Tag Archives: soe

ThaiBev’s Record $4.8 billion Vietnam M&A Deal Verifies Foreign Ownership Limit Work-Around

Pros and Cons of the ThaiBev-Sabeco Structure

ThaiBev affiliate’s legal status as a Vietnamese domestic investor enabled it to acquire a majority stake in Sabeco, despite a foreign ownership cap of 49%.

Vietnam’s Ministry of Industry and Trade (MOIT) auctioned off a majority stake in Saigon Beer – Alcohol – Beverage Joint Stock Company (Sabeco) on 18 December 2017. The former State-owned enterprise has a 40% share of the Vietnamese beer market. The Thai Beverage (ThaiBev) affiliate Vietnam Beverage acquired a 53.59% stake for VND 110 trillion (or roughly US$4.85 billion) – a record for Vietnam.

Sabeco's stock chart

No other companies – domestic or foreign – submitted bids despite much interest. One of the reasons could have been the high price. As seems to happen often in anticipation of such sales, within 6 months before the MOIT announced the auction, Sabeco’s share price had risen about 75%. Vietnam Beverage paid VND 320,000 per share – a 2017 P/E ratio of almost 47 times. The price fell quickly after the deal went through, and the shares have been trading within a narrow band around VND 255,000 for the past few weeks.

Besides the price, the other main reason for international investors holding back could have been a combination of Sabeco’s foreign ownership limit and the timing between the official announcement, bid registration, and auction date. Even ThaiBev admitted in its 22 December 2017 Singapore Exchange (SGX) filing that the timeline for the submission of bids was “extremely tight” and that they had to make compromises, including not obtaining official shareholder approval in advance and in terms of financing of the deal. While timing is very important, we will take a closer look at Sabeco’s foreign ownership limit and legal structure of ThaiBev’s investment here. Understanding the structure first can help investors to position themselves for future deals and meet tight deadlines.

The ThaiBev-Sabeco structure

We illustrated the legal structure of ThaiBev’s investment in Sabeco in the following chart based on publicly available information. We have suggested this structure since 2015, when Vietnam’s then-new Investment Law came into force. Our interpretation of Article 23 of the Investment Law is that subsidiaries of companies registered in Vietnam with a foreign ownership of less than 51% can conduct investment activities under the same conditions as domestic investors. The Sabeco deal confirms the validity of this structure in practice, even for bigger deals, and that foreign ownership limitations do not apply to such subsidiaries.

ThaiBev-Sabeco structure chart

Here, Vietnam Beverage is a wholly-owned subsidiary of Vietnam F&B Alliance Investment Joint Stock Company (Vietnam F&B). ThaiBev’s indirectly wholly-owned subsidiary BeerCo Limited, a Hong Kong company, owns 49% in Vietnam F&B. Because BeerCo’s stake in Vietnam F&B is less than 51%, Vietnam F&B’s subsidiary Vietnam Beverage is not subject to investment conditions that apply to foreign investors. Therefore, Vietnam F&B could buy Sabeco shares as a domestic investor.

Sabeco’s foreign ownership limit

ThaiBev announced that it chose the above domestic-company structure to acquire a majority stake in Sabeco, because of Sabeco’s foreign ownership cap. Under Vietnamese securities regulations, foreign investors can only own up to 49% (in aggregate) of a public company where the company has registered so-called “conditional” business lines (unless otherwise provided by international treaties or domestic law).

A conditional business line is an activity that is subject to additional requirements, such as a special business license. Like many Vietnamese domestic companies, Sabeco had a long list of registered business lines, including conditional activities, e.g. – distribution and real estate trading. (By law, a company in Vietnam must register all its business activities.) Without substantially restructuring its business, Sabeco’s sale to foreign buyers was limited. Considering the 49% cap and that foreign investors had already owned 10.4% of Sabeco (including Heineken’s 5%), less than 39% of the total 54% for sale in this round were available to foreign buyers. But as a domestic investor, ThaiBev’s affiliate Vietnam Beverage could buy a majority stake.

To what extent does ThaiBev control Sabeco?

The 4.8 billion-dollar question is ThaiBev’s level of control over Sabeco. Although, Vietnam Beverage has a 54% majority stake in Sabeco, Vietnam Beverage is wholly owned by Vietnam F&B, where ThaiBev’s wholly-owned subsidiary BeerCo owns only a minority stake.

