Conditions for the share transfer contract to take effect: perspective from The Court and practice

In mergers and acquisitions (“M&A”) transactions in the form of capital contribution/share transfer (hereinafter collectively referred to as “share transfer”), the time to complete the transaction is one of the factors that the parties are particularly concerned about. For the buyer, receiving shares quickly along with the right to control the operation of the target company is an extremely important requirement, while for the seller, it is the early receipt of payments from the buyer. Thus, it is common for approaches, negotiations, and agreements between the parties to take place before they are approved by the competent authorities (for M&A transactions that require such approval). In some cases, the parties also sign share transfer contracts during this period. This helps save time on negotiations, shows goodwill on the seller’s part to complete the transaction, and helps the buyer limit the disclosure of information regarding the share transfer to too many interested parties. However, one issue the parties must also pay attention to is whether share transfer contracts signed before receiving approval from the competent authority take effect in accordance with the law? In this article, we will express some perspectives from multiple angles to clarify this issue.

Perspective from a verdict

On January 24^th, 2024, the High People's Court in Ho Chi Minh City issued Judgment No. 06/2024/KDTM-PT on the dispute over the share transfer contract. The dispute arose between the plaintiff, Dak R'Tih Hydropower Joint Stock Company (“Hydropower Company D”) and the defendant, Vietnam Rubber Group – Joint Stock Company (“Vietnam Rubber Group”) related to the share transfer contract between these two companies. Accordingly, Vietnam Rubber Group, in accordance with the Prime Minister's policy on investment from non-core investments, offered for sale all of its shares in subsidiaries operating in the hydropower industry. After being approved to offer all shares in lots, Vietnam Rubber Group carried out the offering and as a result, Hydropower Company D won the auction, becoming the buyer in the share transfer transaction. The parties subsequently signed a share transfer contract, and Hydropower Company D made a deposit to ensure contract performance. However, despite many requests from Hydropower Company D, Vietnam Rubber Group did not carry out the procedures to transfer shares to Hydropower Company D. As a result, Hydropower Company D initiated a lawsuit against Vietnam Rubber Group. The first-instance judgment accepted most of Hydropower Company D's requests, including the cancellation of the contract, return of the deposit, imposition of a penalty for breach of contract, and compensation for damages. However, after Vietnam Rubber Group appealed, the Court of Appeal had a different view. The Court of Appeal ruled that the share transfer transaction between the parties required approval from the competent authority, which Vietnam Rubber Group had not yet obtained. Therefore, the share transfer contract had not yet taken effect. Based on this, the Court of Appeal rejected Hydropower Company D's requests for penalties and damages, holding that Vietnam Rubber Group was not at fault in this case.

In this judgment, the Court of Appeal also cited the terms of the share transfer contract, including the validity of the contract, the payment period, the rights and obligations of the parties. The Court highlighted that the approval of the competent authority, in order to strengthen the argument of the competent authority, was a condition for the validity of the share transfer contract.

Practical perspective

In addition to the case in the above dispute, as mentioned in the introduction, in order to speed up the progress of mergers and acquisitions, the parties often wish to negotiate and agree on the terms of the contract even when the M&A transaction has not been approved by the competent authority. In practice, share transfer contracts often include a clause stating that the contract will only take effect once the M&A transaction is approved by the competent authority. At the same time, this contract is used to submit to the competent authority for M&A approval. In some localities, despite the contract containing such a condition, investment authorities still require the parties to submit a Principle agreement rather than a share transfer contract, in accordance with Point c, Clause 2, Article 66 of Decree 31/2021/ND-CP. In addition, these agencies also believe that the signing of the share transfer contract by the parties as above is not in accordance with the law. The authors believe that it is understandable for the investment authorities to request the parties to submit a Principle agreement regarding the share transfer based on Decree 31, but the view that the parties are not allowed to sign a contract without the approval of the competent authority is unreasonable. Because a contract is an agreement between the parties, including the conditions for the validity of the contract in accordance with the law, in case the parties have stipulated the conditions for the validity of the contract that the M&A transaction must be approved by the competent authority, this agreement should be respected.

Does the approval of the competent authority affect the validity of the share transfer contract?

Although parties often sign share transfer contracts before receiving approval from the competent authority, we believe that for M&A transactions requiring such approval, the share transfer contract only takes effect once the M&A transaction is approved by the competent authority, regardless of whether the contract contains such a provision. Nevertheless, there are some notable cases that can arise in practice, potentially leading to disputes.

The first case involves a situation where, at the time the parties sign the share transfer contract, there is a provision that the transaction must be approved by the competent authority. However, before the transaction is approved, the provision loses its validity. This is an example drawn from the case mentioned above. In this case, under Decision 41/2015/QD-TTg on the sale of shares in lots, if a parent company—an economic group—transfers shares via a direct agreement (as permitted by the Prime Minister), the representative agency must report to the Prime Minister for consideration and approval to directly sell the deal to the investor. In other words, transactions between the parties must be approved by the Prime Minister. However, before this condition could be fulfilled, Decision 41/2015/QD-TTg expired. As a result, Vietnam Rubber Group was unable to obtain the Prime Minister’s approval (because the regulation had expired) and therefore could not transfer shares to Hydropower Company D. At the time the share transfer contract was signed, the Prime Minister’s approval was a condition for the contract to take effect. In the author's view, in this case, the parties can agree to sign a new share transfer contract, which would no longer be subject to the requirement of approval from the competent authority for it to take effect.

The second case involves a situation where the parties agree that the share transfer contract will only take effect upon approval by the competent authority, but this condition is not in accordance with the law (i.e., it is not a legal requirement for the transaction to take effect). This situation still occurs in practice, where parties that are not subject to M&A approval procedures nonetheless stipulate that the approval is a condition for the share transfer contract to become effective, or they agree on conditions related to project transfer procedures in the share transfer contract.

In this case, the author argues that since the conditions agreed upon by the parties cannot be implemented in practice, the validity of the contract should not depend on those conditions. Instead, it should depend on the intent and performance of the parties. If one party has fulfilled its obligations under the contract, the other party is obligated to reciprocate. Refusing to fulfill obligations on the grounds that the contract has not yet taken effect would be unreasonable in such a scenario.

In short, it is reasonable and understandable for the parties to sign a Share Transfer Agreement before obtaining approvals from the competent authority. However, the parties should also be aware of the type of approval that needs to be reached in order to make appropriate decisions in the performance of their obligations under the contract. Because, depending on each different type of transaction, the approvals of the competent authority will also be different, leading to the validity of the Share Transfer Contract can only be determined in specific cases.