doing business in vietnam-setting up (r&t lct 08092015)

8.09.15

Prepared for

Presentation by

Designation Lawyer

Contact details

Doing Business in Vietnam Setting Up

SHIELD

Logan Leung Foreign Counsel

[email protected]

© Rajah & Tann LCT LAWYERS.

Not to be reproduced or disseminated without permisson. © Rajah & Tann LCT LAWYERS.

Logan Leung Foreign Counsel

• Dispute Resolution • Co-head, International Arbitration sub-practice

• Corporate and M&A

• Head of Pro Bono

LL.B., B.Com., P.Cert.Arb., University of Adelaide, Australia

Admitted Lawyer, Supreme Court of New South Wales, Australia

Registered Foreign Lawyer, Vietnam

Member, Chartered Institute of Arbitrators (MCIArb)


Rajah & Tann LCT Lawyers

Co-headed by Chau Huy Quang and Vu Thi Que

Regional office of Rajah & Tann Asia in Vietnam

Offices in Ho Chi Minh City and Hanoi with Vietnamese qualified lawyers

More than 40 experienced associates and professionals led by 6 partners.

Developed strategic partnerships with Vietnamese authorities and leading legal experts in Asia


Overview of Rajah & Tann Asia

Regional footprint in nine Asian

Jurisdictions giving you Home

Advantage

Highly regarded for its

leading lawyers and practices

Largest legal network in Southeast Asia


Regional Offices

Regional Desks

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Overview of Rajah & Tann Asia


Admiralty & Shipping

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Funds and Investment Management

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Practice Areas


Our Key Clients -- Notable Startups


Our Key Clients -- Funds


Topics Covered

• Key considerations prior to setting up

• Representative offices

• Limited liability companies

• Introduction to acquisitions

Setting Up Key Preliminary Considerations


Considerations Prior to Set-up

Have a business plan prior to setting up. From legal perspective, consider the following:

• Business lines of the company

• Scope of services of the company

• Proposed capital input and scale

• Proposed location(s)

• Members and corporate governance


Business Lines

• Vietnam’s WTO Commitments – first point of call in determining whether foreigners can set up or not.

• Foreigners may incorporate a company (be 100% investor) in most key business lines under the WTO Commitments. Examples:

• Software development and IT services

• Management consulting

• Restaurants (F&B)

• For business lines not committed in the WTO Commitments, acceptance will be on a case-by-case basis. Examples:

• Debt collection

• Recruitment services


Business Lines

• Note some businesses are conditional

While foreigners may be permitted to set up companies in these areas, it will be subject to certain approvals or additional requirements from the relevant authorities. For example:

• Trading (e.g., import into Vietnamese market)

• Manufacturing of certain products (e.g., fertilisers)

• Educational institutions (e.g., school, colleges, language centres)

• For trading companies, note the extent of approvals required may depend on the goods to be traded


Business Lines

• Foreign ownership caps may sometimes apply – i.e., foreigners cannot incorporate a company by themselves in certain business lines, and will require a Vietnamese partner (via joint venture). Examples:

• Travel (including as a travel agency)

• Advertising

• Logistics

• Note that even if no caps apply, having a joint venture with a Vietnamese partner may streamline the incorporation process.


Capital Requirements

• Except for certain businesses (e.g., travel and real estate), there is no minimum start-up (charter) capital requirement under law for incorporating a company.

• However, for foreigners, as part of the licensing authorities’ assessment process to grant the license for the investment project, sufficient capital is required

• This depends on the authorities’ discretion

• It also depends on the type of business (e.g., will it be capital intensive?)


Location

• Having a head office location is required prior to setting up!

• For foreign companies, this can be evidenced by a lease agreement, MOU, letter of offer, etc. for premises.

• The choice of location can also affect the speed of the incorporation process:

• In practice, it may be faster to incorporate a company in Binh Duong Province compared to Ho Chi Minh City due to different internal procedures.

For manufacturing companies, it may be even faster if it is to be located in an industrial zone.


Members and Corporate Governance

• The directors / decision makers of the company will need to be determined prior to setting up, depending on company form. Example:

• Who will be the legal representative(s)?

• If applicable, who will be the general director?

• If applicable, who will be on the board of directors?

• Ensure that you know the function of each decision-maker in the establishment to avoid internal disputes.

Representative Offices Structuring and Setting Up


What is a Representative Office?

