M&A activities in Vietnam have recently emerged as a market entry channel for domestic and foreign investors.

The investors, especially foreign investors, prefer using this efficient method due to its advantages of time saving, less exposure to risks, as well as easier entry into or exit out of the market without carrying out complex procedures, which sometimes are regarded as “impossible” in other investment methods.

The legal provisions on M&A have been regulated in different areas. Under competition perspective, in order to ensure a fair and competitive environment in the economy, the Competition Law and its implementation guidelines have provided a number of provisions on economic concentration (including M&A).

This article will address the impacts of M&A activities on the competitive environment, the necessity of monitoring and controlling economic concentration to protect competition from being distorted or abused, as well as provide some recommendations for the investors using M&A as a market entry channel.

The relationship between economic concentration and the competitive environment

Under the existing legal system of Vietnam, M&A activities are adjusted by two main regulatory categories: The provisions on procedures (procedures, dossiers, and jurisdiction) and the provisions on content (conditions, limitations, operations in conducting M&A). These provisions are included in different legal documents:

Civil Code: Articles 94 and 95 (stipulations on mergers and consolidations of legal entities);

Law on Enterprises: Includes the provisions on consolidation, merger and purchasing shares. Acting as a law directly governing enterprises’ activities, the Law on Enterprises also has established a system of regulations to create a legal framework for M&A activities in Vietnam.

In particular, a number of specific provisions such as: Consolidation of enterprises (Article 152), merger of enterprises (Article 153), regulations on share purchasing (Article 13, Article 89, etc.), and implementing regulations on decision or controlling rate in enterprises. At a certain level, these regulations have contributed to promoting M&A activities in Vietnam.

Law on Investment: In the legal system, a number of provisions relating to purchasing or transferring shares have also been mentioned as: Clause 5, Clause 6 of Article 21 recognise certain M&A activities as the forms of direct investment; Article 25 stipulates the rights of investors in M&A transactions; Article 26 creates a legal framework for M&A through transactions on the stock market. In addition, Decree 108/2006/ND-CP providing detailed provisions and guidelines for implementation of certain articles of the Law on Investment also contain s some provisions on procedures and principles in conducting M&A such as: Article 56 on investment procedures in the form of capital contributions, purchase of shares, merger and acquisition between enterprises, Article 64 on transferring of capital and Article 65 on transferring of project. However, these regulations have not been clear or uniform.

Competition Law: The Competition Law has many important provisions related to economic concentration (in which, M&A is a main content of economic concentration practices). Under the provisions of Articles 16, 17 of the Competition Law, the forms of economic concentration include mergers, consolidations, acquisitions, joint ventures and others, as follows:

Merger - an act whereby one or several enterprises transfers/transfer all of its/their assets, rights, obligations and legitimate interests to another enterprise, and at the same time terminates/terminate the existence of the merged enterprise(s).

Consolidation - an act whereby two or more enterprises transfer all of their assets, rights, obligations and legitimate interests to form a new enterprise and, at the same time, terminate the existence of the consolidated enterprises.

Acquisition - an act whereby an enterprise acquires the whole or part of assets of another sufficient to control or influence all or one of the business lines of the acquired enterprise. (Article 34 of Decree No.116/2005/ND-CP providing detailed provisions and guidelines for implementation of certain articles of the Competition Law stipulates a firm shall be deemed to have the right to control or influence the operations of another when the former owns the assets of the latter to a degree which allows the former to have at least 50 per cent of the voting rights at the general meeting of shareholders or board of management, or to a degree which, according to laws or the charter of the latter, allows the former to influence financial policies and operations of the latter so as to gain economic benefits from the operations of the latter.

Joint venture is an act whereby two or more enterprises jointly contribute part of their assets, rights, obligations and legitimate interests to the establishment of a new enterprise.

Other acts of economic concentration as prescribed by law.

Thus, in addition to joint ventures, M&A is the main internal function of the phrase “economic concentration” in the Competition Law. Articles 18 to 24 of the Competition Law provide the thresholds for M&A notification, type of exemptions, exemption procedure and so on. These regulations are important in guaranteeing for M&A to take place in a transparent and fair manner, as well as competition would not be prevented or distorted in the market.

Furthermore, it is noted that the provisions in banking, finance, insurance, securities and other sectors also contain many clear and detailed articles regarding conditions, process, procedures and content of M&A activities. For example: Regulation 241 on merger, consolidation or acquisition of credit institutions in Vietnam was, issued together with Decision 241/1998 in July 1998 (currently the State Bank is upgrading this regulation to become a circular).

Economic concentration

A raised question is that the Civil Code, the Law on Enterprises, Law on Investment and other areas such as finance, banking, insurance, securities, and so on, have regulations on M&A. So, why should provisions on economic concentration be contained in Competition Law?

Under the economic aspect, M&A is an investment activity that should be encouraged because of its advantages in saving costs, time and other resources when entering or exiting the market. However, from the perspective of competition, M&A activities could bring some potential risks to the competitive environment. This is shown in case that M&A will provide a greater market power for the merged entities compared to other competitors, and the post merged enterprise might create a dominant position and potentially abuse its dominant position to cause anti-competitive behaviours, which are detrimental to the existence of the other competitors in the market.

