commerce in vietnam - a legal guide

7/27/2019 Commerce in Vietnam - A Legal Guide

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Passport to VietnamInbound investment trends and tips

H CHIU


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Population:91 million

GDP growth:5% (2012)5.9% (2011)6.8% (2010)

Average deal size:

US$20 - 35 millionMajor players:Foreign multinationalsand private equity firms

Ease of doing businessranking:99 (out of 185 countries)

Corruption ranking:123 (out of 174 countries)

Vietnam is not an easy place todo business. The rules are alwayschanging, the laws are murky and thegovernment often makes arbitrarydecisions.

A lot of clients say that Vietnamis 1 percent of their Asia businessbut 99 percent of their headaches,says Fred Burke, an M&A partnerin Baker & McKenzies Ho Chi MinhCity office.

Yet theres no denying that Vietnamsgrowing consumer market, educatedworkforce, cheap labor costs, highGDP growth rate and boomingtourism industry have made the

country an attractive destination forforeign investment.

In 2011 and 2012, M&A inboundinvestment in Vietnam rose to nearlyUS$2 billion each year, up from anaverage of $400 million in previousyears, according to ThomsonReuters. Many deals involve sellerstrying to raise capital for theirstruggling businesses or to pay offdebts on investments they can nolonger afford following the global

economic crisis and the recentcrackdown on nonperforming loans(NPLs). Other M&A activity is drivenby foreign multinationals trying tobreak into the Vietnam market orprivate equity firms taking advantageof bargain prices in sectors like realestate and consumer products.

Six months before the globaleconomic crash in 2008, PrimeMinister Nguyen Tan Dung startedto tighten up Vietnams credit policy,which enabled the countrys bankingsystem to remain capitalized andavoid a situation as dire as the 1997Asian Financial Crisis. But banks

are still working out bad loans andlarge state-owned companies havesuffered major losses. In September2012, Moodys downgraded Vietnamsbond rating one level to B2, five stepsbelow investment grade.

The recent economic trouble hassparked attacks on Prime MinisterDung by President Truong TanSang, who claims that Dungsmismanagement of state-ownedfirms and push for rapid growth

is the cause of Vietnams slump.

Sparring between the politicalfactions appears to be settling down,but has diverted attention from thegovernments efforts to move forwardwith economic reform.

Vietnam has been in talks to jointhe Trans-Pacific Partnership,which would create a free tradezone similar to NAFTA amongVietnam and Australia, Brunei,Chile, Malaysia, New Zealand, Peru,Singapore, Mexico and Canada. Theagreement would not only reducetariffs on trade, but set bindingrules on things like service-sectorregulation, patents and copyrights

and government procurement, aswell as provide foreign investors withrecourse in cases of expropriation.

The power struggle at the top of thegovernment has left it with little timefor working on foreign investmentprojects, but we hope this will stabilizesoon and the economy will get backon a higher growth track, Burke says.We have so many small businessesthat are growing and need foreigncapital and expertise. Globalization is

still in growth mode here.

The state of M&A:

Biggest investment opportunities:

Sources:World Bank, Transparency International

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1. Real estate

In the run up to the global economic crisis, many real estate developers took on toomuch debt and are now selling parts of their portfolios to repay those commitments.The glut of vacant hotel rooms and office and retail space has led to a spike in M&Aactivity as local authorities have become more accommodating to workouts andforeign investors have taken advantage of bargain prices.

2. Seafood

Fish and shrimp are some of Vietnams largest exports, particularly to the US and Japan.Vietnams seafood industry is comprised of small family-owned businesses that have

recently been struggling financially, drawing attention from foreign private equity firmseager to streamline their operations and capitalize on Vietnams abundant sea life.

3. Supermarkets

Grocery stores didnt exist in Vietnam 15 years ago, when wet markets and Mom-and-Pop shops dominated the sector. But a recent boom in consumer spending has drawnlarge foreign-owned supermarkets like Metro (Germany), Big C (France) and LotteMart (South Korea) to Vietnams major cities.

4. Financial services

Starting in 2007, the Vietnamese government opened the financial services industryto allow up to 20 percent foreign ownership of local banks, attracting investors fromJapan, Australia, Europe and the US. Until recently, financial services drew moreforeign investment than any other sector. Now that most Vietnamese banks already

have 20 percent foreign ownership and the global economic crisis has taken its toll,deal making has slowed. But the government is considering increasing the cap, whichwould open up the sector to a new wave of investment.

5. Others

Electronics and medical equipment manufacturing, retail, consumer products(especially food, beer and cosmetics)


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Greatest challenges for foreign investors:

Tips for increasing chances of M&A success:

1. Bureaucracy

In Vietnam, decisions are made by consensus. Getting a business license requires multipleapprovals by ministry officials who must be convinced that the enterprise will benefit thelocal economy before putting their chops (stamp) on the papers. If you want an exportmanufacturing license so you can make industry staples like footwear, clothing or furniturefor export, you can get it in a few days, Burke says. But if youre trying to compete with localcompanies to sell cosmetics, it can take up to 15 months because it has to be approved by alot of ministries and its all done by snail mail.

