of the acquiring enterprise.
5.M&A Implementation Process
a, Preparation Phase
The preparation stage for an M&A transaction plays a decisive role in the success or failure of the M&A deal. For the seller, careful planning and preparation are factors that determine the success of the transaction. For the buyer, this is an extremely important stage. Understanding and evaluating the target audience is key to whether the parties can reach the official transaction stage or not.
Step 1: Reach the Target Audience
Reaching the target audience can be accomplished through various channels, such as marketing by the seller, self-searching in the buyer’s information network, or through consulting units and brokerage organizations in the same investment field, business consulting, or units specializing in M&A consulting.
At this step, the scope of approach depends on the seller’s preliminary assessment of the following factors before deciding to proceed to the next step of the acquisition roadmap:
The target audience must operate in a field consistent with the buyer’s development orientation.
The target audience often has an established source of customers, partners, or a certain market share in the market that the seller can continue to exploit in accordance with the buyer’s market acquisition strategy.
The target audience often has a long-term or medium-term investment scale that can be taken advantage of, such as technology investment results, taking advantage of management experience, and taking advantage of skilled labor resources.
The target audience has a certain position in the market, helping the buyer reduce short-term costs and increase market share, take advantage of the ability to cross-sell services, or take advantage of product and business knowledge, market experience to continue to consolidate and create new business investment opportunities.
The target audience has advantages in available land, infrastructure, and facilities that can be taken advantage of to minimize initial investment costs.
Step 2: Appraisal Report
Based on the preliminary assessments in step 1, the buyer will hire professional legal and financial consulting units to evaluate the overall target audience before making a decision to transact or not.
However, in reality, the seller does not necessarily have to provide all internal information about the business depending on the seller’s internal information control regulations, specialized laws, or at the request of the seller’s shareholders. Therefore, normally, the parties should sign an information confidentiality agreement before the buyer has access to the seller’s information data.
In Vietnam, depending on the target audience and the buyer’s needs, the buyer often evaluates one of two or both types:
Financial Due Diligence Report: This report focuses on checking compliance with accounting standards, capital transfers, provisioning, loans from organizations and individuals, and the stability of cash flow (taking into account the business cycle), checking asset depreciation, and debt recovery ability.
Legal Due Diligence Report: This report focuses on a comprehensive and detailed assessment of legal issues related to legal status, capital contribution situation and status of shareholders, rights and obligations, legal services of the target audience, assets, labor, and projects.
b, Negotiation and Transaction Implementation Stage – Signing the M&A Contract
Negotiating and Signing M&A Contracts
Based on the results of a detailed appraisal, the buyer can determine whether the target transaction type is a full acquisition or partial acquisition, serving as the basis for negotiating M&A content. Some issues to note at this stage are as follows:
-Understanding the Difference Between “Merger” and “Acquisition”: Buyers and sellers need to understand the types and variations of M&A transactions to negotiate suitable and effective terms.
–Reasonable Pricing: The buyer and seller often cannot agree on the transaction price. The M&A paradox is often mentioned, where the buyer offers too high a price while the seller only accepts a low price. To address this issue, parties in M&A transactions often hire an independent valuation unit to determine the value for the buyer.
–The Contract Needs to Be Comprehensive, Transparent, and Anticipate All Scenarios: The outcome of this stage is a contract that records the form, price, and content of the M&A deal. The M&A contract is an expression and acknowledgment of the parties’ commitments to the transaction. It covers legal aspects and outlines the mechanism for harmoniously coordinating factors related to other M&A transactions, such as finance, labor, management, and market development. The contract also needs to anticipate various scenarios that may occur during and after the M&A, including how to handle the consequences. In other words, the M&A contract should be designed as a tool to safeguard the rights of the parties involved in the transaction, extending to the post M&A period.
6, Legal Procedures for Recording M&A
Business mergers and acquisitions are only recognized by law when the legal procedures related to recording the transfer from the seller to the buyer have been completed, especially for assets that require registration with the competent authority. Once this step is finalized, an M&A deal can be considered complete.
7, Legal Consequences
For merger transactions, after business registration, the merged enterprise will completely cease to exist, while the merging enterprise will enjoy legal rights and obligations, as well as bear responsibility for unpaid debts, labor contracts, and other property obligations of the merged enterprise. Meanwhile, for an acquisition transaction, after the contract takes effect, the acquired enterprise will partially terminate operations for the acquired portion; the acquiring enterprise will enjoy legal rights and interests and will be responsible for unpaid debts, labor contracts, and other property obligations of the acquired enterprise.
Mergers and acquisitions are two similar activities, yet they differ in nature, legal consequences, and are governed by various legal frameworks. Thus, it depends on each specific case and a number of factors to determine whether each M&A transaction is a merger or a purchase.
The M&A process can mark the beginning of a new development cycle or the end for the business being acquired or merged. Conversely, for businesses, the buyer will maintain the initiative in this process.When conducting M&A, it will change the ownership structure, control rights, operations, financial capacity, and business scale, thereby contributing to opening new business opportunities, enhancing the competitive position, and improving business efficiency. On the other hand, M&A can also generate waves of corporate and economic restructuring, contributing to the improvement of structure, openness, cohesion, and the ability to participate in the global supply chain for each business, both individually and in the broader economy.
Accordingly, the speed of the process of screening healthy, quality businesses will be faster than ever. From there, suitable and effective corporations and organizations will be formed in the new situation, thereby increasing positive driving forces for economic development.
However, M&A activities also pose many potential risks for participating entities. Specifically, parties conducting M&A will encounter many obstacles related to financial issues, brand value, as well as other legal risks. Therefore, before entering into any M&A deal, the parties involved must gather information and consult carefully with experts to avoid adverse problems that may arise, as well as unwanted legal risks.
With a team of lawyers with many years of experience in handling M&A related cases in Vietnam, if you have any needs or questions regarding M&A transactions or other legal issues, you can contact us at:
Legal and Investment Department – WINCO Law Firm