In the practice of M&A transactions in Vietnam, the choice of transaction structure in the form of share transfer instead of direct transfer of investment projects is quite common. This approach can help the parties simplify the transaction procedure, but at the same time raises many debates about determining the true nature of the transaction and the limits of the freedom of agreement in investment and business relations.
Can prioritizing the "real nature" of the transaction replace the mandatory legal procedures of the transfer of investment projects?
Judgment No. 77/2024/KDTM-PT dated September 20, 2024 of the High People's Court in Ho Chi Minh City ("Judgment No. 77")[1] regarding the dispute between Ms. Nguyen Tuong V and T1 Joint Stock Company and T2 Joint Stock Company is a typical example of this issue. The case raises a notable legal question: when the contract is called "share transfer" but the actual economic content and purpose are aimed at the transfer of the entire investment project, how should the Court determine the nature of the transaction? And can prioritizing the "real nature" of the transaction replace the mandatory legal procedures of the transfer of investment projects?
1. Unusual transaction structure and content of the contract
T1 Joint Stock Company is a major shareholder owning 69% of the charter capital of T2 Joint Stock Company – an enterprise established to implement the Wind Power Plant No. 5 – Thanh Hai 2 project in Ben Tre province. On 05/10/2021, Ms. Nguyen Tuong V and T1 signed the Share Transfer Contract No. 01/2021/HDCN-THCBT (the "Contract"), whereby T1 transferred to Ms. V 3,750,000 shares, equivalent to 25% of T2's charter capital, with a total transfer value of VND 1,500 billion.
It is worth noting that the price of VND 1,500 billion not only reflects the value of 25% of the contributed capital at T2, but corresponds to the economic value of the entire Wind Power Plant No. 5 – Thanh Hai 2 project. Right from the transaction value structure, it can be seen that the object that the parties are really aiming for is not only the capital contribution in the project enterprise, but also the control and exploitation of this wind power project.
In terms of legal form, the transaction is designed as an ordinary share transfer transaction under the Law on Enterprises 2020. Before signing the contract, the General Meeting of Shareholders of T1 approved the transfer of 25% of shares in T2 for VND 1,500 billion and assigned the Chairman of the Board of Directors to sign and carry out relevant legal procedures. However, not only the seller and the buyer participate in the transaction, the contract also has the signature and seal of T2 Company itself and the founding shareholders of T2. The fact that all related entities participated in the signing of the agreement shows that the transaction has been uniformly designed towards a change of control over T2's wind power project.
More notably, although the Contract is called "Share Transfer Contract", the content of the Contract contains many clauses that go beyond the scope of an ordinary capital contribution transaction. Article 4.3 of the Contract stipulates that within 60 days from the time the buyer completes the 1st installment payment, T1/T2 must carry out legal procedures to transfer all ownership, exploitation, operation, operation and benefit from Wind Power Plant No. 5 – Thanh Hai 2 to Ms. V or a third party designated by Ms. V at a price 0 VND.
In a normal share transfer transaction, the buyer only becomes a shareholder of the business and only has indirect rights to the company's assets through the contributed capital that it owns. The assets of the enterprise are still under the independent ownership of the company's legal entity. However, in this case, the parties agreed on the direct transfer of all ownership and right to exploit the project to the buyer or a legal entity appointed by the buyer. That shows that the ultimate goal that the parties aim for is not only to change the shareholder structure of T2, but to transfer the control and exploitation of the wind power project to Ms. V.
In addition, Article 9.2 of the Contract also establishes a special sanction mechanism directly associated with the project implementation schedule. Accordingly, if by 31/12/2021 the project is not completed without being a force majeure case, T1 must continue to transfer an additional 25% of shares in T2 to Ms. V at the price of 0 VND. This clause shows that the transaction is designed in the direction of gradually transferring the control of the project from T1 to Ms. V, and at the same time closely linking the interests of the buyer to the completion and operation of the wind power project.
From the overall content of the Contract, it can be seen that although the transaction is expressed in the form of share transfer, the economic and legal goal that the parties are really aiming for is the transfer of control and exploitation of the investment project. This is also the key point leading to the dispute and becomes the basis for the Court to consider the true nature of the transaction in the process of settling the case.
