Removing barriers to M&A

Problems arising from practice

Real estate has been among sectors seeing many successful M&A deals in recent times. In the first quarter of 2016, the Novaland Group acquired projects totaling about 30ha of land in the Nam Rach Chiec residential area, Ho Chi Minh City, from VinaCapital. In another deal, Singapore’s Keppel Land Limited acquired 40 percent of stock at the Empire City Company Limited by pouring US$93.9 million in the latter’s joint venture partners, including Gaw Capital Partners, Tien Phuoc Real Estate Joint Stock Company, and Tran Thai Real Estate Joint Stock Company. Many Japanese investors such as Hankyu Realty and Nishi Pippon Railroad have achieved cooperation agreements with domestic real estate investors such as Nam Long Investment Corporation, Sanyo Homes Corporation, and Tien Phat Real Estate Investment Corporation.

According to Jen Capital Vietnam Property Fund Chairman Nguyen Vinh Tran, a lack of vacant land due to complicated site clearance procedures is now the biggest hindrance to real estate M&A. Foreign investors and capital funds can hardly accept projects which still face site clearance problems. Unclear land rentals are also hindering foreign investment in real estate projects in Vietnam.

Despite growing M&A in recent years, many problems have arisen from inappropriate mechanisms and policies. The Thai Central Group’s acquisition of Big C Vietnam from the French Casino Group at the cost of more than US$1.14 billion is an example. Initially, investors did not agree with tax authorities on the way in which transfer taxes were calculated. Therefore, Central Group paid transfer taxes (more than VND2.03 trillion) no earlier than nearly half a year following the completion of the deal. “Under the Law on Corporate Income Tax, businesses have to pay taxes equal to 20 percent of incomes arising from capital transfers. This regulation can be easily applied to direct capital transfers but creates troubles for both investors and tax authorities when dealing with indirect capital transfers. This explains why many investors are concerned about taxes arising from M&A deals and hesitate to make investment decisions,” said a finance expert.

According to a food business intending to sell its stock to foreign investors, the transferee has to implement procedures required to amend business registration certificates or apply for investment certificates. However, this regulation is still unclear, making it difficult for investors to implement. Specifically, if the regulation is applied in accordance with the Enterprise Law, foreign companies wishing to own less than 49 percent of the capital of domestic businesses just have to amend their business registration certificates, but under the Investment Law and instructions from state management authorities, the Ministry of Industry and Trade for example, foreign investors will have to apply for investment certificates even when the ownership rate is just one percent.

Adequate legal corridor needed

Vietnam is forecasted to see a new wave of M&A deals in the 2016-2020 period. Therefore, it needs to create an adequate legal corridor for M&A to develop and contribute to strengthening the entire economy. Tran Nhat Huy, Deputy Director of Banking Services at the MB Securities Company, said Vietnam needs to improve the legal framework for M&A as regulations on these activities are included in several laws. In his opinion, Vietnam needs to have a specific law providing detailed stipulations on M&A. In addition, it needs to issue as soon as possible sub-law documents such as decrees and circulars guiding the implementation of investment and business laws that took effect in 2015. This effort is to facilitate business operations and avoid unnecessary sublicenses.

Sharing this opinion, lawyer Dang Duong Anh from the Vietnam International Law Firm (Vilaf), said the amended investment and enterprise laws require the completion of complicated procedures to grant two or three licenses to foreign investors involved in each M&A deal. Payment-related requirements also make foreign investors hesitative to be engaged in M&A deals in Vietnam. Inadequate information about equitized SOEs and the limitations of laws related to equitization make investors unwilling to acquire the capital of these SOEs, Dang Duong Anh added.

Gia Huy