Some problems in practice of investment and business registration in Vietnam

HM&P Law Firm
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    Some problems in practice of investment and business registration in Vietnam
    Posted on: 18/09/2024

    As Vietnam's economy becomes increasingly integrated with the global economy, it is imperative that legal regulations be adjusted to ensure transparency and convenience for businesses. However, the regulations on dissolution of enterprises under Decree 01/2021/ND-CP on the Registration of Enterprises ("Decree 01/2021/ND-CP") and the procedures for registration of capital contribution, acquisition of shares and capital contribution by foreign investors ("M&A approval procedures") under Decree 31/2021/ND-CP, which details and guides the implementation of a number of articles of the Investment Law ("Decree 31/2021/ND-CP"), still have certain shortcomings. The unclear and limited points in these regulations not only create difficulties for enterprises, but also affect the investment and business environment in general. In this sense, this discourse will focus on analyzing, evaluating the shortcomings and proposing solutions to further improve the legal framework, which will contribute to improving the effectiveness of state management and creating favorable conditions for investment and business activities of enterprises in Vietnam.

    1. Difficulties in the regulation of enterprise dissolution

    Enterprise dissolution is a procedure that enterprises must carry out when they want to withdraw from the market. The current Law on Enterprises provides many cases in which enterprises are required to carry out procedures for registering enterprise dissolution. However, many regulations on enterprise dissolution are still problematic and cause difficulties or are even difficult to apply in practice, especially the decision to dissolve the enterprise, leading to barriers in the process of carrying out dissolution procedures.

    1.1. Decision to dissolve in case the company does not have the minimum number of members

    Currently, the Law on Enterprises 2020 provides that a company will be dissolved if it does not have the required minimum number of members for a period of six consecutive months without completing the procedures for changing the type of company. In fact, this is a common occurrence, for example, the case mentioned in Judgment No. 09/2023/KDTM-PT dated February 23, 2023 (“Judgment”) on the settlement of a dispute over a capital contribution transfer contract between the plaintiff, Ms. Lam Van A (“Ms. A”) and the defendant, Mr. Tran Phuc H (“Mr. H”)[1].

    According to the Judgment, on August 10, 2016, L Game Company Limited (“Company L”) was established with a charter capital of 10 billion VND, including two members, Ms. A and Mr. H. On August 30, 2016, Company L prepared the minutes of the meeting of the board of members no. 08/2016/BB with full signatures of the members of Company L, which included the content of acknowledging that Ms. A has not contributed any capital to Company L. On June 4, 2018, Mr. H and Ms. A signed a capital contribution transfer contract, which mentioned that Mr. H has transferred all of his capital contribution to Company L to Ms. A with a value of 2 billion VND. Also on that day, Company L has a board of directors' meeting record with the full signatures of the members, which still shows that Mrs. A did not make any capital contribution to Company L.

    According to the law, the deadline for capital contribution is 90 days from the date of issuance of the Certificate of Business Registration. Company L was issued the Certificate of Business Registration on August 10, 2016, but as of June 4, 2018, Ms. A had not contributed any capital. Therefore, Ms. A is no longer a member of Company L, and Company L must carry out procedures to reduce the charter capital and change the type of company from a two-member limited liability company to a single-member limited liability company.

    In fact, as of June 4, 2018 (more than six months after the capital contribution deadline), Company L has still not completed the above procedures. Therefore, Company L must proceed with the dissolution in accordance with Article 208 of the Company Law 2020. According to this provision, in case of dissolution of a company that no longer has the required minimum number of members within a period of six consecutive months, the prerequisite procedure to be carried out is the adoption of a resolution, a decision to dissolve the company (“dissolution decision”).

    Article 208 of the Law on Enterprises requires that the dissolution resolution be signed by the owner of the company, the chairman of the board of members, and the chairman of the board of directors. In the above case, this requirement can be met because Mr. H is now considered to be the owner of Company L. Therefore, Mr. H's approval of the decision to dissolve Company L naturally includes Mr. H's signature on the dissolution decision. However, if we assume that Company L is a joint-stock company with 03 shareholders registered to purchase shares, namely Mr. H, Mrs. A and Mr. M, then after Mrs. A fails to pay for the registered shares and Company L still does not carry out the procedure to change the type of enterprise, Company L must carry out the dissolution procedure and the board of members must pass the resolution. However, in reality, Company L has not carried out the procedure to change the type of enterprise, it has not been determined between Mr. H and Mr. M who is the chairman of the board of members, so the requirement for the signature of the chairman of the board of members is not really reasonable in this case.

