Lawyer in Vietnam Oliver Massmann Lifting Foreign Ownership Limits in Public Listed Companies

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AGENDA:

INVESTMENT LAW, ENTERPRISE LAW AND THEIR IMPLEMENTING DECREES WHAT IS NEW?

FOREIGN EQUITY CAP LIFITED UNDER DECREE NO.

60/2015/ND-CP CONCLUSION

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Vietnam 2014 Economy at a glance GDP: US$187.5 billion GDP per capita: US$2,028 GDP Growth: 5.98 % Inflation: 4.09% Population: About 90.73

million Labor force aged 15 and above:

54.48 million Total export and import

turnover: : US$ $298 billion Minimum wage: VND 2.7

million (US$ 147) per month (Jan 2015)

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Vietnam has the fastest-growing middle and affluent class in the region (Boston Consulting Group)

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WTO analysis of liberalization of market access

Vietnam ties in first place with Singapore

*Typical restrictions: number of opened sectors, JV requirement, limits on foreign-owned shares, permission requirement

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Country Limitation of market access*

Country Limitation of market access*

Malaysia medium Myanmar high Indonesia medium Cambodia medium

Philippines medium Laos medium Singapore low India high Thailand medium China medium Brunei high Vietnam low

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Investment environment in Vietnam Main governing laws: Investment Law, Enterprise Law and their

implementing documents Forms of doing investment in Vietnam:

Economic entity establishment; Business cooperation contract: a contractual arrangement

between two or more investors without creating a legal entity Public-Private Partnership; a contractual agreement

between competent state authorities and investors, an enterprise project in order to implement an investment project;

purchase of shares or capital contribution.

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Investment environment in Vietnam Forms of enterprises in Vietnam Limited liability company: members are liable to the extent of their

capital contributed Shareholding Company: charter capital (authorized share capital) is

divided into shares and members are liable to the extent of their capital contributed

Partnership: established between two or more partners; Business Cooperation Contract: an agreement without constituting a

legal entity and each party is individually responsible for paying taxes. Branch: a branch of a foreign company permitted to conduct

commercial activities Representative Office: represents the parent company, no actual

business operations. A suitable tool for market research 7

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Definition of foreign investor

New Investment Law: Very simple definition!

Foreign investor is any foreign individual or organization incorporated under foreign law doing

business investment activities in Vietnam

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Foreign investors Who are they?

Foreign nationals and foreign corporate entities Foreign Invested Economic Organizations (FIEO):

those whose members or shareholders are foreign investors

FIEO under the M&A rules: narrower scope (see next slide)

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FIEO under the M&A procedures

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A Offshore Investor

F1 Company in Vietnam with 51%+ ownership

by A

F2 Company in Vietnam with 51%+ ownership

by F1

F3 Company in Vietnam

with 51%+ ownership by A and F1

F1, F2 and F3 are considered as FIEO and subject to investment requirements applicable for Offshore

Investor Others: subject to

requirements applicable for domestic investor

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Prohibited business activities: Trade in the narcotic substances as specified; Trade in the chemicals and minerals as specified; Trade in specimens of wild flora and fauna as specified in Appendix

1 of Convention on International Trade in Endangered Species of Wild Fauna and Flora; specimens of rare and/or endangered species of wild fauna and flora as specified;

Prostitution; Human trafficking; trade in human tissues and body parts; Business pertaining to human cloning.

Freedom to conduct business activities not prohibited by law less risk in doing business

Prohibited business activities

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Investment procedure Under the Investment Law and Enterprise Law: 2 separate steps - Application for

Investment Registration Certificate (IRC) and Application for Enterprise Registration Certificate (ERC)

Step 1: IRC IRCs for projects required to obtain preliminary approval of the National Assembly/ Peoples

Committee are issued within 05 working days upon issuance of such approval For other projects, IRCs are issued within 15 days (instead of 35 days as in the old law) upon

receipt of the application dossier

Step 2: ERC Submit an application dossier to the licensing authority upon issuance of the IRC ERCs are issued within 03 working days upon receipt of the application dossier

Under recent Decree guiding the Investment Law: 2 steps can be combined and application dossiers for IRC and ERC can be submitted at the same time to the investment registration authority only.

