On 16 November, 2017, the Government issued Decree No. 126/2017/ND-CP ("Decree 126") on privatisation of state-owned enterprises ("SOE") (referred to as “equitisation” in Vietnam) with effect from 1 January, 2018. Decree 126 replaces Decree 59/2011/ND-CP ("Decree 59").
The promulgation of Decree 126 appears well-timed and strategic, as Vietnam looks to introduce a more transparent and developed framework to maximise valuations on the sale of state assets against the backdrop of the current wave of investment interests in the Vietnam market and the large number of planned state divestments. The introduction of book-building as an initial public offering (IPO) pricing method should facilitate more market sensitive pricing, which appeals both to the investors and the state. In addition, selling stakes to strategic investors only after the IPO ensures that Vietnam’s equity capital markets will play a critical role in the equitisation process.
How much of an SOE can be sold and who makes such decisions?
The governmental body representing the state ownership in the SOE may decide on equitisation of an SOE by either selling all or part of the charter capital, or issuing additional shares to increase charter capital and dilute the interests of the state. An SOE may launch an IPO by auction, underwriting, private placement or book-building.
Who may invest and what is a strategic investor?
Both domestic and foreign investors are entitled to acquire shares of an equitised SOE. Strategic investors may acquire initially offered shares of an SOE in which the state continues to hold more than 50% of the shares after equitisation upon meeting certain requirements.
Strategic investors must undertake to support the equitised SOE, which may include technology transfer, personnel training and secondments, and enhancing corporate governance. In addition, strategic investors are required to maintain the current business and brand name of the equitised SOE for at least three years unless otherwise decided by the prime minister, though further guidance on interpreting these requirements will be needed. A strategic investor is subject to a lock up of three years, which may be more attractive to investors than the five-year lock-up under Decree 59.
Selection of strategic investors is made prior to an SOE's IPO. Unlike strategic investments in certain other markets that enable strategic investments prior to the IPO (which was permitted under Decree 59), shares may be sold to qualified strategic investors in a private placement only after the public offer is completed. The selling price to strategic investors may not be less than the average price at which the shares were sold in the public offer.
Decree 126 provides detailed guidance for calculating the value of an SOE, including specific exclusions in calculation of an SOE's value. Investments of SOE in other companies are included for valuing the SOE, unless, at the time of valuation, that particular investment has been assigned to another governmental body or other investors (either an existing or new investor).
Business advantage is also considered for determining the value of an SOE, including brand name and the value of potential development. The brand name value is determined based on the actual costs for establishing and protecting such brand during the preceding five-year period, which includes incorporation, training, marketing, advertisement, promotion and website development. History and tradition may be considered in some special cases for valuing the brand name. Development potential is valued based on the expected profitability of the SOE in the future. This expected profitability is based on the value of state ownership, rate of return and interest rates of government bonds.
In addition, Decree 126 also sets out the provisions for handling financial and accounting matters of a SOE prior to equitisation in order to calculate value, such as leased assets, receivables, payables and investments.