2. Violation of the commitments of the parties under the contract
After the Contract is signed and Ms. V completes the 1st installment payment with the amount of VND 500 billion, the obligation to transfer the project of T1/T2 according to Article 4.3 officially arises. According to the agreement, within 60 days from the time of receipt of payment, T1/T2 must complete legal procedures to transfer all ownership, exploitation, operation and benefit from Wind Power Plant No. 5 – Thanh Hai 2 to Ms. V or a third party designated by Ms. V.
However, by the commitment deadline, T1/T2 did not hand over the project as agreed. Instead, on December 18, 2021, T2 Company issued an official letter requesting to extend the project handover time to June 30, 2022 on the grounds that the impact of the Covid-19 epidemic slowed down the construction and operation of the Plant.
However, in fact, the wind power project No. 5 – Thanh Hai 2 has been connected to the grid and generates commercial electricity since the end of 2021. According to documents from the Department of Industry and Trade of Ben Tre province, the plant has been connected to the grid since October 31, 2021 and generated continuous commercial electricity production in the following time. This shows that the reason "the project has not been completed due to the epidemic" cited by T1/T2 to delay the handover is not completely consistent with the actual operation of the project.
Throughout 2022, Ms. V repeatedly sent notices requesting T1/T2 to continue to perform the obligation to transfer the project under the Contract but was not met. Even during the proceedings, the T1/T2 side denied the existence of the transaction and said that it did not sign the Contract or receive the payment of VND 500 billion from Ms. V. However, this argument was rejected by the Court because the Contract was fully signed. seals of related parties, accompanied by receipts showing that T1 had received the payment from Ms. V. Notably, it was in the counterclaim that T1 cited that Ms. V "did not pay the correct amount of VND 500 billion as committed", thereby indirectly acknowledging the existence and validity of the transaction.
From the process of performing the Contract and the behavior of the parties after signing, the Appellate Trial Panel held that although the transaction was expressed in the form of "share transfer", the real goal that the parties were aiming for was the transfer of control and exploitation of the entire Wind Power Plant No. 5 – Thanh Hai 2 project. The Court specifically emphasized that the Contract not only stipulates the transfer of 25% of shares in T2 but also binds the obligation to transfer all ownership, exploitation and benefit from the project to Ms. V or the legal entity appointed by Ms. V.
At the same time, the fact that T2 Company, the enterprise that owns the project, participated in signing the contract and directly sent an official letter extending the project handover time to Ms. V shows that T2 also admits that the real object of the transaction is the wind power project, not merely the capital contribution in the enterprise.
On that basis, the Court of Appeal concluded that the transaction between the parties is essentially a transfer transaction of an investment project designed in the form of share transfer. Therefore, the Court accepted Ms. V's request, forced T1 to continue to perform the Contract and complete the procedures for transferring Wind Power Plant No. 5 – Thanh Hai 2 in accordance with the initial commitment of the parties.
The case file shows that the parties have not fully carried out the procedures for transferring the project according to the Law on Investment but mainly use the share transfer structure to establish transactions.
3. Legal issues raised by the judgment
From the perspective of the Law on Enterprises 2020, T1's transfer of 25% of shares in T2 to Ms. V is in principle a legal transaction and has been approved in accordance with the authority. However, if this is only considered an ordinary share transfer transaction, Ms. V's rights after the transaction will only stop as a shareholder owning 25% of the charter capital in T2. According to the principle of asset independence of legal entities, the assets of the wind power project are still owned by T2 and not directly belong to the company's shareholders. Therefore, legally, Ms. V's request to directly transfer the entire project is not a normal consequence of a share transfer transaction.
However, the contract between the parties not only stops at the transfer of shares but also binds the obligation to transfer the entire ownership, exploitation and benefit from the Wind Power Plant No. 5 – Thanh Hai 2 project to Ms. V or the legal entity designated by her. The fact that all founding shareholders of T2 and T2 company itself participated in signing the contract shows that the owners of T2 have agreed to transfer the project to the buyer, even though the transaction is designed in the form of a share transfer.