The IRC and ERC will be given to the investors at the same time at the investment registration authority.

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M&A procedures for foreign investors Appears to be simple!!! Only registration required, no more IRC

Satisfying the requirements for investment Submitting application dossier Assessment by the licensing authority and decision making after 15 days

Subjects: foreign investors making investment in conditional business activities for

foreign investors; F1, F2 or F3 holding 51% or more of the targeted economic enterprise after

the M&A Exclusion: Company other than F1, F2 and F3:

Registration to amend the ERC (for LLCs) Notification of the change in foreign shareholders (for JSCs)

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FOREIGN EQUITY CAP LIFTED IN PUBLIC COMPANIES

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Rules on foreign ownership in a listed company If Vietnamese law, including international treaties, provides for a specific

ownership cap, the maximum foreign ownership (MFO) must not exceed such a cap.

If Vietnamese law treats a business activity as conditional on foreign investment (pursuant to the list of conditional sectors under the Investment Law) but does not yet provide any ownership limit, MFO must not exceed 49%.

If Vietnamese law provides ownership limit for public companies in specific business sectors (for example, 30% for banking), MFO must not exceed such limit.

If a public company conducts different business activities in which MFOs have been provided differently, the MFO will not exceed the minimum ratio specified in relation to the business activities which such company is conducting, unless otherwise stipulated in any applicable international treaty

In cases that do not fall within the above 4 groups, MFO can be up to 100%. 16

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Positive effects of the relaxed foreign equity cap

Foreign investors are no longer restricted from investing in public listed companies

More investment opportunities for foreign private equity investors to invest in majority stakes in companies. However, the Government still takes certain control over conditional business sectors where MFO is still limited in the Investment Law and the companys charter (if any).

Enhance market liquidity and capitalization levels. Easier to find strategic investors (lessons learned from recent failed

IPOs of Vietnam Airlines and other big companies). Accelerate companies restructuring and equitization of state-

owned enterprises 17

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How the new foreign equity cap be implemented until now MFO in public securities companies and fund management

companies (up to 100%) can be implemented immediately without further guiding documents

Circular No. 123/2015 guiding the procedures to implement the MFO in securities companies has been issued on 18 August 215 and takes effect from 01 October 2015. However, the MPI has not issued any document guiding the specific MFO in other conditional business sectors. foreign investors now cast certain doubts about the implementation feasibility of Decree 60.

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But MFO is not the only hindrance for foreign investment Limited stakes offered for sale in state-owned

enterprises, especially large SOEs (only 3-5%) Financial statements not in compliance with

international accounting and auditing standards difficulties for investors to evaluate the real value of the target company

Lack of transparency in company management

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What steps investors should take to determine MFO in a target company

Step 1: Whether the MFO in business activities of the target company is specified in international treaties to which Vietnam is a party (for example, WTO, TPP) If Yes: such cap applies If No: move to Step 2

Step 2: Whether the MFO in business activities of the target company is specified in the Investment Law, on the National Information Gate on foreign investment or in any relevant Vietnamese law If Yes: Such cap applies If No: Move to Step 3

Step 3: Whether the remaining business activities of the target company is conditional for foreign investors

If Yes: 49% MFO applies - If No: up to 100% MFO applies 20

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How to go beyond the MFO in public companies

Seek a fund management company to purchase shares of the target company, hold such shares on trust for the foreign investors and sell the shares back to foreign investors when the room for foreign investment is more open. This approach is recognized under Vietnam laws; or

Find a local individual or corporate entity to act as a trusted nominee. This approach does not expressly provide for such nominee arrangement but is preferred by foreign investor in practice as it helps to circumvent market access restrictions.

