foreign – Duane Morris Vietnam

January 13, 2017January 16, 2017 by Dr. Oliver Massmann

Vietnam – Real Equitization Progress – Opening State Owned Enterprises up to Foreign Investors except for 11 Sectors

Decision No 58/2016/QD-TTg issued by the Government establishes 11 sectors in which the state will retain full ownership (103 SOEs):

Mapping measurement for military and national security purpose;
Industrial explosive material production and trading;
Transmission, system regulation and management of the national electricity distribution grids; multi-purpose hydropower, nuclear power of particularly importance for economy – society attached to defense and security,
Management of infrastructure system of national railway, urban rail invested by the State; running transportation of national rail, urban rail invested by the State;
Air traffic services, notification services of aeronautical information; search and rescue services;
Maritime security (excluding dredging, maintaining public navigable channels);
Public post;
Lottery business;
Publishing (not including printing and publishing publications sectors);
Printing, minting money, producing gold bars and golden souvenirs; and
Credit policy for economic and social development, securing banking system and credit institutions.

It also lists 137 SOEs in which state will retain ownership from below 50%, 50%-65% and over 65%. These SOEs will be equitized during 2016-2020 period. Among these SOEs include big names such as VNPT, Mobifone, Agribank, Electricity Corporations, Post Corporation of Vietnam, Oil & Gas Corporation of Vietnam, etc.

Sectors in which the state will retain ownership of over 65% (there are 4 companies in total) include:

Operation management of airports; operating flight area services;
Navigation information services, surveillance, aviation meteorological services;
Mineral mining of large scale according to current regulations on classification of mine scale;
Exploration, development and exploitation of oil and gas mines; and
Finance and Banking (excluding insurance, securities and fund management companies, finance companies and financial leasing companies).

Sectors in which the state will retain ownership of 50%-65% (there are 27 companies in total) include:

Production of basic chemicals;
Air carriage;
Enterprises whose market share is 30% or higher, having a role to ensure major balance of the economy and stabilize the market, operating in the following areas:
a) Rice wholesale;
b) Focal petroleum imports.
Production of cigarettes;
Provision of telecommunications services with network infrastructure;
Growing and processing rubber, coffee in strategic areas, mountainous and remote area linked to national defense and security;
Enterprises ensuring basic needs for the development of production and improving material life, spirit of ethnic minorities in mountainous, remote and isolated area;
Electricity retail business (consistent with the formation and development of the electricity market levels).

The publication of companies with state ownership will encourage the equitization process. Investors will find it much more easier to know which enterprises still allow for foreign investment. Yet, equitization of SOEs is raising many concerns due to the leaders’ fear of losing their employment to private investors.

The Government should improve information disclosure and lift the cap on the number of strategic shareholders in SOEs so that both the state and private investors find interest in the equitization process.

Clarified regulation on Foreign Ownership Limit

With an attempt to attract more foreign investment in the securities market and expedite the current equitization process, on 26 June 2015, the Government issued Decree No. 60/2015/ND-CP to relax foreign ownership limit in certain sectors.

However, Decree 60 has had a limited impact on the stock market. The complicated and inconsistent procedures restrain private initiatives and onerous requirement of hiring consultant and lawyers constitutes a significant drag for investors.

To encourage foreign capital inflow to the stock market especially for newly privatized SOEs, clear guidelines creating a transparent environment should be established. Indeed, a sustainable investment environment would be supported by a clear statement that the Law on Investment does not apply for public companies but the Law on Securities.

Moreover, enterprises not operating in sectors where there is explicit limit to foreign ownership in Vietnam laws or international agreements to which Vietnam is a party should be eligible to 100% foreign ownership.

In addition, all foreign-invested public companies or public investment funds must be treated the same as local entities, except for specific cases being explicitly stated in the Vietnamese legislation or international agreement to which Vietnam is a party.

Companies operating in the banking sector subject to equitization are quite limited. Foreign ownership should be raised, for instance, to 35% for banks in which the State is a majority shareholders, 49% for private banks and 100% for banks bought at 0VND by the state.