Politics and other levers aside, from a pure legal perspective, the general meeting of shareholders (GMS) can pass ordinary resolutions with approval of attending shareholders representing at least 51% of the votes. Special resolutions require at least 65%. Likewise, decision in the board of management (akin to a board of directors in some other jurisdictions) require a simple majority of all attending board members. Although, Vietnam’s Enterprise Law permits that companies stipulate higher voting thresholds in their charters, Sabeco’s most recent publicly available charter sets out the same default 51% and 65% ratios for the GMS and 51% for its 7-member board. Therefore, Vietnam Beverage can now unilaterally control ordinary resolutions of Sabeco’s GMS (except for related party transactions) and can vote its nominees to the board.

However, ThaiBev may not fully control Vietnam Beverage, because it only has 49% minority stake in Vietnam F&B. Two Vietnamese individual shareholders own 51%. According to ThaiBev’s 22 December 2017 SGX filing, “One of the Vietnamese investors in Vietnam F&B is a business person [who] is in the same group as the Company’s distributor of alcohol beverages in Vietnam. The other Vietnamese investor is the Company’s local business consultant [who advised] the Company in relation to the [Sabeco acquisition].

This raises a number of questions similar to those that arise in nominee companies in Vietnam: How much control can ThaiBev/BeerCo exert over the two Vietnamese shareholders in Vietnam F&B?

  • Did BeerCo and the Vietnamese shareholders enter into a properly drafted shareholders’ agreement and approve a charter for Vietnam F&B with reserved matters and other guards to give BeerCo more control? (NB: Vietnam’s Enterprise Law permits voting preference shares only with Government approval and only to founding shareholders for maximum three years.)
  • What happens with the dividends from Sabeco/Vietnam Beverage – will the two Vietnamese shareholders get 51%? (Dividend preference shareholders have no voting rights, so that wouldn’t be in BeerCo’s interest.)
  • Can ThaiBev buyout those Vietnamese shareholders? How much will it cost? (The market value of Vietnam F&B should be sky high now.)
  • What if they sell their stakes to a competitor?
  • Will the courts enforce the shareholders’ arrangements when contested (less than 30% of Vietnamese court judgments are enforced in Vietnam; let alone foreign arbitral awards)?

We do not know for sure, as Vietnam F&B’s documents are not public, but those are a few of the potential risks of the ThaiBev-Sabeco structure.

New Investment Law and management committee for SOE equitization

It is important to note that Vietnam is in the process of amending its Investment Law (again, after less than three years in force). The first published draft has revised provisions that affect M&A activities – including the dreaded pre-M&A approval requirement. The ThaiBev structure may or may not work in the future. At the earliest, we expect the new law to come into force in 2019. So, upcoming SOE divestments including Habeco, PV Power, PV Oil as well as the sale of the MOIT’s remaining 35% of Sabeco might still be in time to apply the above structure if they close in 2018.

In addition, the Government plans to establish a new State capital management committee to coordinate divestments of all State-owned assets taking over powers from the various ministries and State Capital Investment Corporation (SCIC).

Pros and cons of the ThaiBev-Sabeco structure

+ Allows foreign investors to participate in investments under the same conditions as domestic investors.

– No full ownership and limited control over those investments.

For more information, please contact Manfred Otto at  MOtto@duanemorris.com or any other lawyer you are regularly communicating with at Duane Morris.

Disclaimer: This post has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. Each case should be analyzed individually with the support of competent legal counsel. For more information, please see the firm’s full disclaimer.

『ベトナム国有企業M&A~コーポレートガバナンス』2017年11月16日プレゼン資料

2017年11月16日に日本アセアンセンターが開催した「ベトナム政府との対話~国有企業の株式化とM&A~in 東京」と題したセミナーの私のプレゼン資料です。

トピック

「ベトナム国有企業M&A~コーポレートガバナンス」

  1. 機関設計
    株主総会、取締役会、社長など
  2. 少数株主の権利保護
    株式譲渡制限に関する定款・契約条項

ダウンロードリンクは以下です。

171116 Vietnam SOE and M&A-ASEAN Centre-Otto-JP.pdf

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Organization Chart of a Vietnamese SOE

〈ご注意〉こちらの記事は皆様に情報をお届けする目的でのみ作成・掲載しておりますので、法的なアドバイスとして提供・構成することを目的としておりません。詳細につきましては、当事務所の注意書きをご一読下さい。

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Slides from my recent presentation in Tokyo on “Vietnam State-Owned Enterprises and M&A – Corporate Governance” organized by ASEAN-JAPAN Centre on 16 November 2017.

171116 Vietnam SOE and M&A-ASEAN Centre-Otto-JP.pdf

For more information , please contact Manfred Otto at MOtto@duanemorris.com or any other lawyer you are regularly communicating with at Duane Morris.

Disclaimer: This post has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. Each case should be analyzed individually with the support of competent legal counsel. For more information, please see the firm’s full disclaimer.