• Dependent unit of the establishing entity – i.e., it is not an independent legal entity in Vietnam

• It is not a profit-making entity and it is prohibited from directly engaging in profit-making activities (e.g., sales)

• Its funding comes from its establishing entity for operating expenses

• Scope of activities permitted under law:

• Operating as a contact/liaison office

• Promoting cooperation projects in Vietnam

• Researching the market to increase commercial opportunities

• Supervising contracts signed by the foreign company with Vietnamese partners or relating to the Vietnamese market


Representative Office Set Up (1)

Overseas Company

Representative Office

Market research

Overseas Company

Representative Office

Profit-making activities

Company

Establish and fund

Closure Incorporate


Representative Office Set Up (2)

Overseas Trading Company

Representative Office supervise/monitor

(e.g., customer support)

Customer

Establishment and funding

Contract

Invoicing

Payment


Case Study

• One of Japan’s largest trading company, with a variety of products traded in Vietnam

• Representative office in Ho Chi Minh City and Hanoi

• How can it do business in Vietnam if it cannot directly engage in profit-making activities?


Setting Up

• Prerequisites to establishing a representative office:

• The foreign company must be properly established in its home country

• The foreign company must have been lawfully established for at least one year

• Application dossier

• Application form for the establishment of the representative office

• Foreign company’s business registration certificate (or equivalent)

• Audited financial statement of the foreign company for the past year (or equivalent)

• Foreign company’s corporate charter

• Proof of premises leased (e.g, lease agreement)

• Under law, after submission, the authorities will issue the representative office license within 15 days.

Limited Liability Companies Setting Up and Corporate Governance


What is a Limited Liability Company?

• Independent legal entity

• Owners are liable for debts/liabilities of the company up to the value of the capital they contribute to the company

• Contrast to private companies or partnerships.

• Form of LLC depends on the number of owners:

• One-member LLC for the case of one owner of the LLC

• Multi-member LLC in the case of 2 – 50 owners of the LLC

• Type of LLC affects matters of corporate governance


Incorporation


Introduction to the New Laws

• Law on Enterprises and Law on Investment

• Came into effect from 1 July 2015

• Implementing regulations (decree) not yet available

• Law on Enterprises governs matters of corporate governance, corporate forms, and local company set-ups

• Law on Investment governs matters of foreign investment in Vietnam

• Streamlining of processes?


Steps to Setting Up – Former Law

Investor

Application dossier

DPI Relevant

Authorities

People’s Committee

Investment Certificate

Seeking of opinions


Steps to Setting Up – New Law

Step 3: Enterprise Registration Certificate (ERC) 3 working days

Step 2: Investment Registration Certificate (IRC) 5 working days (15 days if without Step 1)

Step 1: In-principle approval for investment project* 35+ working days

* only for certain projects (e.g., real estate projects or casinos), which are subject to approval by the National Assembly, Prime Minister or Provincial People’s Committee



• The Investment Registration Certificate (IRC) is unique to foreign companies, and denotes approval of the foreign investor’s investment project

• Proposals for use of capital to carry out investment activities

• The Enterprise Registration Certificate (ERC) perfects the incorporation.

• Both local and foreign companies have this – it is proof of a company’s corporate existence

• Assuming no special approval required, the law states that the company can be set up in about 18 days.

• In practice, likely to be longer.

• New laws anticipated to speed up process, but can it?



• Getting the seal

• Getting the tax code

• Announcing the company’s establishment on a newspaper

• Opening capital contribution account


Incorporation for Local LLCs

• Not required to go through the process of obtaining the IRC

• Only ERC is required (under law, issued within 3 working days)

• Therefore, generally not subject to licensing authority’s assessment of the owner’s capacity to run the project

• Incorporation process is considerably faster

• To summarise, there are two sets of procedures for incorporating an LLC in Vietnam:

• Foreign companies = IRC + ERC

• Local companies = ERC


What is Classified as a Local LLC?

• What if a foreigner and a local Vietnamese jointly start up a company together (i.e., multi-member LLC)?

Which procedure applies?

• If the company to be established has 51% or more of its equity held by foreign investors or a company with foreign ownership of 51% or more, it must obtain an IRC and ERC

• If the company to be established has less than 51% of its equity held by foreign investors or a company with foreign ownership of 51% or more, it may only require an ERC.

