New rules for foreign investors doing M&A in the top five e-commerce companies in Vietnam
There is no doubt that M&A activity in fintech and e-commerce companies is starting to get busy again in Vietnam. When you consider that Vietnam has three of the top 10 south east Asian e-commerce sites (Mobile World, Tiki and Sendo), together with a large number of up-and-coming challengers, it is not surprising that there are plentiful opportunities for cash rich foreign investors willing to open up their treasure chests.
This is all against the backdrop of what should be one of the more liberal regimes to foreign investment in Vietnam. Although the pandemic calmed the excitement earlier this year, on 1 January 2021, Vietnam amended the framework of its foreign investment regime with the aim of liberalizing the market-access conditions applicable to foreign investors.
So, with both of these things in mind, the outlook for e-commerce M&A should be a rosy one.
Interestingly, however, it seems that the potential excitement over e-commerce M&A has also caught the eyes of the regulators because on 25 September 2021 the Government issued Decree 85/2021/ND-CP amending some provisions of Decree 52/2013/ND-CP on e-commerce (Decree 85). Decree 85 will be effective from 1 January 2022.
Decree 85 contains a number of new rules, such as those which govern certain foreign e-commerce websites operating in Vietnam.
But for dealmakers, the most interesting nugget would be in Article 67c introduced by Decree 85.
Article 67c sets out an additional set of market-access conditions applicable to foreign investors investing in e-commerce sector in Vietnam:
- Investment in the e-commerce sector must be in the form of either establishing a company or an M&A transaction. This means that a BCC-type of investment is not allowed.
- In addition, an approval from the Ministry of Public Security (MPS) must be obtained by the foreign investors who have “control” in a company under the Ministry of Industry and Trade’s list on top 5 e-commerce companies in Vietnam.
A foreign investor has control in a company when:
- it holds more than 50% of the company’s total charter capital or 50% of the company’s total voting shares; or
- it directly or indirectly appoints, removes or dismisses (A) the majority or all of board directors or (B) chairman of the members’ council or (C) CEO of the company; or
- it is entitled to “decide” important matters in the company’s business (including company’s technology, business model, business lines, forms of capital mobilisation, etc.). Decree 85 does not clarify whether negative control would be captured (e.g. veto rights over a reserved matter).
Article 67c suggests that merely holding the interest in an operating company via multi-layer holding companies does not provide a foreign investor with an argument that it does not control the operating company.
These requirements give rise to a number of questions, four of which are:
- First, who are these top 5 e-commerce companies in Vietnam? Article 67c gives some idea of how they will be ranked but will this list be publicly available and how often will it change?
- Second, does the need to get the MPS’s approval apply also to the existing controlling foreign shareholders of the top 5 e-commerce companies? One would think that it should not. But Decree 85 also provides that within 12 months from the effective date of this Decree (which is from 1 January 2022), organizations specified in Article 67c must fulfill the obligations as set out in Decree 85. So that implementing wording suggests that maybe this is the case. And that then begs the question as to what happens if those existing controlling foreign shareholders do not (or cannot) obtain the MPS’s approval? Decree 85 is currently silent on this.
- Third, whether the MPS’s approval is required if the foreign shareholders obtain the control over an e-commerce company when it remains a small company but then the company evolves to be a top 5 e-commerce company?
- Fourth, how will these regulations play out in the context of a reorganisation for the purpose of possible overseas IPOs that a number of e-commerce companies seem to be contemplating? And how will they interact with other regulations that focus on control, such as the merger filing regime?
The e-commerce sector is one in which the regulators have proposed big changes before. To name but a few examples: the hype about the proposed draft decree amending/replacing Decree 101/2012/ND-CP on non-cash payments; the (for-the-first-time) personal data protection decree being enacted as a standalone law on personal data protection; and the (still very sandy) sandbox on mobile money.
The ramifications of those other proposed big changes remain to be seen. And we think that is certainly the same with these new requirements too.
But it is clear that the Government recognises how e-commerce and other fintech companies are becoming more important in our everyday lives. It will also be interesting to follow how the regulators will monitor and govern this sector in the near future.
Article 67c also indicates that the Government may take similar approach with respect to sectors that it considers to be important and sensitive to public security.
To be e-continued…