Public debt puts the squeeze on government guarantees, stifling project finance projects in Vietnam

Vietnam’s economic success story is evident in the rapid development of its big cities. However, while the country’s growth has outpaced its neighbours, so has its debt; a factor that threatens to de-rail growth.  Not least of all because of the impact on the government’s ability to give guarantees to underpin privately-financed infrastructure.

 

Over recent decades, the government has spent significantly. Priority has been given to roads, export zones and other critical infrastructure. This is evident across the country, where highways, tunnels, factories, airports and metro systems are being expanded, or built from scratch, at an incredible pace.

 

The biggest macroeconomic challenge facing Vietnam today is sustaining that growth. The government needs to be more rigorous about how it spends money, leveraging it better to attract and benefit from private funds rather than prop up State-owned entities.  The looming spectre of public debt will need to be tackled before the country finds itself in a precarious position.

 

Vietnam’s total public debt as of mid-July 2017 reportedly stood at US$94.6 billion, or about US$1,038 per capita. In fuelling the country’s celebrated growth, public debt has increased consistently, from 36% of GDP in 2001 to about 62.4% in 2016. According to an IMF forecast, it will hit 63.3% and 64.3% in 2017 and 2018, respectively, while the self-imposed public debt ceiling is set by the government at 65% of GDP for 2020.

 

Vietnam’s public debt compares unfavourably with the rest of the region, with Thailand coming in at 41 percent of GDP and Malaysia at 56 percent, according to the World Bank.

 

The annual growth of public debt during 2011-15 was 18.4 per cent, triple the annual GDP growth rate, which averaged about 5.9 per cent over the period.

 

A squeeze on guarantees

 

In an effort to tackle the ballooning public debt, the Ministry of Finance (MoF) announced changes to regulations on Government guarantees earlier this year. The adjustment is one of the regulations stated in the Government’s Decree 04/2017/ND-CP (Decree 04), superseding Decree 15/2011/ND-CP (Decree 15), issued on February 16, 2011.

 

Taking effect from March 1, the maximum level of Government guarantees for a programme or project was reduced from the previous level of 80 percent. Decree 04 replaces this with a three-tiered cap on the amount of guaranteed debt as a percentage of the investment capital depending on the size or importance of the project, each lower than the cap established in Decree 15.  In all cases this is far lower than the golden days of Vietnam’s early privately financed infrastructure projects like the Phu My 3 and Phu My 2.2 power projects which both enjoyed near total guarantees.

 

The current highest level of guarantee, set at 70 percent, applies to projects that must be implemented on an urgent basis, and have been approved by the National Assembly or the Prime Minister. Secondly, for projects whose total investment is at least VND2.3 trillion (US$102 million) and have been approved by the Prime Minister, the maximum proportion guaranteed by the Government is 60 percent. A cap of 50 percent will be applied to other projects.

 

In continuing to restructure of the country’s public debt with more stringent monitoring of projects, the decree aims at tightening the provision of Government guarantees and enhancing the management of public debt.

 

However, at a time when Vietnam needs to develop much infrastructure, notably in the energy sector, and requires substantial foreign investment to do so, Decree 04 makes it more difficult for private investors to obtain MoF Guarantees for projects.

 

Ticking debt time bomb

 

Taking the energy sector as an example, questions remain over EVN’s economic health. Tariffs on electricity have long been maintained at below cost levels. The policy of low subsidised tariffs to maintain the competitiveness of domestic industry and keep consumers happy is putting pressure on the government and EVN’s balance sheet.

 

The average retail electricity tariff stood at just above US$0.08/KWh as of 2016, the lowest in Southeast Asia, and only just above EVN’s average generation cost of US$0.075/KWh (excluding transmission and distribution costs). This has depressed sector cash flow and contributed to EVN’s rising debt.

 

This has raised concerns among private sector investors over EVN’s ability to pay for electricity generated as the single buyer, while the current low retail tariffs mean that investors are not confident of negotiating adequate prices for generation projects.

 

With the situation likely to continue, EVN’s financial position will surely deteriorate, leaving it with unsustainable debt and unable to finance capital expenditure. This would force private sector investors to seek increased government guarantees. Unfortunately, as mentioned above, the government is looking to rein in such largesse. As Vietnam’s economy grows, the previously abundant soft loans and ODA are beginning to dry up, meaning that the sources of support for private finance are becoming harder to find.

 

In order to reduce risk, the developers of major infrastructure projects may need to seek out private insurance groups or institutions like the World Bank’s Multilateral Investment Guarantee Agency (MIGA). However, these options obviously don’t come without their own costs. Investors, and ultimately end consumers, will have to take the hit.

 

Much of Vietnam’s current fiscal position can be blamed on poor management. The state-owned giants that have lost their repayment ability on Government-guaranteed loans are passing on the burden to the Government.