2. Restricted marketsAfter Vietnam joined the WTO in 2007, it opened much of the market to foreign investment. Butsome industries, such as the service sector, remain highly regulated and in some cases, closed.Foreign retailers, for example, are subject to an economic needs test, which gives authoritiesthe power to reject their applications to expand beyond one store. Its a rule that has made largeforeign retailers wary of entering Vietnam. Pharmaceuticals is an even harder industry to breakinto. Foreign drug companies cant sell their products directly to the market, but must gothrough local distributors. If youre trying to compete in an industry like health care wheremost of the local players are government owned, theres bound to be barriers, Burke says.

3. Non-compliance with financial reporting requirements and anti-bribery laws

Some Vietnamese companies fail to keep proper financial records and try to dodge corporatetaxes. Others have cozy relationships with government customers or suppliers. Bothscenarios create risks for foreign investors who must comply with strict financial reportingrequirements and anti-corruption laws like Sarbanes-Oxley and the FCPA.

4. Unchartered legal territory

Following enactment of the Enterprise Law in 2007, Vietnamese companies with morethan 100 shareholders became public companies, subjecting them to strict disclosurerequirements and corporate governance rules. Many smaller companies that didnt havethe means to comply with these requirements became public without planning to. In whatwould otherwise have been simple private transactions, several smaller companies foundthemselves among the first to try to manage a tender offer to take themselves private beforethey could accept much needed foreign capital from private equity firms. There was noguidance on how to do a tender offer because nobody had ever done one before, Burke says.We had to collaborate with the government to work out the details.

5. Language barriers

All M&A documents must be translated into Vietnamese, a requirement that many foreigninvestors overlook in the heat of negotiations. Failing to account for this step in the process

can delay closing a deal for one to two months while waiting for the translation and thenrenegotiating terms that the local party may not have clearly understood the first time around.

1. Resist the temptation to operate under the wrong license

Because its more difficult to get some types of business licenses than others, foreign investorscan let local consultants convince them to operate under an incorrect license because, Itshow we do things in Vietnam. But problems arise when, for example, foreign companiesoperate a retail business with a wholesale license, running the risk of the government shuttingthem down until they get the proper license. It may not seem like a problem if the businessis small, but as it grows, it is at greater risk of detection. A competitor that has the properlicense could report the violation to put you out of business. And theres no guarantee that thegovernment will be open to working out a compromise.

2. Become familiar with Vietnams WTO commitments

Because the government restricts access to certain markets, the first thing you needto do before establishing a commercial presence in Vietnam is cross reference its WTOcommitments with the relevant central product classification (CPC) codes to make sure itsa sector theyve opened. You will also need to understand how Vietnams administratorsinterpret and implement these commitments to limit surprises as you operate your business.

3. Be strict about compliance

Many foreign companies have learned the hard way that avoiding taxes and paying kickbacksis still part of Vietnams business culture. When taking over a Vietnamese workforce, youremore than likely to have employees who are engaged in these activities as a routine part ofdoing business. To avoid violating anti-bribery laws, its important to conduct thorough duediligence and make sober assessments about whether the business is even viable if the badpractices are cleaned up. Also, its not a given under Vietnams Labor Code that staff can be

terminated for engaging in these practices.

4. Appeal to the ministries

The courts in Vietnam are overwhelmed and under-resourced and judgments are hard toenforce. The best way to resolve business disputes is to appeal to the relevant ministry topressure the parties to resolve the problem. Arbitration options are improving, but its stilltypically slower than supportive government intervention.

Its amazing to see how muchVietnam has changed in 10 years,how quickly its become part ofthe world community.

Fred BurkeM&A partner

Ho Chi Minh City

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TARGET INDUSTRIES

BY DEAL VALUE 20082012

WHOS INVESTING IN VIETNAM

BY DEAL VALUE 20082012

Current trends

The road aheadIf Vietnams political situation stabilizes and the government can provide greater flexibility and certainty for foreigninvestors, M&A activity will continue to rise.

2013 Baker & McKenzie. All rights reserved. Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with thecommon terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm.

Similarly, reference to an office means an office of any such law firm.

This may qualify as Attorney Advertising requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.

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Source: Thomson Reuters

VIETNAM INBOUND DEALS

60

70

80

$2.0

$2.5

50$1.5

40

$1.030

$0.5

2008

63

51

58

7267

2009 2010 2011 2012

20

10

$0.0

Number of deals Total deal value US$

WHOS INVESTING IN VIETNAM

BY DEAL VOLUME 20082012

Singapore9%

United States10%

Other29%

France23%

Japan18%South Korea

6%

United Kingdom5%

Indonesia 3%

No. of deals Billions

Industrials5%

Telecom3%

Consumer Products1%

Energy and Power

23%

Financials27%

Healthcare1%

Consumer Staples13%

Media andEntertainment

11%

Real Estate7%

Materials9%

China 2%India 1%Russia 1% Unknown

18%

Japan15%

Singapore14%United States

7%

Malaysia5%

South Korea4%

United Kingdom4%

Other33%

commerce in vietnam - a legal guide

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