• Therefore, for example, a company with less than 51% of its equity held by foreign investors may only be required to obtain an ERC.

• However, this is subject to the authorities’ views. Some authorities have required companies with 1% foreign ownership to obtain an IRC, while some have no such requirement.


Corporate Governance


When must capital be contributed?

• Within 90 days from the date the ERC is issued, the company must contribute its committed capital

• Otherwise, the company will be forced to decrease its charter capital after the expiry date of contribution

• Within 30 days for one-member LLCs

• Within 60 days for multi-member LLCs


Corporate Structure: One-member LLC

General Director

Director

Chairman or Board of

Members Inspector(s)**

Owner

* if Owner is an individual, Chairman required. Otherwise, optional

** if Owner is an individual, Inspector(s) not required


Corporate Structure: Multi-member LLC

* if there are 11 or more owners

Members’ Council

Inspection Committee*

General Director/ Director

Chairman of the Members’ Council


Managerial Positions Defined

• Owner or Members’ Council is the highest decision making authority of the company

• Decides on all matters of key importance to the company (contents of the charter, annual business plans, organisational structure, etc.)

• Chairman or Board of Members is the next highest decision making authority of the company

• Director or General Director implements matters regarding the day-to-day operations of the company

• Deciding on operational matters, implementing decisions of the Chairman or Board of Members, etc.

• Inspectors or Inspection Committee supervises the affairs of the company

• Inspecting conduct of management, verifying financial and business reports, etc.

Acquisitions Fundamentals


Acquisitions 101

• Share acquisition: 0ne company buys a part of or all of the equity of the target company

• Buyer also acquires all liabilities!

• Asset acquisition: one company buys most or all of the assets of the target company

• Buyer does not acquire liabilities

• However, there is a complex process in changing title in assets

• A share acquisition can sometimes be a ‘cleaner’ process


Basic Steps in an Acquisition

Approaching the target company or assets

Framework Agreement

(LOI/MOU/Term sheet & NDA)

Due Diligence / Audit

Negotiation

Document preparation

Submission of application dossier

Approval by the licensing authorities (if required)

Closing


Framework Agreement

• Comes in many forms, and sets out basic terms and overall purpose of the acquisition

• Letter of Intent (to purchase)

• Memorandum of Understanding (MOUs)

• Term sheets and non-disclosure agreements (NDAs)

• Contains key terms, which are usually not binding:

• Indicative purchase price and payment method

• Indicative proposed equity stake acquired

• Conditions of purchase

• Subject to due diligence

• Indicative Closing date


Due Diligence

• How does the buyer know whether there are any issues with the company? Due diligence stage

• Legal due diligence

• Financial due diligence

• Tax due diligence

• For buyers, getting a legal, financial and tax adviser helps identify key issues to help you to decide on whether to buy the company and how much you should pay.

• For sellers, getting a legal, financial and tax adviser helps prevent you from disclosing too much information, which may decrease the potential price that you get.


Negotiations and Document Preparation

• After due diligence, buyer has greater picture of the target company

• Decision on whether to buy, whether to adjust purchase price, etc.

• Transaction documents (e.g., share/asset purchase agreement) drawn up to reflect key terms

• Whether you are buyer or seller, do engage a lawyer to ensure your rights are properly protected!


Licensing and Implementation

• Licensing procedures likely required.

• For share purchase

• Obtaining approvals for the acquisition

• Amending ERC to reflect the buyer as a new owner

• For asset purchase

• Transfer title of ownership to the buyer of assets

• Special procedures required for real estate, intellectual property, etc.

• Contracts to be assigned

• Labour contracts to be terminated and fresh contracts signed


Disclaimer

The material in this presentation is prepared for general information only and is not

intended to be a full analysis of the points discussed. This presentation is also not

intended to constitute, and should not be taken as, legal, tax or financial advice by Rajah

& Tann LCT Lawyers. The structures, transactions and illustrations which form the

subject of this presentation may not be applicable or suitable for your specific

circumstances or needs and you should seek separate advice for your specific situation.

Any reference to any specific local law or practice has been compiled or arrived at from

sources believed to be reliable and Rajah & Tann LCT Lawyers does not make any

representation as to the accuracy, reliability or completeness of such information.

Not to be reproduced or disseminated without permisson. Not to be reproduced or disseminated without permisson. © Rajah & Tann LCT LAWYERS.