Transparent privatization schedule and enforcement

The privatization schedule as well as bid offers of each SOEs concerned should be publicly published. In order to ensure the equitization efficiency, the State should oblige privatized companies to strictly follow the schedule by imposing fine of 10% of the company’s net profit. Besides, by holding members of the board personally accountable for the company’s violation, the state would press the newly privatized company to meet with the Government’s schemes.

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If you have any question on the above, please do not hesitate to contact Mr. Oliver Massmann under omassmann@duanemorris.com, Oliver Massmann is the General Director of Duane Morris Vietnam LLC. Thank you very much!

November 10, 2016November 10, 2016 by Dr. Oliver Massmann

Position paper on expectation of foreign investors willing to invest in Vietnam and recommendations to improve foreign investment in Vietnam

Considering Vietnam’s recent deep integration into regional and world’s economy, foreign investors are very optimistic about their business development in Vietnam in the upcoming time. Despite having said that, there remain hurdles that discourage foreign investors when deciding to invest in Vietnam or other countries in the region, for example, Thailand, Indonesia and Myanmar. These hurdles are discussed in details below.

Integrity

It is an area of great concern despite recent Government efforts to combat it. Our recent small-scale surveys shows that ratio of unofficial payment or facilitation payment in a firm’s revenue is increasing over the years. Government officials are still causing a lot of troubles in case of refusal to pay the facilitation fee by enterprises. Most of the cases result in delay in receiving Government’s services or even being refused to be provided the services. Enterprises are deeply concerned about these issues, as they have to suffer from loss of business opportunities, which in turn becomes financial loss. Unfortunately, some enterprises participating in our survey express their losing of confidence that the situation will be improved before the next 10 to 20 years.

Access to information

It is of utmost importance that foreign investors get to understand the country they are going to invest in and its surrounding factors. However, public available information is limited while it takes a lot of time and money to get such information, for example, shareholders information, corporate structure, financial status, etc. of a company. In addition, the fact that information is not always available in English or other common languages causes discomfort to investors. While the websites of many Government authorities are in both Vietnamese and English, the English interface is very limited in its contents compared with its Vietnamese one. The same applies for legal documents.

Compliance

Compliance is a burden for not only Vietnamese but also foreign-owned enterprises. The bigger the size of an enterprise is, the more likely and frequently that it is subject to examination and supervision procedures from many levels of several Government authorities. One enterprise could receive at least 2-3 delegations per year to check its operation status, for example, tax, labour, firefighting and prevention, police, etc. In some cases, the scope of examination repeats.

Foreign invested enterprises also face a burden of having to comply with many administrative procedures, especially those in real estate, customs, fire prevention and safety, environment protection, labour and tax sectors.

Infrastructure

Energy production is of key concern, especially renewable energy. There is so much delay by the Prime Minister in issuing guiding documents for foreign investors to develop renewable energy in Vietnam, despite Vietnam’s urgent need of electricity for growth. Feed-in-Tariff rates are not attractive enough to investors. EVN’s monopoly is still a big hurdle.

Intellectual Property (IP)

Enforcement of IP rights is not assured and remains a concern for foreign investors. Legal sanctions must be much more severe and strengthened.

Enforcement of foreign arbitral awards

The reality is that the arbitration law is being ignored in Vietnam. The percentage of annulled foreign arbitral awards is high due to the matter of practice that the recognition and enforcement of foreign awards in Vietnam are almost impossible. When arbitration is being used more frequently in disputes, it is disappointing that the arbitrators’ decisions have not yet been duly respected. It must be made clear in terms of fundamental principles based on which arbitration awards could be set aside.

Investment in education sector

Legal capital for investing to establish high schools and universities are heavenly high (VND50 billion and VND300 billion respectively). This discourages many investors from countries with high educational reputation. This is not good for Vietnam especially when the young now needs better education than ever before.

House ownership and land use right of foreign invested enterprises and foreign individuals

The law is very unclear and inconsistent as to land regime applicable to residential houses sold to foreign invested enterprises. In addition, while the Law on Residential Housing already allows foreign individuals to purchase property in Vietnam, there is no clear procedure to grant the red book to such individuals. We have seen a huge demand from foreigners to buy houses in Vietnam, but their intention is damaged due to lack of procedures to acknowledge their ownership right.