In the Competition Law, when considering the market power of competitors, the factors such as market structure, market share, the level of market concentration (the HHI index, CR3, CR5, and so on), economic and financial power, ability to substitute for suppliers and consumers (current and potential competitive factors), current and potential barriers when entering the market, the development of supply and demand, interests and influences of other competitors in the market, among other things, will be considered. When a competitor gains a market power, specifically a dominant position, would have the opportunity to influence prices, impact on other issues as mentioned above. As a result, other competitors will fall into difficulties and face with bankruptcy.

In the process of implementing the Competition Law, the Vietnam Competition Authority is responsibility for monitoring and supervising undertakings of economic concentration to ensure the economic concentration which are not subjected to control, or if subjected to control, they may be exempted or not. In case of controlling, the Competition Authority should ensure that the transaction with market shares of the merged enterprise exceeding 50 per cent would be prohibited; similarly in case the market share of the merged enterprises being between 30 and 50 per cent, they must notify the Competition Authority in order to ensure that the deal would not create a dominant position or strong market power which causes negative effects to the competitive environment.

Economic concentrations having combined market shares below 30 per cent or the merged enterprises of the still small and medium-sizes would not be subjected to control. Where the deals are subjected to control or prohibited that does not comply with the provisions of Competition Law, the Competition Authority will conduct necessary investigation and propose suitable remedy measures under the provisions of the Competition Law (Penalties can be up to 10 per cent of revenue in the fiscal year prior to the economic concentration and divestiture requirement).

In addition, in the legal systems and competition policy in most countries with market economy regime, the control of M&A is an important content in order to prevent anti-competitive acts in the market. Hence, the competition authorities in those countries promulgate detail regulations on M&A activities to determine market power, and at the same time, competition authorities also have the right to make decisions based on quantitative analysis and assessment.

This reflects the role and responsibility of competition authorities in other countries for the control of M&A in the aim of preventing anti-competitive practices in the market.

Practical M&A activities in Vietnam in recent years

According to the VCCI statistics, until now, the number of enterprises in Vietnam is approximately over 500,000. Since a few years ago, Vietnam economy has been regarded as an attractive destination of investment by foreign investors, quite a few economists have predicted that up to 50 per cent of Vietnamese enterprises would get involved in M&A activities with domestic or overseas partners.

The fact is that, M&A activities have been conducted quite vibrantly in Vietnam in recent years, though the value of transactions decreased in 2008-2009 as a result of the impacts of the global economic crisis (it has increased again in 2010). Specifically, in 2006 - there were only 38 M&A cases, from 2007 to 2010, the numbers of cases were 108, 146, 295 and 345 respectively. In term of size, the aggregated values of past transactions decreased in the 2008-2009 period due to impacts of the global economic crisis but made a record at $1.75 billion in 2010, according to PwC.

The reasons why the quantity and value of M&A deals has increased remarkably in recent years are as follows, among other things:

(1) Higher consumer demand: especially in 2006 and 2007. At that time, as a part of the emerging economy bloc of VISTA , Vietnam is known as a hot place to invest in. Many investors around the world have paid special attention to the Vietnamese market and decide to invest in the country. Besides the “traditional” investment methods such as establishing new enterprises/factories, M&A is also considered to be a prompt, effective tool for investors to penetrate into Vietnamese market, especially in the context of WTO’s commitments coming into effect.

(2) Higher buyout opportunities: In contrast to times of high economic growth, when the economy faces recessions, many Vietnamese companies which were struggling with fierce competition may actively seek partners for mergers or acquisitions.

In the trend of increasing M&A deals in Vietnam recently, the Vietnam Competition Authority has consulted and issues evaluations for a number of cases which are subjected to control. Typical cases are as follows.

An acquisition between two life insurance companies - AIA and Prudential

In April 2010, the Vietnam Competition Authority received two official documents of Prudential Plc (based in the UK) and American International Group Inc (AIG - based in the US) asking for consultation on the acquisition of AIA Group Limited (AIA), which is a subsidiary entirely owned by AIG, by Prudential.

At that time, those two insurers were operating in Vietnam in which Prudential Vietnam and AIA Vietnam’s market shares in the life insurance market were 39.97 per cent and 6.67 per cent, respectively. The market shares were calculated on the total revenue in 2009. Hence, the proposed case must be notified to the Vietnam Competition Authority because the combined market share of both parties is 46.64 per cent (over 30 per cent and below 50 per cent). However, by June 2010, representatives of the parties notified that the merger of AIA and Prudential was given up and as a consequence, the case was closed.

A merger between North Kinh Do JSC., KIDO’s and Kinh Do JSC

In October 2010, the Vietnam Competition Authority received the official dossier of KinhDo JSC to consult the merger between the North KinhDo and KIDO’s to the KinhDo JSC. Based on the information provided by the involved parties and the provisions of the Competition Law and Decree 166/2005/ND-CP, the relevant markets and the combined market of parties are:

-Manufacturing and retailing of confectionery products in the territory of Vietnam: 24.5 per cent

-Manufacturing and retailing of ice-cream in the territory of Vietnam: 17.3 per cent

-Manufacturing and retailing of yoghurt in the territory of Vietnam: <1 per cent.

