Foreign-invested companies could face unnecessarily complicated re-registration procedures after the new Enterprise Law takes effect in July. A draft decree circulated for comment by the Ministry of Planning and Investment contains mandatory obligations for all foreign-invested companies regardless of whether or not they wish to re-structure under the new law.
The new corporate and investment laws that take effect in July this year have, fairly enough, won considerable accolade over the past months. For the first time, foreign and domestic investors will, almost, be treated alike under the new laws. Of note, there will no longer be dual company laws governing the kinds of companies that can be established and the rules on how to run them. In those respects at least, July will mark a new beginning for Vietnam and the government was rightly lauded for its consultative efforts during the course of drafting the new laws.
Laws themselves, however, are just one part of the equation. All laws need lower-level implementing regulations to work in practice and in recent weeks, the Ministry of Planning and Investment (MPI) circulated drafts of one such implementing decree: the decree on re-registration under the new laws applicable to foreign-invested companies already established and operating under the current Law on Foreign Investment (LFI).
There are currently some 6,000 foreign-invested companies in Vietnam established under the LFI. As of July 1, the LFI will cease to exist, leaving a potential vacuum for those LFI companies currently operating under a set of rules almost completely distinct from domestic counterparts. The draft decree aims to provide a bridge between the two systems and implements a provision in the new Enterprise Law giving existing foreign-invested companies two years to “re-register”, “organise” and “operate” under the new law. According to the new Enterprise Law, those foreign-invested companies that choose not to re-register within the time limit must remain as currently operating and will expire at the end of their currently-licensed terms.
So far, so simple. However, the draft decree complicates the issues substantially by requiring those foreign-invested companies that elect not to “re-register” to, instead, “adjust their organisational structure” in accordance with the new Enterprise Law within the same two-year time period. This is a requirement seemingly completely non-existent under the Enterprise Law itself.
At present, it is unclear what such adjustment actually requires and how it practically differs from re-registration under the new laws. Investors may be concerned that this amounts, in practice, to unnecessary re-licensing of existing activities and that their operations will be subject to fresh and unwarranted scrutiny as a result. To take just one example, it is hard to see why a wholly foreign-owned company operating successfully and with no need to raise additional capital or desire to expand its activities should be required to “adjust” its organisational structure under the new laws when the Enterprise Law itself does not require it to.
The biggest issues, however, are likely to face joint venture companies wishing to re-register under the new laws (and there are certainly advantages in doing so in some cases). The LFI, with the exception of several stipulated issues requiring unanimous decisions, operates on the principle that 51 per cent ownership provides management control. Many joint ventures are owned 60:40 or even 51:49 by foreign investors as a result. The new Enterprise Law, however, embodies the principle that 65 per cent majority ownership is required (and in some cases 75 per cent) to make a decision.
Accordingly, re-registering under the new law will result in a significant shift in balance of power in many existing joint venture companies. On the one hand, minority partners will likely have to give up veto rights over decisions requiring unanimous approval and on the other hand, majority partners with less than 65 per cent ownership will give up management control on all other issues. These conflicting interests could easily result in disputes and deadlock between joint venture partners trying to agree new charters and organisational structures. It is not hard to imagine such disputes taking more than the permitted two-year re-registration time limit to resolve. Unless that time limit is changed, such companies would effectively be consigned to operational purgatory under the terms of their existing licences without any opportunity to expand operations or change form.
Although it is possible to argue that the prospect of such a result might prove a motivating force to push joint venture partners to co-operate to settle any differences, it will be difficult for many investors to understand why they must effectively renegotiate already-agreed, legally valid, joint venture contracts. If carried through to the final decree, such a mandatory erosion of existing legal rights will, at best, prove highly unpopular.
As presently drafted, the authorities have missed the opportunity to include greater scope and flexibility in the draft decree. It had been hoped and expected that foreign investors would be given a free hand to convert their forms of company under the new Enterprise Law, most notably to joint stock companies, according to commercial preferences. However, the draft decree does not allow this. Rather, wholly foreign-owned companies must become one-member limited liability companies while foreign-invested joint venture companies must become limited liability companies with two or more owners. Presumably, such limited liability companies will subsequently be able to convert to joint stock companies (essential for share issues and stock exchange listing) but it is currently unclear how this will work in practice and the dual step is undesirable. In contrast, new foreign investors will be permitted to immediately establish joint stock companies after July 1 should they so desire.
Another noteworthy omission from the draft decree’s present scope is the absence of regulations on existing business cooperation contracts (BCCs) currently being implemented under the LFI. Such BCCs often, by nature, concern important and sensitive sectors such as telecommunications, and oil and gas. At present, the draft decree states only that the MPI will be responsible for drafting separate rules for conversion of existing BCCs. The MPI has a heavy workload at present and it can only be hoped that BCC investors will have sufficient time to review, consider and implement the applicable rules when issued.
This latter point about the MPI’s workload is not insignificant. It is a considerable logistical exercise to process the re-registrations and/or adjustments of all existing foreign-invested companies within the two-year time limit. As a number of companies will await further implementing regulations for the new Enterprise Law and Investment Law before making a final decision on how to proceed, it is quite possible that the MPI will face a flood of applications in a short period of time and struggle to meet the demand. Meanwhile, companies will rightfully want their applications dealt with quickly and efficiently to avoid the disastrous situation of corporate limbo.
It is not doubted that regulation is required to bridge the gap between existing LFI companies and the new laws after 1 July. Nevertheless, the complex, unclear and mandatory rules in the present draft decree do little to build on the generally-positive expectations following the new laws. It is submitted that the re-registration decree should be as simple and flexible as possible and based on the fundamental principle that commercial partners should be permitted to agree themselves on how best to proceed. One way to achieve this might be to simply provide that any existing foreign-invested enterprise that wishes to may choose an appropriate form of company to convert to and prepare the necessary documents. Existing agreements as to voting and other rights between joint venture partners should continue to be respected unless the parties agree themselves to change them. Those foreign-invested companies not wishing to convert for any reason need do nothing and continue to exist and operate under the terms of their existing investment licences.
The MPI is consulting with the business community on the draft decree and it is hoped that the final product will provide greater flexibility than is evident in the current draft.

Source: Vietnam Investment Review, April 3-9, 2006
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Giles Cooper is an attorney with Baker & McKenzie’s Hanoi office. He can be contacted at Giles.Cooper@Bakernet.com.
This article is for informative purposes only and should not be considered legal advice.