Currently, the conversion of SOEs into joint-stock companies, known as "equitisation", is governed by Decree 187/2004. Decree 187 was based on the Law on State-Owned Enterprises 2003, which was replaced by the Enterprise Law 2005 in July 1, 2006. Hence, the Government needs to issue a new Decree to replace Decree 187.

The Ministry of Finance has recently sent a draft version of the new decree replacing Decree 187 to the Government for approval.

The current laws have been criticised for failing to provide transparent procedures and unduly restrictions on the rights of foreign investors to purchase shares.

It is pleasing that the draft decree addresses some of these issues. However, there are several areas that could be improved to further encourage investor interests in future equitisations.

Foreign ownership limits

One major positive step in the draft decree is the removal of most limits on foreign investors wanting to purchase shares in equitising SOEs.

According to Article 6.2.2 of the draft decree, foreign investors are not subject to any share purchase limit except for (i) investment sectors where conditions are applied to foreign investors; and (ii) where the equitisation plan of the enterprise sets forth a certain minimum or maximum ratio for the share purchase of foreign investors.

The first exception is understandable and includes those sectors which Vietnam has announced restrictions on foreign ownership in international commitments, for example in the World Trade Organisation negotiations.

However, the second exception is troubling. The Law on Investment provides for equal treatment between foreign and domestic investors and it is unclear on what legal basis the equitising enterprise can limit, in its equitisation plan, foreign ownership if it does not operate in a conditional sector.

It is also unclear whether such a restriction only applies to the initial sale of shares or also during the life of the equitised joint-stock company.

Strategic investors

In the equitisation process, there is scope for an allotment of shares - up to 15% of the chartered capital - to be sold to "strategic investors", separate from those shares offered to the public.

In return for this allotment, strategic investors are supposed to provide financial, technical and/or managerial support to the equitising enterprise, and are obliged to retain the shares for at least three years, unless otherwise approved by shareholders at a general meeting.

Under Decree 187, foreign investors were not allowed to act as strategic investors. Pleasingly, this restriction has been removed in the draft decree. However, there remains concern about the draft decree’s treatment of strategic investors.

Firstly, under the current set-up, there is no guidance as to how strategic investors should be selected. Article 6.3.2 merely states that the strategic investors and the quantity of shares which may be sold to each strategic investor shall be reflected by the enterprise in the equitisation plan which is approved by the relevant authority.

The selection of the strategic investor or investors is a vital part of the equitisation process.

The procedures for selecting the strategic investor must be transparent to promote investment in SOEs.

It is suggested that the strategic investor or investors should be selected on the basis of a competitive process. When the equitisation of an SOE is announced, the Equitisation Steering Board should call for expressions of interest from potential strategic investors in different categories - for example in finance or industry.

Following publication of the valuation of the business, and based on the interest expressed by potential investors, more concrete invitations to tender could be produced, including the proposed percentage of ownership to be allotted to strategic investors.

Those potential strategic investors meeting the criteria would then either participate in an auction to purchase the shares, or the top candidates could be invited to directly negotiate the terms of their involvement with the Government.

Secondly, the draft decree currently requires that the price paid by strategic investors for shares on the basis of direct negotiation must not be lower than the price obtained at public auction.

Though well-intentioned, this provision may make it difficult to recruit strategic investors. The strategic investor will not know the minimum share price until the public auction is conducted.

If the price at auction is higher than expected, then the strategic investor may refuse to buy its allocation of shares, which would delay or even derail the equitisation process.

Also, holding the public auction prior to the negotiations makes it impossible to grant strategic investors special rights in the draft charter, since this must be published prior to the public auction.

Lastly, it will be difficult to comply with the requirement to list "founding shareholders" in the company charter if the direct negotiation follows the public auction.

Source: Viet Nam News