Vietnam’s restrictions on imports of used machinery and equipment

Restrictions on imports of machinery and equipment based on any arbitrary time standard must be removed, administrative procedures to ensure compliance with international standards of safety, energy savings and environmental requirements must be simplified and incorporated into the National Single Window project, and any quality standards must be based on international standards. Otherwise, it would cause delays in customs processing, impact the modernization and industrialization process of supply industries and be not in accordance with the WTO Technical Barriers to Trade Agreement (Article 2.2) or the TPP Chapter on Technical Barriers to Trade.

Privatization of state-owned enterprises – in name only

State-owned enterprises have long played an important role in Vietnam’s economy. These enterprises have operated in an inefficient manner compared with private companies, many enterprises operating at loss for several years. Therefore, the Government has conducted several rounds of state-owned enterprises reform. However, setting aside the ambitious target of 289 state-owned enterprises to be privatized in 2015, the privatization process has been very slow and only by name. Only 5%- 20% of the shares are offered for sale, which is too low to attract foreign investors. They will be reluctant to invest in these enterprises as long as they have no chance to gain decision-making power by purchase of shares. The Government must then show stronger effort and commitment in reforming state-owned enterprises to attract more foreign investment in the process.

Please do not hesitate to contact Oliver Massmann under omassmann@duanemorris.com if you have any questions or want to know more details on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

August 11, 2016 by Dr. Oliver Massmann

Lawyer in Vietnam Oliver Massmann Equitization Quality over Quantity

VIETNAM – Comment on a recent draft from the Ministry of Finance on strategic investors purchasing stakes from equitized state-owned enterprises (SOEs)

Author: Oliver Massmann – Chairman of the Legal Sector Committee – European Chamber of Commerce in Vietnam

On 4th August, the Ministry of Finance announced a Draft Decree on converting 100% state-owned enterprises (SOEs) into joint stock companies, which will replace Decree No. 59/2011/ND-CP, Decree No. 189/2013/ND-CP and Decree No. 116/2015/ND-CP.

Although the currently in force Decrees have brought positive results in the re-structuring of state-owned enterprises since the beginning of the process in 2011, the restructuring quality has proven to be inefficient considering the small percentage of private participation in the company’s charter and management after the privatization. In addition, many big corporations with long financial history will need much more time and have to follow specialized rules to complete the privatization procedure. Many strategic investors have thus found it less attractive to participate in the process.

In order to tackle the above issues and bring substance to the equitization process in the context of new Enterprise Law, Investment Law, etc., there is a need to introduce a new Draft Decree on converting 100% state-owned enterprises into joint stock companies.

In particular, the draft’s Article 6 stipulates that a strategic investor must have the same business sectors as equitized SOEs. In addition, the strategic investor must have at least two years of profits (as of the time for buying stake of SOEs). Moreover, its equity in the latest financial report (which has to be audited by an independent auditing firm) must be sufficient for purchasing the stakes that it registers to buy.

Under the current regulations in Decree 59/2011/ND-CP, the strategic investor is only required to have sound financial capacity, and have a written commitment endorsed by an authorised agency. The commitment must state that after SOEs are equitized, the strategic investor must support SOEs in terms of technology transfer, human resource training, corporate governance, material supply and development of output markets.

This new stricter regulations in the draft will affect foreign firms who wish to buy stakes from SOEs and become strategic partners. In particular, foreign firms must be aware that they are not allowed to freely invest in any SOEs that have business activities not relevant to what they are doing, despite their strong interest in those sectors. This is to prevent cases where inexperienced foreign investors get into the management of the SOEs without having track record ability to manage them, and for example, aim at targeting Vietnam as a trial market for their business expansion.

In addition, we believe that the Government is showing its strong effort to select eligible investors to improve the equitization quality, and to make sure that the investors have proven financial status to efficiently recover the operating at loss status of SOEs. With stricter requirements, the Government will be able to attract investors with serious investment targets and with ability to contribute to the long-term development of SOEs.