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High expectation in foreign investment surge

Foreign investment in public companies will increase after relaxed MFO in Decree 60

Combined effects with the AEC, TPP and EU- Vietnam FTA:

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AEC Market Snapshot Asias main investment hub GDP: US$2311.3 billion (2012) GDP per capita: US$3748.4 (2012) Population: 620 million, 60% under the age of 35 AEC % of world GDP: ~3.3% AEC % of world population: 9% AECs merchandise exports: US$1.2 trillion - ~54% of total

ASEAN GDP and 7% of global exports If ASEAN were one economy, it would be the 7th largest in

the world 4th largest by 2050 if growth trends continue 23

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EVFTA Comprehensive agreement Trade in goods Market access for goods tariffs Rules of Origin Export duties Technical Barriers to Trade (TBT) Sanitary and Phytosanitary Measures Customs and Trade Facilitation Administrative Cooperation in Customs Matters

Services and investment: National treatment Liberalisation commitments / market access Investment to state dispute settlement

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Cross-cutting issues Dispute Settlement and Investment Dispute Settlement Government Procurement State Owned Enterprises & Subsidies Intellectual Property Rights Geographical Indications Trade and Sustainable Development Cooperation and Capacity building Annexes (car; green tech and pharma)

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EVFTA Main features

Symmetrical elimination of nearly all tariffs (over 99%)

Removal of almost all export duties and cap on remaining ones

Services commitments going beyond GATS

Negotiations on Investment protection and disputes settlement on-going

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How will TPP benefit Vietnam? 70% 70% of the total export value of Vietnams textile industry is from TPP countries. By participating in the TPP, the market is expected to double. Export turnover to the US may reach USD55 billion in 2025

0% The average tax rate on textile products into the US market is currently 17.5%, after TPP it falls down to 0%

0% The whole import tariffs on footwear currently from 3.5% to 57.4% also falls down to 0%

USD 335.7 billion According to a study by East West Centre (USA), Vietnams GDP may increase by USD35.7 billion, equivalent to 10.5% until 2025. At the same time, Vietnams exports also increase by 28.84%, equivalent to USD67.9 billion

Investment increases by 9.2% TPP helps Vietnams GDP increase by 1-2%/year as a result of an increase in investment by 9.2% (mostly inbound investment), consumption increase by USD6.9 billion and production increase by USD2.4 billion

Opportunities to export flagship products

Create more than 6 million jobs in textile industry until 20

Liberalizing investment environment among TPP countries

Expectation on more competitive business environment, cheaper goods and services at higher quality

TPP offers free market access for enterprises operating in service sectors

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TPP and AEC intersection

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Thailand

Malaysia

Brunei

Canada Australia

Cambodia

Indonesia Myanmar

Peru

Philippines

Japan

Laos

Mexico New Zealand

Singapore

The United States

Vietnam

Chile

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Questions & Answers

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DUANE MORRIS VIETNAM LLC

Thank you very much!

HANOI OFFICE HO CHI MINH CITY OFFICE Pacific Place, Unit V1307/08, 13th Floor, Suite 1503/04, Saigon Tower 83B Ly Thuong Kiet, Hoan Kiem District 29 Le Duan Street, District 1 Hanoi, Vietnam Ho Chi Minh City, Vietnam Tel.: +84 4 39462200 Tel.: +84 8 3824 0240 Fax: +84 4 3946 1311 Fax: +84 8 3824 0241

Contact email:

[email protected]

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VIETNAM SCRAPS FOREIGN OWNERSHIP LIMITS IN INVESTMENTHow much you know & What you can do?AGENDA:Vietnam 2014 Economy at a glanceVietnam has the fastest-growing middle and affluent class in the region (Boston Consulting Group)WTO analysis of liberalization of market accessInvestment environment in VietnamInvestment environment in VietnamDefinition of foreign investorForeign investors Who are they?FIEO under the M&A proceduresProhibited business activitiesInvestment procedureM&A procedures for foreign investorsSlide Number 14FOREIGN EQUITY CAP LIFTED IN PUBLIC COMPANIESRules on foreign ownership in a listed company Positive effects of the relaxed foreign equity capHow the new foreign equity cap be implemented until nowBut MFO is not the only hindrance for foreign investment What steps investors should take to determine MFO in a target companyHow to go beyond the MFO in public companiesHigh expectation in foreign investment surgeAEC Market Snapshot Asias main investment hubEVFTA Comprehensive agreementEVFTA Main featuresSlide Number 26How will TPP benefit Vietnam?Slide Number 28Slide Number 29TPP and AEC intersectionQuestions & AnswersDUANE MORRIS VIETNAM LLC