From the perspective of the Civil Code 2015, the parties have the right to freely negotiate if they do not violate the prohibitions of the law or are contrary to social ethics. In this case, the parties used the share transfer structure to achieve the economic purpose of transferring the wind power project. Therefore, the transaction has signs of using the form of capital transfer to achieve the economic objectives of the transfer of investment projects. However, instead of considering the transaction from the perspective of invalidity due to the concealment of another transaction, the Court chose an approach based on the true will and performance of the contract of the parties to recognize the validity of the transaction and force the continued performance of the obligation to hand over the project.
However, this approach also raises many controversies when compared with the Law on Investment 2020. According to the provisions of the investment law, the transfer of all or part of an investment project must meet the statutory conditions and in many cases must be approved by a competent authority before implementation. For the Thanh Hai 2 wind power project, a project subject to an investment policy decision of the provincial People's Committee, the transfer of the project must in principle be considered and approved by a competent state agency on the basis of assessing the capacity of the transferee as well as ensuring the continued performance of related obligations to land, environment and investment.
Meanwhile, the case file shows that the parties have not fully carried out the procedures for transferring the project according to the Law on Investment but mainly use the share transfer structure to establish transactions. This may also be the reason why the parties choose the form of capital transfer instead of directly transferring the project, because the transaction of transferring shares in the project company is in principle simpler and does not have to go through a strict approval process like the transfer of an investment project.
However, the transfer of all assets, exploitation rights and benefits from the project to Ms. V is no longer a mere share transfer relationship but has directly impacted the status of the subject of the investment project. In fact, to complete the transfer of the wind power project, the parties still have to carry out a series of legal procedures such as adjusting the Investment Registration Certificate, transferring land use rights, adjusting related licenses and handling contractual relations with EVN.
In this context, the fact that the Court still recognizes the validity of the transaction and is forced to continue to perform the obligation to hand over the project, instead of considering the legal consequences of not fully complying with the provisions of the Investment Law, may be a point that will still cause a lot of debate about the persuasiveness and legal basis of the ruling.
4. Legal consequences and lessons for trading practice
From the above analysis, it can be seen that the transaction between Ms. Nguyen Tuong V and T1 is not merely a share transfer transaction in essence, but an investment project transfer transaction designed in the form of capital transfer. The fact that the parties choose the structure of "share purchase and sale" is only a legal method to gradually realize the real economic goal of transferring control, exploitation and benefiting from the Wind Power Plant No. 5 – Thanh Hai 2 project.
The correct determination of the nature of the transaction is of particular importance for dispute resolution. If this is only seen as a share transfer dispute, Ms. V's interests after the transaction will only be limited to the status of a shareholder owning 25% of the charter capital in T2. On the contrary, when viewing the transaction from the perspective of transferring an investment project, the Court has grounds to force T1/T2 to continue to perform the obligation to transfer Wind Power Plant No. 5 – Thanh Hai 2 in accordance with the established commitment.
However, the case also shows a very fragile legal boundary between the transfer of shares and the transfer of investment projects in the practice of M&A transactions in Vietnam. The use of capital transfer structures to achieve the goal of project transfer can help parties simplify transaction procedures, but at the same time, it also raises the risk of circumventing the control mechanism of state management agencies over investment project transfer activities.
Notably, Judgment No. 77/2024/KDTM-PT shows the tendency of the Court to prioritize considering the true nature and economic purpose of the transaction instead of relying only on the superficial legal form of the contract. This is an approach that is in line with the principle of interpreting transactions according to the real will of the parties in civil law and reflects the increasingly substantive trend in the adjudication of commercial and investment disputes.
However, the value of the judgment should not be construed as a legitimacy for the use of share transfer to replace the investment project transfer procedure. On the contrary, the case shows that the parties to the M&A transaction need to design transparent, true nature and fully comply with the mandatory legal conditions right from the stage of establishing the contract. Only then can the transaction ensure legal stability and limit complex disputes arising during the implementation process.
In summary, the remarkable point of Judgment No. 77/2024/KDTM-PT does not lie in the Court's naming of the transaction as share transfer or project transfer, but in the approach: The Court has overcome the formal name of the contract to trace the real economic purpose of the parties. This approach is valuable in protecting contractual fairness, but it also requires clearly defining the limits of freedom of agreement when transactions involve investment projects under the management of State agencies.
Lawyer Nguyen Van Phuc
HM&P Law Firm