Considering these new proposed stricter requirements, it is highly recommended that foreign investors conduct sufficient due diligence on the targeted SOEs, prepare themselves ready in terms of financial capacity and proven management skills, obtaining knowledge about Vietnam’s stock exchange market as well as regulations on bidding to come to a smart investment decision. We expect that with more substantive equitization, foreign investors will have more voice in the SOEs, via which being able to adopt development plans that serve the equitized companies’ future business outcomes, not any individual’s benefits.

THANK YOU !

April 12, 2016April 12, 2016 by Dr. Oliver Massmann

Lawyer in Vietnam Oliver Massmann Transportation and Logistics businesses Requirements to apply for the badges: Which way for wholly owned foreign enterprises?

On 10 September 2014, the Government issued Decree No. 86/2014/ND-CP setting out conditions on transportation business (Decree 86) that automotive vehicles with designed capacity of 10 tones and above and from 7-10 tones must bear badges (the Badges). On 7 November 2014, the Ministry of Transportation and Communications (MT) issued Circular No. 63/2014/TT-BGTVT guiding Decree 86 (Circular 63), which requires that only enterprises having the Certificate of doing transport business by automotive vehicles can apply for the Badges.
However, according to Vietnam’s WTO Schedule of Specific Commitments in Services, foreign contribution in a joint venture doing transportation services must not exceed 49% of the total charter capital of that joint venture. Accordingly, enterprises with more than 51% foreign ownership do not have transportation business in their investment certificates, resulting in the impossibility to obtain the Certificate of doing transport business by automotive vehicles. This further leads to the fact that these enterprises will neither be able to apply for the Badges.
Moreover, Decree 86 creates the concept of ‘transport business with indirect money collection’ which is defined as ‘the transport business by automotive vehicles, in which the transport business units perform the transport phase and perform at least another phase in the process from production to consumption of products or services and collect freight through revenues from such products or services’ (Article 3.3). Circular 63 further requires trucks used by companies that carry out the transport business with indirect money collection to affix the Badges thereon when in traffic.
It is noted that some enterprises, considering their business nature, have to invest in specialized means of transportation to transport their own products between their locations and to their customers in Vietnam (for example, industrial gas products). Examples would be road tankers, special trailers and tube trailer, etc. that must be imported because their special designs make them impossible to be produced in Vietnam. Given high technical safety standards of international level, it is nearly impossible/very difficult for enterprises to rent these special vehicles in Vietnam while relying on the same standards.
It does also not make any business and legal sense if a manufacturing foreign invested enterprise which is allowed to import means of transport for its operations to serve its production activities is forced to register for professional transportation business or outsource this internal job to a professional business transportation company. In fact, thousands of other foreign invested enterprises have been long granted with the right to import means of transportation without any requirement on transportation business until the adoption of Decree 86.
Considering the abovementioned difficulties of enterprises with more than 49% foreign ownership doing business in crude oil products with special characteristics, the Ministry of Transport has proposed to the Government to consider the issuance of the Badges for vehicles of these enterprises without requiring the Certificate of doing transport business by automotive vehicles, and at the same time consider the amendment of Decree 86.
Consequently on 30 March 2016, the Prime Minister issued Resolution No. 23/NQ-CP which clearly states that in the short term, the Government allows the Ministry of Transport to issue the Badges to commodity carrying trucks of foreign invested enterprises with 49% foreign ownership or more for the purpose of the main production and business of these companies. For the next step, the Ministry of Transportation is responsible for incorporating the same regulations in the amendments of Decree 86. This has basically solved difficulties resulting from Decree 86 for enterprises with 49% foreign ownership or more.
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Please do not hesitate to contact Oliver Massmann under omassmann@duanemorris.com if you have any questions or want to know more details on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

November 30, 2015 by Dr. Oliver Massmann

Lawyer in Vietnam Oliver Massmann New Decree guiding the Law on Investment What you must know:

