Acquisition Conditions

We receive many questions from readers about setting up a business in Vietnam. The procedures for setting up a company often appear burdensome and, sometimes, discouraging for those with a ‘small-size’ project. However, an alternative is to purchase a pre-existing company instead of setting up a new one. Here’s how to purchase a pre-existing company in Vietnam and how it could be easier than setting up a new one. 

In legal terms, the purchase of a pre-existing company is referred as the “acquisition” of such company. Acquisition appears in Vietnam to be an effective way for you to step into the local market, as the procedure for acquisition by foreign investors in Vietnam may (in certain cases) be much more straightforward than the procedure to establish a new company.

Take for example a company for computer programming. Under the WTO commitments of Vietnam, foreign investors are permitted to provide computer and related services in Vietnam. In order to do that, they are permitted to establish a company in Vietnam that will actually provide such services to customers. However, the establishment procedure may prove to be a bit burdensome and time consuming in practice, even if this sector is totally ‘open’ for WTO purposes.

If a foreign investor wishes to establish a computer programming company in Vietnam, the first step is to find the proper premises. It means that in the application file for the establishment of the company, the investor must already include the lease agreement signed with the landlord (or simply the in-principle agreement on leasing the facilities). The leased premises have to be suitable for the project contemplated by the investor, with regards to the estimated number of employees, annual volumes of production, etc. Furthermore, the investor will have to provide information on the amount of capital it intends to invest (even if there is no minimum), and to prove its financial capacity (its capacity to actually disburse such amount) by submitting supporting evidence from the bank or (for corporate entities) the annual financial accounts from the country of incorporation etc. There are also a number of official documents from the investor’s home country, which must be “legalized” in the home country, and then officially recognized by Vietnamese authorities. Even in the best case, it could take around three months or more to gather all the required documentation and to complete the official registration of the company, and even longer before it is actually operational. In comparison, if a foreign investor finds an existing computer programming company, it may sign an agreement with the current owners to purchase it. The current owners might be Vietnamese rather than foreign investors, but this won’t change much: the important point is that the acquisition of such pre-existing company is more a matter of private agreement between the seller and the purchaser. Because in this case the purchaser is a foreigner and will acquire more than 51% of the company, a specific procedure will have to be completed to acquire an “in-principle approval,” and this is described below in more detail.

The in-principle approval procedure is not related to procedure described above for the establishment of a new company: it depends on each case of course, but to give you an idea, a month and half might be enough to actually become the owner of the purchased company. After acquisition, the seller will have to pay tax on the acquisition. But that’s not your concern (as the purchaser) in most cases. The in-principle approval procedure applies if you wish to acquire 51% or more of the pre-existing company, but also (in the case of companies operating in certain sectors) if you only wish to acquire part of the company or to invest as a new shareholder in the company (we call it “increase of capital”).

Let’s be a little more specific about this procedure. If you, as a foreigner, acquire or invest in the company and as a result (1) hold 51% or more of the company or (2) hold any percentage of a company operating in some specific sectors (called “conditional sectors”, such as the retail sector or the banking sector), then you have to obtain an in-principle approval from the relevant local authority beforehand. Such authority is the department of planning and investment of the province in which the target company is located. You will have to submit to this authority (1) a standard form providing information on the acquisition and (2) a copy of your passport (or the certificate of incorporation for foreign companies, to be legalized as in the case of establishment of a new company mentioned above). The department of planning and investment shall give its in-principle approval within 15 days from the date of submission. Once you obtain the in-principle approval, you may proceed with the acquisition (or increase of capital), which means pay the price and register it with the local registry of corporate entities (a simple process).

If you are contemplating to hold less than 51% of the company (not operating in a conditional sector), then the procedure will be even less complicated. You will only have to register the transaction with the local registry of corporate entities—and there is no step that is applicable only to foreign investors, such as the in-principle approval requirement mentioned above.

In any case, you will have to refer to the WTO Commitments of Vietnam, because if Vietnam has not committed to open the sector at the WTO (unlike computer programming mentioned above), then the applicable procedure may be more complicated.

Finally, keep in mind that the first step before acquiring a company or investing in it (and even before paying any money or signing any binding agreement) is to carry out a proper “due diligence.” This is advisable even for small-size companies. It simply means that you should take the appropriate steps to be fully aware of the legal and financial situation of the target company, including its situation with regards to tax obligations, bookkeeping (accounting), debts, etc. This is not a legal obligation, but common sense: before buying any goods, you should check that it is in good condition—every reasonable person would do that, and if you don’t, you should not expect to have any claim to rescind the acquisition or to compensation.

Do not invest more than you can afford to lose. Things may go wrong, and in this case, it may be unlikely that you will be able to recover the money you have invested.

So, you think that investing in the restaurant at the corner might be costefficient? Or you friend’s start-up is awesome and you want to be part of the adventure? Do it, the legal framework gives you some flexibility to invest and I wish you good luck!

 

BIO: A member of the Paris Bar, Antoine Logeay has been practicing law first in France, mainly in litigation and arbitration, then in Vietnam for three years as an associate ofAudier & Partners based at its Hanoi office. Audier & Partners is an international law firm with presence in Vietnam, Myanmar and Mongolia, providing advice to foreign investors on a broad range of legal issues.

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