    1.2. Inconsistencies in the Regulations on the Convocation of the General Meeting of Shareholders

    In addition to the case of dissolution mentioned above, the Law on Enterprises also provides that a company shall be dissolved in the event that its business registration certificate is revoked. According to Clause 2, Article 209 of the Company Law 2020, the company must convene a meeting to decide on dissolution within 10 days from the date of receipt of the decision to revoke the company registration certificate. In the case of a joint stock company, the authority to decide on the dissolution of the company is vested in the general meeting of shareholders. However, the time required for a joint stock company to convene a general meeting of shareholders in accordance with the law is longer.

    Specifically, in order to convene a general meeting of shareholders, the convener of the joint stock company must send an invitation to the meeting to all shareholders included in the list of shareholders entitled to attend the meeting at least 21 days before the opening date, unless the company's articles of association provide for a longer period. Thus, the time limit for organizing a general meeting of shareholders of a joint stock company has exceeded the time limit specified in Article 209 of the Law on Enterprises 2020 only for the procedure of convening the meeting.

    Article 71 of Decree 01/2021/ND-CP provides more specific guidance on the case of dissolution of the company due to revocation of the company registration certificate, but does not mention the convening of a meeting to decide on the dissolution of the company. However, according to the principle of priority in the application of legal documents with higher legal value, the requirement to convene a meeting to decide on the dissolution of the company within 10 days from the date of receipt of the decision to revoke the Certificate of Enterprise Registration, as stipulated in the Law on Enterprises, is still applicable. In other words, Article 209 of the Law on Enterprises 2020 seems to be inconsistent with the provisions on convening a general meeting of shareholders of a joint stock company and cannot be applied in practice.

    In addition to the difficulties and problems related to the procedures to be carried out in practice, the legal provisions themselves are unclear and cause many difficulties for enterprises to understand and apply them. With the statistics of about 35,531 enterprises waiting for dissolution procedures (calculated in the first 7 months of 2024)[2], it can be seen that besides entering the market, exiting the market is also an administrative procedure that needs to be accelerated in terms of progress. To this end, the review and improvement of the regulations on company law in general, and Decree 01/2021/ND-CP in particular, in a clearer and more explicit direction, also requires attention and appropriate adjustment by the competent authorities.

    2. Difficulties in procedures for registering capital contribution, purchasing shares and capital contribution by foreign investors

    M&A approval is a prerequisite procedure that enterprises are required to carry out in some cases before receiving capital from foreign investors. Although this is a common procedure, many enterprises and foreign investors still face difficulties and restrictions when carrying out this procedure in practice. This is due to many different reasons, including the different understanding and application of legal regulations between enterprises and record keeping agencies, leading to difficulties in the registration process and investors' operations.

    2.1. Cases in which M&A approval procedures must be performed

    According to Clause 2, Article 26 of the Law on Investment 2020, foreign investors shall conduct M&A approval procedures before changing members or shareholders if they fall into any of the following cases a) the capital contribution, share purchase or capital contribution purchase increases the ownership ratio of foreign investors in enterprises operating in industries or businesses that have conditional market access for foreign investors; b) the capital contribution, share purchase or capital contribution purchase results in foreign investors and enterprises referred to in items a), b) and c) of Clause 1, Article 23 of the Law on Investment holding more than 50% of the charter capital of an economic organization in the following cases c) foreign investors contribute capital, purchase shares, purchase capital contributions of enterprises with land use right certificates in islands and border municipalities, counties and cities; coastal municipalities, counties and cities; other areas affecting national defense and security.

    It can be seen that this regulation has listed quite clearly listed the cases in which M&A approval procedures must be conducted. However, in practice, it is not uncommon for M&A approval procedures to be conducted even though they do not fall under the above-mentioned cases. To illustrate this content, the author will explain a real case that has been provided to clients as follows:

    Single-member limited liability company A, owned by individual investor X (nationality M). Company A is located on an island in Vietnam, but Company A does not have a Certificate of Land Use Rights in this area. Y is an individual investor (nationality M) who wishes to transfer a capital contribution equivalent to 40% of X's registered capital in Company A. It can be seen that the acquisition of Y's capital contribution does not fall under the listed cases for which M&A approval procedures must be conducted as prescribed in Clause 2, Article 26 of the Law on Investment 2020. However, when we contacted the relevant investment and business dossier settlement agency, we received a request to conduct M&A approval procedures.

    At that time, Company A was 100% owned by foreign investor X, so the transfer of capital from X to Y did not increase the ownership ratio of foreign investors (still 100% of the charter capital of Company A) according to item a, paragraph 2, Article 26 of the Investment Law 2020. Unlike point (a), point (b) of this article is directed to the case of increasing the capital of a specific foreign investor instead of all foreign investors. However, this capital increase must be from less than or equal to 50% to more than 50%, or increase the charter capital ownership ratio of foreign investors if foreign investors already own more than 50% of the charter capital of the company. Compared with the above case, this case doesn't require M&A approval procedures because Y's capital is expected to be only 40% of A's charter capital.