On 12 November 2015, after months of delay, the Government has finally issued Decree No. 118/2015/ND-CP (“New Decree”) on detailing and guiding the implementation of certain provisions of the Law on Investment.
Set out below are major worth-noting points in this New Decree:
Investment conditions for foreign investors
Investment conditions for foreign investors are defined as conditions that foreign investors must satisfy when investing in conditional business sectors applicable for foreign investors pursuant to Vietnam’s laws, ordinances, decrees and international treaties on investment.
These conditions include:
– Conditions on foreign ownership of charter capital in an economic organization;
– Conditions on investment form;
– Conditions on scope of investment activities;
– Conditions on a Vietnamese partner participating in investment activities; and
– Other conditions pursuant to laws, ordinances, decrees and international treaties on investment.
The above conditions must be satisfied when foreign investors:
– Making investment to establish an economic organization;
– Contributing capital, purchasing shares, capital contribution portion in an economic organization;
– Investing in the form of business cooperation contract;
– Receiving investment projects transferred from another investor or other cases of receiving transferred investment projects; or
– Amending or supplementing investment business lines or sectors of foreign invested economic organizations.
Conditional business sectors applicable for foreign investors as well as the corresponding conditions are not included in the New Decree but will be published on the National information gate on foreign investment. For business sectors whose conditions are not specified anywhere in Vietnam’s WTO Commitments and other international treaties on investment or not yet committed (“Uncommitted Sectors”), the investment registration authority must seek approval of the Ministry of Planning and Investment and other specialized ministries on the foreign investment.
It is worth noting that the New Decree recognizes ‘licensing precedent’, meaning where foreign investment in Uncommitted Sectors has been approved and such Uncommitted Sectors have been published on the National information gate on foreign investment, any later foreign investors making investment in the same Uncommitted Sectors will no longer need the approval of the specialized managing ministry.
Licensing procedures on investment registration and enterprise registration by foreign investors
Instead of go through 2 different steps, namely (1) applying for issuance of an Investment Registration Certificate; and (2) applying for issuance of an Enterprise Registration Certificate when establishing an enterprise in Vietnam, foreign investors now can apply for these two certificates at the same time. Specifically:
– Foreign investors submit the applications for issuance of an Investment Registration Certificate and an Enterprise Registration Certificate to the investment registration authority;
– Within 01 working day from the receipt of the applications, the investment registration authority sends the application for enterprise establishment registration to the Business Registration authority for review and notifying the investment registration authority of its decision;
– If there is any request for amendments or supplements to either the application for investment registration or enterprise establishment, the investment registration authority will provide the investors a single response within 5 working days from the receipt of the applications.
The coordination regime between the investment registration authority and the business registration authority will be detailed by the Ministry of Planning and Investment later.
Securing the implementation of an investment project
Investors that are granted, or leased land by the Government, or allowed by the Government to change the land use purpose, with certain exceptions, must make a deposit from 1-3% of the total investment capital recorded in a document approving the investment plan or in the Investment Registration Certificate based on a progressive basis, in particular:
– For capital part of up to VND300 billion, the deposit rate is 3%;
– For capital part from VND300 billion to VND1,000 billion, the deposit rate is 2%;
– For capital part from VND1,000 billion, the deposit rate is 1%.
M&A procedures

There is explicitly no requirement of application for Investment Registration Certificate in acquisitions of target companies by foreign investors.
However, foreign investors must register its acquisition of the target company if:
– They contribute capital to, purchase shares or capital contribution portion of an economic organization doing business in conditional sectors which are applicable for foreign investors;
– The capital contribution, shares and capital contribution portion result in F1, F2 and F2’ mentioned in the graph above holding 51% or more of the target company:
o Increasing foreign ownership rate from below 51% to more than 51%; and
o Increasing the existing foreign ownership rate of 51% to a higher ownership rate.
After completion of the acquisition, the target company must carry out procedures to change its members or shareholders at the business registration authority.
For investment of foreign investors other than F1, F2 and F2’, the target company only needs to carry out procedures to change its members or shareholders at the business registration authority without the foreign investors having to register the acquisition transaction with the investment authority.

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Please do not hesitate to contact Oliver Massmann under omassmann@duanemorris.com if you have any questions or want to know more details on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.