Foreign ownership limits in Vietnam
Foreign ownership in certain sectors is restricted (or prohibited) under domestic law or international treaties (such as the WTO commitments or FTAs). In some sectors, foreign investors are required to cooperate with a Vietnamese party to set up joint ventures. If international treaties and domestic laws are silent, the licensing authority has the discretion to decide whether or not to allow foreign investment into the relevant sector.
Most publicly traded Vietnamese companies are still subject to a foreign ownership limitation of 49 percent. In light of new laws that came into effect early 2021, there is a clear path for public companies to take certain steps to increase the foreign ownership to 50% or above or remove foreign ownership restrictions with the consent of the State Securities Commission (SSC).
Vietnamese companies tend to register as many business lines as they can. Some of these business lines (including those are not necessary for the business) may be subject to a foreign ownership limitation. If a foreign investor wishes to acquire a business that registers to do various business lines, the acquisition will only be possible if it is of less than the lowest foreign ownership limit applicable to any of its business lines. The foreign ownership limit is not only applicable to the target company in which the foreign investor directly holds interests but it might only be applied to subsidiaries of the target company if the foreign investor holds a majority of the target company.
Accordingly, before the transfer of shares to foreign investors, both the target and foreign investors should undertake proper due diligence in relation to the scope of business of the target company and its subsidiaries (where relevant). If it is possible as a business matter, the target group may have to restructure its business and/or amend its scope of business to remove the restricted businesses that cause a deal problem.
Foreign Ownership Limits in Non-Public Companies
A recent Decree 31/2021/ND-CP of the Government dated 26 March 2021 contains a list of 25 business lines in which foreigners are not permitted to invest, including trading in goods and services subject to state monopoly, press business, public opinion polls, tour business (except international tours) etc. Foreign investment in 59 other business lines are subject to market access conditions, being:
- a foreign ownership limit applicable to an investment in certain sectors (see below);
- conditions on the form that the investment can take (e.g., a joint venture may be required);
- conditions on the scope of the investment (e.g., some educational businesses are limited to teaching technical, scientific, business, economics, accounting, international law and language subjects);
- qualifications applicable to the investors (e.g., investors supplying facilities-based telecommunications services have to be telecommunications service suppliers duly licensed in Vietnam); and
- conditions set out by law or arising through a treaty to which Vietnam is a party (e.g. application of the economic needs test to the establishment of any additional retail outlet by foreign owned retailers).
Some of the main sectors subject to foreign ownership limits are set out below:
- Banks: 5% for any foreign individual, 15% for any foreign organisation, 20% for any foreign strategic investor, 20% for any foreign organisation and related parties, and 30% for total foreign ownership in a Vietnamese joint-stock bank.
- Nonbank credit institutions: total foreign ownership of shares in a Vietnamese joint stock non-bank credit institution (such as a finance company) is 50%.
- Aviation: 34% for all foreign investors investing in airlines or companies providing aviation services.
- Land Transportation: 49% for transportation of people, and 51% for transportation of goods.
- Sea transportation: 49%.
- Logistics: 50% for container handling, no cap on customs clearance and brokerage but must be in the form of a joint venture with Vietnamese investor.
Foreign Ownership Limits in Public Companies
Public companies are potentially subject to more foreign ownership limits than non-public companies are:
- Limits under international treaties: If a public company engages in a business activity in respect of which foreign ownership has been agreed in an international treaty to which Vietnam is a party, then this agreement will be applied (even if it is not technically a cap). Non-public companies are subject to the same limits.
- Limits under sector-specific laws: If a public company engages in a business activity which is subject to a foreign ownership cap in a sector-specific law, such cap will be applied. Again, non-public companies are subject to the same limits.
- Limits applied to market access conditions: If a public company engages in a business that is subject to a market access condition, (i) if the market access condition stipulates a foreign ownership cap, such cap will be applied; or (ii) if there is no specific foreign ownership cap for such business in the law, the foreign ownership limit will be 50%.
- Limits under equitisation regulations: If the public company is an equitised State-owned company, the foreign ownership may be limited by the equitisation plan approved by the relevant governmental body at the time of equitisation.
- Limits under the charter: A public company can impose a lower foreign ownership cap than those mentioned in the first to the third bullet points above by specifying such a limit in its charter. However, this must be approved by the General Meeting of Shareholders of such public company.
Each public company should determine its own foreign ownership limit and report the same to the SSC with supporting documents. The SSC will then confirm the receipt of complete dossier.
Acquisitions of Interests Through Nominees
While nominee arrangements are not uncommon in Vietnam, there is no concept of ‘trust’ under Vietnamese law. As a result, nominee arrangements come in various forms in practice. Often they involve undertakings from the nominee, service agreements with the nominee, loan agreements, call option agreements, equity mortgage agreements and proxy agreements. In situations where the foreign party has valuable rights offshore, there may also be a licence agreement enabling the nominee company to use such rights in Vietnam. In the context of sectors that are not considered sensitive, the risk of such arrangements being investigated and unwound is not high because the authorities tend not to view arrangements as a whole, but to see each element of the arrangement as a discreet transaction.
While the regulators may seldom act of their own volition, it is always possible that they could be stirred into action by another business seeking to thwart a competitor or indeed by a dissatisfied nominee. If the authorities do investigate, and become aware of nominee arrangements, then in the absence of specific permission for a nominee arrangement (which is unlikely), they could declare the transaction to be void.
In addition, the nominee, which would have legal title, could assert that it has ownership to the company as the beneficial nominee arrangement would not be enforceable in Vietnam.
Some structuring steps are being used to sidestep the foreign ownership limitation, as the 54% Thai Beverage purchase of Saigon Beer Company (Sabeco) demonstrated.