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A Legislative change expects to transform Vietnam Business Community
A new Investment and Enterprise Law will come into force from 1 July 2015, hoping to boost investment environment in Vietnam and enhance competitiveness with neighbor emerging markets. These new laws contain more transparent and consistent provisions, which enable investors to feel more confident of doing business in Vietnam. I will discuss the main new provisions in the two new laws in more detail below.
1. Unified investment incentives
The old laws set forth investment incentives as encouraging indicatives to attract more capital, technology and human resources in less developed industries and geographical areas. However, investment incentives regulations are not stipulated consistently and fragmented in different sections of law. This has caused overwhelming “incentive rat race” for attraction of foreign direct investment amongst provinces and cities around the country. The new law lays strictly down general principles governing investment incentives. For example, the new law set forth three forms of providing investment incentives:
- Favorable corporate income tax rate for a definite period or for the whole duration of implementation of investment projects; and exemption from and reduction of corporate income tax;
- Tax exemption in respect of goods imported to form fixed assets; raw materials, supplies and components for implementation of an investment project; and
- Exemption from and reduction of land rent, land use fees and land use tax.
In addition, a list of eligible investment projects is described in a greater detail in the new law. This would help investors locate their scope of business in order to benefit from investment incentive regulations.
2. Two step licensing process
Under current legislation, foreign investors investing in Vietnam will be issued an investment certificate which serves concurrently as an enterprise registration certificate. However, the new laws generally require foreign investors first to obtain an investment registration certificate and then an enterprise registration certificate. In case of real estate projects in which the States allocates or leases out land without auction or tendering; the foreign investor is required to convert the land use purpose, they must obtain an in-principle investment decision before having the investment registration certificate. The enterprise registration certificate expects to be issued within three Business Days of the application date. The time for issuance of various approvals and certificates has been reduced from approximately 75 days to 45 days. Once implemented correctly, the business community is not frustrated any more to engage in licensing procedures.
3. Globalizing corporate governance principles
Modern corporate governance principles have been deployed to bring the new laws close to international norms. This would enhance economic efficiency of applying appropriate business model in Vietnam and create new generations of entrepreneurs equipped with worldwide standards.
a. Self-executing corporate seal
The new concept of using corporate seal has been applied by giving more freedom to a company and helping prevent disputes in corporate seal. Unlike the current laws, the new laws allow a company: (i) to freely determine form, number, and contents of corporate seal; (ii) to manage and maintain corporate in line with the company’s charter. Most importantly, the corporate seal is compulsorily used only when the law requires so or the contracting parties agree. This would facilitate corporate transactions and remove unnecessary administrative procedures in operating day-to-day business activities.
b. Multiple directorship
The current law does not allow a person to be director/general director in a limited liability company and shareholding company at the same time. This limitation has provoked difficulties in finding the director’s replacement because directors must be an important person managing and directing a company. It requires exceptional and excellent knowledge and management skills. Furthermore, this limitation also has causes registration process because the company is unable to verify where the chosen directors have been a director of another company. The new law is intended to remove this limitation, giving more freedom to a company in searching for the right person and directors in choosing the right place they wish to work for.
c. Removal of registration of shareholder holding more than 5% of total shares
It has been seen as unnecessary registration causing more administrative work to do in managing a company’s operation. The current law requires registration of shareholder as soon as there is a change in shares ownership of a shareholder resulting in holding more than 5% of total shares. In fact, this is a just notification directed at the licensing authorities for their information. No acceptance or response is required. The removal has been made in response to constant complaints of business community for years.
d. Quorum and voting threshold
This can be a historic breakthrough in an effort to adapt to international norm of corporate governance. Under the new law and in a multiple member limited liability, for the first time of convening a meeting of members’ councils, quorum is 65% of members which must be present, instead of 75% under the current law. Quorum is still 50% for the second time of convening a meeting. Under the new law and in a joint venture company, quorum is 51% of of members which must be present, instead of 65% under the current law. Quorum is reduced to 33% for the second time of convening a meeting, instead of 51% under the current law.
In addition, voting threshold in a shareholding company has been revised under the new law. Voting threshold of 65% applies to important matters, instead of 75% under the current law. Other matters will be passed upon satisfaction of voting threshold of 51%.
e. Independent member of board of management
Practical application of independent members in the board of management has been seen for years even though the current law does not cover. The new law gives effect to legal position of independent members in the board of management. For instance, the new law provides for terms, eligible conditions, rights and obligations, organization and coordination of independent members. This shows a positive and predictable sign of lawmakers’ philosophy in drafting and institutionalizing Vietnamese laws close to generally accepted principles of private international law.
f. Flexibility to re-negotiate pre-incorporation contracts
Prior to establishment of a company, the parties agree to pre-incorporation contracts (shareholders’ agreements) to set forth rights and obligations of incorporation. There have been disputes over inherence of rights and obligations of shareholders after the company is established. The current law requires the shareholders simply to inherent rights and obligations as agreed in the shareholder’s agreement after formation of the company. In this sense, the shareholders could not amend what has been agreed in the shareholders’ agreement. The new law provides the shareholder with more flexibility to change rights and obligations of the shareholders in the shareholders’ agreement if they wish to do so even after formation of the company.
4. New regulations affecting M&A activities
a. Clearer definition of foreign invested enterprises
Since 2005 which is the year the Law on Investment 2005 and the Law on Enterprise 2005 were introduced, there has been a longstanding discussion of when the status of an enterprise converts from a purely domestic enterprise to a foreign invested one. This discussion is an important one for foreign investors since there continues to be different provisions and conditions applying to foreign invested enterprises and domestic enterprises. The lack of clarity in the current legislation and inconsistent implementation by various authorities has led to confusion and in some cases, missed investment opportunities. The new laws specify that a foreign invested enterprise is an enterprise incorporated in Vietnam with 51% or more shareholding held by one or more foreign investors. Further, any enterprise with shareholders holding 51% or more of its shareholding being other foreign invested enterprises or foreign investors will also be a foreign invested enterprise.
b. Removal of mergers between the same two business forms
The current law only provides for mergers between the same two business forms. It has been frustrating for a company to merge with another company if they are not in the same business form, for example a joint venture company as a merging company and a limited liability company as a merged company. In doing so, the merging company must convert to a limited liability company before performing a merger. This would extend time-frame for acquisition plan and creat more costs in completion of the merger. By removing mergers between the same two business forms, merger and acquisition could fastern business consolidation in a cost-effective manner.
c. Compulsory registration requirement for acquisition
For an M&A transaction, there is a clear provision which states that there is no requirement to obtain an investment registration certificate for the foreign investment in form of capital contribution, purchase of share or capital in a domestic enterprise. Where the shareholding of the foreign investor in such domestic enterprise is 51% or more; or the business lines of the domestic enterprise fall in the conditional sectors applied to the foreign investors which includes real estate projects; a registration of such contribution/purchase to the related Department of Planning and Investment is required. The language used suggests a much simpler procedure than what is currently in place under the current laws. We will need to wait for more implementing regulations on what is required for such registration.
From the outset, the new laws would increase equal opportunities for foreign investors to carry out investment projects and at the same time and reduce investment cost. Nonetheless, investors should look up for implementing regulations of these two laws in the next months. Clear implementation guidelines and scheduled action plans should not be overlooked to make investors feel much easier than ever before to carry out investment activities in Vietnam, thereafter revitalizing entirety of environmental investment over the long run.