After reviewing data in the market, barriers of market entry, competition situations as well as the interlocking directorial issues, the Vietnam Competition Authority approved the above mentioned merger.

From our observations, it is found that M&A cases in Vietnam in recent years have the following features:

-First, M&A activities are focusing on areas such as finance, energy, manufacturing, raw materials and consumer goods (notably FMCG sector) (three quarters of total publicized M&A cases)

-Second, foreign investors play an increasingly important role in M&A activities (including MNCs and Private Equity Firms)

-Third, the majority of transactions are categorised as small and medium size (below $5 million ~30-35 per cent of total number of cases; from $5 to 20 million ~ 50-55 per cent of total number of cases)

-Fourth, M&A has two main types: foreign companies acquire Vietnam’s companies ~ 40 per cent; Vietnam’s companies acquire Vietnam’s companies ~ 40 per cent;

-Fifth, some types of hostile takeovers have been conducted (for instance, the case of Vien Dong Pharmaceutical - Ha Tay Pharmaceutical; Binh Thien An - Descon)

-Sixth, the emergence of vertical mergers since 2010 in order to control the sources of raw materials supply or to restructure the enterprises with the aim of focusing on business area.

In addition to the features of M&A cases briefed above, it is noticed that there are a couple of issues which investors and governmental agencies can consider as follows:

First, M&A activities in Vietnam have increased remarkably in terms of size, form and characteristics and led to more complicated and diversified issues in this area, which requires the policy and the law of M&A to constantly reflect the reality of business. However, it seems that legal provisions have not consistently catch up that requirement. In more details:

- Some concepts in the legal documents are not as clearly stated as it required. For example, the concept of “Foreign investors” and “Investment projects” in the service sector, which is an important part of WTO’s commitments relating to the opening and deregulation of service markets and still used in paragraph 8, Article 3 in the Law on Investment, remains ambiguous for understanding.

- The provisions on procedures of contributing capital and purchasing shares though stipulated in the Law on Enterprises and the Law on Investment, however, in implementation, have shown are not consistent, especially considering the lack of clear provisions about the procedure of capital contribution and purchasing shares of less than 49 per cent and above 49 per cent.

- Experiences show that the Article 9 of the Competition Law, which “prohibits parties to participate in merger with combined market share on relevant market of above 30 per cent or more” is difficult to implement in practice because it’s a time consuming process to determine the relevant market in order to detect cases violating the law.

It becomes more complicated when as a consequences of opening the market, international big names in the fields of distribution, logistic, finance and banking are ready to acquire Vietnamese enterprises through M&A. Hence, a strict approach based solely on market share could not reflect the real pressure on competition from potential new players.

Second, in the process of building the legal documents, M&A has not reached to the consistency among the governmental agencies. The separation of different governmental agencies in regulating and controlling M&A activities are not as clear and consistent as it should have been, leading to ambiguities in understandings and different explanations of the government agencies in enforcement. Besides, the roles of involved agencies in regulating various types of business are also different. Currently, M&A activities involving listed companies are managed and regulated by the State Securities Commission, while those related to foreign direct investment are under the jurisdiction of the Ministry of Planning and Investment and provincial departments. In addition, there remain differences among government agencies in the views of whether M&A activities are categorised as direct or indirect investment, or the conditions to convert from direct to indirect investment and vice versa. When individual agencies view M&A in the narrow scope of its regulations, there may be hard to build a mechanism and policies to build a favourable environment for this activity.

Third, the coordination among governmental and provincial agencies responsible for controlling and regulating M&A activities are perceived as not good as it should have been. For example, the concerned parties in an M&A case are obliged to produce and submit the same documents and complete the same procedures to various agencies due to the duplication of provisions prescribing same behaviours or conducts in many laws and regulations and more than one agency are responsible in enforcing those laws. In many cases, those overlaps lead to the waste of time and resources, which are scared, of business entities, and indirectly affecting the competitiveness of enterprises.

Fourth, there is no common database, which is important for effectively managing and controlling M&A activities, among state agencies. As a matter of fact, it is very difficult for the Vietnam Competition Authority to gather accurate data of market share and other information which is crucial in assessing the market power of parties involving in an M&A deal.

Development trend of M&A in the future

In the coming years, it is predicted that the trends of M&A activities in Vietnam may be as follows:

- M&A would be a measure conducted by many enterprises when facing difficulties

- More and more foreign investors may enter Vietnam’s market through M&A

- The consulting firms and professional brokers would take a more important role in linking the transactions

- The methods using in M&A deals would be more diverse and complex (tender offer, creeping tender offer, proxy fight, reverse takeover)

- The growing role of SWFs, Hedge Funds, PEFs.

- Cases fall within the threshold of notification and prohibition are starting to happen and tend to increase.

Source: VIR.