On 26 June 2015, Vietnam loosened foreign ownership limits (FOL) in public companies by the adoption of Decree 60/2015 (Decree 60).
Decree 60 permits foreign investors to own up to 100 percent of the equity in most public Vietnamese companies, which will boost the liquidity of the Vietnamese bourses. In addition to creating more attractive investment opportunities for foreign investors, this enhanced liquidity and expanded universe of potential investors in public companies will facilitate exit strategies both with respect to investments in public companies and investments in private companies that may look to a listing as a liquidity event. As ownership of voting shares will remain capped at 49 percent, Decree 60 may give rise to more innovative transaction structures to raise capital from offshore.
Another key provision of Decree 60 provides guidance on debt for equity swaps by public companies, which should facilitate restructurings in Vietnam.
Decree 60 becomes effective on 1 September 2015. It amends Decree 58/2012 (which implements the Securities Law 2006, as amended in 2010) and repeals Decision 55 signed by the Prime Minister dated 15 April 2009 (Decision 55).
Moving Beyond Decision 55
Under Decision 55, FOL in public companies was capped at 49 percent. Public companies are defined as joint stock companies which have conducted a public offering or have 100 shareholders or more, whether listed or not listed on a stock exchange.
As of 26 June 2015, it was reported that foreign ownership in 33 listed companies on the Hanoi and Ho Chi Minh Stock Exchanges has reached, or is close to, 49 percent. This cap has limited foreign investment in public companies, which is exacerbated by trading bands on both bourses. Several companies have reportedly elected to delist from a stock exchange in order to mobilise more capital from foreign investors. Delisting is a time consuming and costly process; it reduces liquidity, and potentially damages the value of the company. Restrictions on foreign ownership in public Vietnamese companies also constitute an obstacle to exit strategies for foreign investors and generally reduce liquidity in the market.
In this context, Decree 60 provides that FOL in public companies is lifted (i.e., foreign investors could own up to 100 percent of a public company), unless otherwise provided in the charter of the public company, and subject to the following clarifications and exceptions:
a. Non-voting shares only. A 49 percent FOL will continue to apply to classes of shares with voting rights in public companies, securities companies or funds. Foreign investors consist of both Vietnamese companies and entities in which foreign investors hold 51 percent or more of charter capital. Accordingly, foreign investors may hold an unlimited proportion of non-voting shares unless otherwise provided in the charter of the public company and subject to paragraphs (b) through (d). This will likely result in innovative transaction structures enabling foreign investors to invest in public companies that have already reached the relevant FOL cap.
b. International treaty exceptions. A public company operating in sectors subject to specific foreign ownership limits under an international treaty (such as Vietnam's WTO Commitments) is subject to the specific limits set out in that treaty. As of 26 June 2015, almost all FOLs in the service sectors specified under Vietnam's WTO Commitments have been abolished. Certain highly-specialised and sensitive sub-sectors such as banking, telecommunication, transportation, agriculture and audiovisual services still maintain FOL restrictions.
c. Conditional sectors. A public company operating in sectors conditional to foreign investors in which the specific foreign ownership limit has not been set, are subject to a FOL of 49 percent. This restriction seems slightly unclear given that the new Law on Investment dated 26 November 2014 provides a lengthy list of 267 conditional investment sectors. Further implementing regulations are necessary before foreign investors could determine whether FOL in these conditional sectors will be capped at 49 percent or not.
d. Most restrictive FOL applies. Foreign ownership in a public company operating in multiple sectors that are subject to different FOL cannot exceed the lowest limit applicable to any of such public company's business activities, unless an exception is specified in an applicable international treaty.
Debt for Equity Swaps
Decree 60 also clarifies several issues that arise in the context of private placement of shares by public companies. Notably, Decree 60 sets out detailed regulations on private placement of shares issued pursuant to debt for equity swaps by public companies, which were not previously regulated. This will be welcomed by banks and other financiers as they will have a clearer roadmap as to how to conduct debt for equity restructurings.
Pursuant to Decree 60, a public company must meet numerous conditions, including the following, in order to conduct a debt for equity swap private placement:
i. The private placement plan must be approved by the General Shareholders' Meeting (the "GSM") and must contain details such as number of shares to be issued, the list of creditors, values of swapped debts and shares for each creditor, and other relevant details;
ii. The swap ratio and the methods used to determine the swap ratio must be determined in consultation with an independent valuation agency who may be either an approved auditor or a securities company licensed to provide valuation services;
iii. The swapped debt must be specified in the most recent audited financial statement and approved by the GSM;
iv. The public company issuer and the creditor must meet other legal requirements if the company engages in a conditional business sector; and
v. The swapped shares are subject to a lock-up period of one year and the period between two consecutive private placements must be at least six months.