 

The sluggish privatisation of State-owned enterprises means that inefficiency will continue. The sooner this process is completed, the better for the economy as a whole. Measures like reducing government guarantees may be prudent, but if Vietnam wants to maintain its economic momentum serious action is needed to first untangle the mess of intra-State bad debt.

 

For more information about project finance matters please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Vietnam’s State-Owned Enterprises Equitisation and M&A – 6 July 2017 Presentation Slides

Slides from our recent presentation in Singapore on “SOE Equitisation and M&A – Recent Trends and Corporate Governance”.

Vietnam SOE Equitization and M&A-6 July 2017-Otto-ENG

For more information , please contact Manfred Otto at MOtto@duanemorris.com or any other lawyer you are regularly communicating with at Duane Morris.

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先日シンガポールで開催した「ベトナム国有企業の株式化とM&A~最近の動向とコーポレートガバナンス」についての日本語版プレゼン資料です。

Vietnam SOE Equitization and M&A-6 July 2017-Otto-JP

ご質問等ございましたら、オットー(MOtto@duanemorris.com)または弊所で通常連絡を取っている担当弁護士までご連絡ください。

 

Lawyer in Vietnam Oliver Massmann Solutions for Management of State Owned Enterprises

 

Comments to Vietnam Investment Review on a recent MPI draft decree supporting the establishment of a state-level management Committee to steer SOEs

Vietnam’s Ministry of Planning and Investment has announced a draft decree highlighting the need to establish a committee exclusively in charge of managing state-owned enterprises (SOEs). Currently SOEs are managed by different localities, ministries, and sectors.

It is expected that this Committee will manage up to 30 economic and corporations. It will also separate the state’s role of state management from the role as a trader and a producer.

  • Do you think that the establishment of this Committee is good for Vietnam’s economic now? Why?

I believe the establishment of a Committee exclusively in charge of managing SOEs, separating SOEs from their managing Ministries is a positive move of the Government.

The Ministries will not be put in a position when they have to adopt policies to regulate all enterprises within their managing authority and at the same time having to care about their interests in their SOEs. With the establishment of the Committee, the Ministries will have no chance or no incentive to be biased towards SOEs. In other words, all enterprises will be treated equally, regardless of whether they are SOEs or private.

The proposal to establish the Committee is extremely important, especially when SOEs are proved to continue operating at loss, investment activities are inefficient, state ownership capital is poorly managed,all leading to loss of state assets. I note that SCIC was established with the expectation to perform the same duties of representing state ownership in SOEs. However, SCIC is only an agency under the Ministry of Finance, which makes it not of equal leverage with and independent of other ministries and unable to regulate big SOEs. Thus, it is necessary to have another independent Committee to take over SCIC’s responsibilities.

  • In many nations, is this model applied?

This model is very similar to that in Germany when there was reunification between East and West Germany. The current model in China is considered as closely similar to the proposed one in Vietnam. However, instead of only establishing a Committee at a central level, meaning the Committee will not take over SOEs under provincial management, Ministry of Public Security, Ministry of National Defence, public enterprises and state-owned commercial joint stock banks, such Committee in China is established at all levels, from central to provincial one.

It could be a good start to have the Committee at central level. I recommend that after a trial period to supervise the efficiency of the model, it should be implemented at all provincial level under central management as well.

  • Do you have any recommendations?

According to the Draft Decree, chairman and vice-chairmen of the Committee will be appointed by the Prime Minister. I am concerned that ministers or vice-ministers of other ministries may have to take the chairman or vice- chairmen position of the Committee concurrently with their minister role. This will not be efficient. Instead, the management of the Committee must include both Vietnamese and foreigners. I recommend at least one foreign expert who has worked as manager for private companies and has a success track record should be member of this Committee. I can recommend some people if the Government could approve the budget for this position. I myself am very willing to be a member of the Committee to assist. The foreign expert must not necessarily be the decision-making person, but at least (s)he is there to give advice to the Committee.

Members of the Committee must be independent. They should not comprise of representatives from selected ministries who have certain interest in some SOEs, or else neutrality cannot be ensured. The Committee must act as an investor responsible for all investment activities of state capital before the Government. Only by doing so can SOEs play the same game with same rules as in the private sector.

In addition, it is important to create an operation regime for this Committee towards transparency for public supervision. Transparency is a critical issue, especially for a Committee which holds huge state assets worth around VND5.4 quadrillion.
Please do contact the author Oliver Massmann under omassmann@duanemorris.com if you have any questions. Oliver Massmann is the General Director of Duane Morris Vietnam and the Chairman of the Legal Sector Committee of the European Chamber of Commerce in Vietnam (”Eurocham” Vietnam)