    The above case is only one of many cases that occur in reality, where the understanding and application of legal regulations differ between agencies that handle records in different localities. This can be explained by concerns about security and defense issues in the area where foreign investors are investing, so there are indeed individual cases where some investment management agencies in some localities also consider the nationality of foreign investor X and foreign investor Y to see whether these investors come from the same country. This is completely outside the current legal regulations.

    Regarding this issue, we believe that the Ministry of Planning and Investment needs to have a document that unifies the determination of cases requiring M&A approval, providing specific criteria based on legal regulations so that investment management agencies in each locality can apply them consistently, creating convenience for investors, especially investors with investment activities in many different localities.

    2.2. Consulting on national defense and security issues

    This is also one of the issues that many investors are concerned about when conducting M&A approval procedures. According to the provisions of Point b, Clause 4, Article 65 of Decree 31/2021/ND-CP, one of the conditions for foreign investors to obtain M&A approval is to meet the conditions regarding national defense and security. Although Decree 31/2021/ND-CP has made additions to previous regulations in other areas affecting national defense and security, in many cases the Investment Registration Agency still needs to obtain opinions from the Ministry of Defense and the Ministry of Public Security on whether the defense and security conditions are met. This consultation process often takes many months and is the most time-consuming stage in the M&A approval process.

    Regarding this issue, we believe that the Ministry of Planning and Investment needs to discuss and cooperate with the Ministry of Defense and the Ministry of Public Security to clearly and specifically agree on areas that affect defense and security, so as to avoid a situation where the investment management agency has to obtain opinions indiscriminately, which affects the progress of investment procedures.

    2.3. On the composition of the dossier

    According to the current regulations, one of the documents that enterprises must submit to the competent authority is the basic agreement on capital contribution, purchase of shares, purchase of capital contribution between foreign investors and enterprises with which foreign investors contribute capital, purchase shares, purchase capital contribution, or between foreign investors and shareholders or members of the enterprise.

    Usually, in transactions such as the above, the parties involved often go through many steps, from sending a letter of intent, signing a memorandum of understanding, a principal agreement, a deposit agreement, and then going on to sign a contract for capital contribution, share purchase, or capital contribution. However, in the case of small transactions or transactions between parties that have had a previous cooperative relationship, the parties often skip the above steps and go directly to the step of signing a Capital Contribution, Share Purchase or Capital Contribution Contract. Although the parties mentioned in this contract that the implementation of the M&A approval procedure is a prerequisite for the validity of the contract, in many cases the competent authority has rejected this document. Some authorities believe that at the time of filing the application, the parties have only agreed in principle on the capital contribution, share purchase and capital contribution, but have not specifically agreed on other terms of the transaction because this transaction still needs to be approved by the competent authority. This explanation of the competent authority is not really reasonable if the parties have stipulated that the implementation of the M&A approval procedure is a prerequisite for the validity of the contract.

    In addition, in the Draft Regulation on the Registration of Companies (Draft dated June 17, 2024) we found an adjustment in the content of the document for the registration of capital contribution, purchase of shares, purchase of capital contributions, in particular, the phrase "expected transaction value" was replaced by "actual transaction value". The reason for this change is that the parties had agreed on the transaction value at the time of filing the document. This explanation seems to be different from the explanation given by the investment management agencies when they require the parties to submit only a document of agreement in principle and not a transfer contract, because once the actual value of the transaction has been determined, the content of the agreement between the parties at that time may no longer be only a principle.

    In addition, in many cases, investment management agencies also impose requirements on investors regarding documents that are not within the scope of the Investment Law and Decree 31/2021/ND-CP. These include requirements that documents be initialed on each page, stamped on the edges, and some agencies even require investors to submit a visa to enter Vietnam or a temporary/permanent residence card in Vietnam to prove that the investor is present in Vietnam at the time of application.

    In conclusion, although Decree 31/2021/ND-CP has relatively clear regulations, investment management agencies in each locality still do not apply these regulations uniformly. We believe that the Ministry of Planning and Investment should have documents to share and guide localities to apply uniform regulations, avoiding illegal and unreasonable requirements that affect investors' investment process.

    In addition, although the Law on Enterprise and Investment has made significant improvements to promote the development of the business environment in Vietnam, there are still certain shortcomings in both legal regulations and practical implementation. The above-mentioned problems not only cause difficulties for enterprises/investors in the investment/business process, but also create barriers to market development. Therefore, it is necessary to adjust and supplement relevant regulations and timely guidance from the Ministry of Planning and Investment to ensure transparency, fairness and convenience in business activities, thus contributing to the sustainable development of the Vietnamese economy.