Mergers and acquisitions

M&A (a common abbreviation of  Mergers and Acquisitions) is a general term that refers to the process by which one company gains control over another through various types of financial transactions, including purchase of capital, shares or assets.

An acquisition is when one company purchases another, by which the vendee firm shall acquire legal ownership of vendor one in accordance with acquisition rate. This acquisition process can be carried out by purchasing most or all of the assets, shares or contributed capital of one company. Therefore, in the following article, AZLAW would like to share some basic information about the business M&A process in Vietnam.

Common types of M&A

Vertical M&A

Vertical M&A involves two companies in the same industry. These two companies sell similar products or services but operate in different stages of production. For example, a coffee chain purchases a coffee factory.  This type of acquisition is carried out to maintain the supply of essential goods. In addition, vertical M&A also aims to reduce the supply for other competitors, thereby helping companies increase revenue and minimize unnecessary intermediary costs.

Horizontal M&A

Horizontal M&A occurs when companies operating in the same industry combine together. These companies sell similar products, services and operate in the same stages of production. In other words, they could be direct competitors in the market. The purpose of horizontal M&A is to increase their market share, increase their profits and reduce competitors in the industry. 

Congeneric M&A 

In a congeneric M&A, the acquirer and target company have different products or services, but operate within the same market and sell to the same customers. Normally, after the mergers, their products will complement each other, making it more convenient for customers. The purpose of congeneric M&A is to diversify their products and services. In addition, it will help companies increase their market share and profits. For example, when a customer searches for interior design service, he/she tends to find a construction company. In that way, customers will choose a company which has both services because it brings great convenience to customers.

Note: Before carrying out M&A process

• Conditions on market access: For cross-border M&A involving a foreign legal entity, the laws of each country often set certain criteria to identify foreign investors in M&A deals. Moreover, these criteria also impose restrictions on investment business lines, invested capital or value of shares which are allowed to own in purchasing transactions. These regulations are specified in international treaties and other legal documents that Vietnam has signed and promulgated. For detailed information, customers can refer to these conditions on the Business Registration Portal.
• Regarding competition law: M&A is an act of economic concentration. When a large company acquires all other companies in the same market, it will seize the market power and abuse its dominant position in the market to profiteer and influence the customers’ rights. In order to avoid this situation, Vietnamese law stipulates that economic concentration has a significant impact or is likely to have the effect on competition restriction in the Vietnam market, therefore, before conducting an M&A, companies shall submit an economic concentration dossier to the National Competition Commission for preliminary assessment.
• For foreign investors, before carrying out the M&A process in Vietnam, they have to apply for an Investment Registration Certificate.

Procedures for carrying out M&A process

Unlike other simple transactions, M&A is a complex process consisting of many stages which require participants to have certain objectives and understanding of the market, financial and legal regulations. Each M&A deal has certain distinct features, but in general, most deals are still conducted according to a general process as follows:

Step 1: Set a business strategy and find a target company

When conducting an M&A deal, every company has a certain purpose such as expanding business scope or market share, etc. In order to fulfill their purpose, they have to map out a specific strategy and roadmap to determine its goals. Then, companies can look for and select the target company in accordance with their business orientation. The target company should have certain advantages which are continually exploited by vendee companies such as having a stable source of customers or partners, achieving good market position or having advantages in human resources, land, infrastructure, facilities, etc.

Step 2: Preliminary planning and negotiation 

After determining objectives and finding a suitable target company, the vendee firm can exchange more information with the vendor firm, then plan and make an offer by drafting a letter of intent to outline some basic terms such as price, rights and obligations of both parties, .. before negotiating and completing all remaining procedures.

Step 3: Appraisal report

After the preliminary assessment, the vendee company shall hire legal and financial consultants to conduct an in-depth assessment of the operation of the target company.

When conducting an enterprise appraisal, the vendee party will have access to many internal documents of the vendor. Therefore, before conducting an appraisal, both parties shall sign a non-disclosure agreement to ensure the legitimate interests of the vendor in case the vendee does not intend to buy, which avoids the vendee using the vendor’s internal data for other purposes.

The appraisal often includes:

• Financial appraisal: focus on checking its compliance with accounting standards, capital transfer, loans, cash flow stability (taking into account the business cycle), asset depreciation and recoverability in debt,..
• Legal appraisal: focus on evaluating all legal issues related to legal status, capital contribution and status of shareholders, legal rights and obligations of target subjects, assets, labor, projects, etc.

The results of the Appraisal Report play a very important role for the vendee party, helping the vendee to plan and understand the overall performance of the target company. In fact, this is the step that decides whether an M&A deal is conducted or not.

Step 4: Price appraisal

In fact, price negotiation is a stage that causes many conflicts when the Vendor tends to offer an over-high price while the Vendee offers to buy at a low price. Therefore, these parties must hire a professional valuation organization to value the company because the value of a company depends not only on the available capital but also on the business secrets, technology, ownership of intangible assets, etc.

Step 5: Negotiate and sign the M&A contract

After reaching the agreement of these above steps, the two parties signed an M&A contract to affirm the commitments of both parties to the transaction. The contract refers to the legal aspects and coordination mechanisms of factors related to M&A transactions such as finance, labor, management, market development, etc. In other words, the M&A contract needs to be adjusted to become a tool to ensure the interests of all parties involved in the transaction.

After completing the agreement, the parties shall carry out formal legal procedures for affirming the transfer from the Vendor to the Vendee, especially assets or the rights must be registered with the competent authorities.

For the transfer of contributed capital or shares, the procedure will be different for different types of companies.

For the transfer of shares in a joint-stock company

• Related parties sign and perform share transfer contract;
• Write up a minutes to confirm that the procedures for transferring shares have been completed;
• Hold the General Meeting of Shareholders to approve the transfer of shares;
• Modify and adding information in the Register of Shareholders of the company;
• Register to change shareholders according to regulations;
• Declare and pay personal income tax for share transfer procedures.

For the transfer of contributed capital in a limited company

• Such capital must be offered to the remaining company’s members in proportion to their contributed capital under the same conditions;
• Only transferring to non-members if the remaining members of the company do not buy or do not buy all within thirty days from the date of offering;
• Changing members due to transfer of contributed capital within 10 days from the date of making a change decision. The company sends a notice form to the business registration office where the company has registered its business;
• Submit and declare capital transfer income for capital transfer activities.

Note some post-M&A difficulties 

• About personnel: after the M & A process, for example, if there are two branches in the same area, the company will have to make a decision to reduce one. The effective reduction of personnel is still a difficult problem for companies after the M&A process. The Labor Code stipulates that, upon merger or consolidation, the enterprise must continue to use the existing employees and amend the labor contract. If the company does not use all of its employees, it is entitled to unilaterally terminate the labor contract but must develop and implement a plan to use labor, including re-train them to continue using… In case of termination, enterprises also spend a lot of money on unemployment benefits for employees.

• Building credibility with the customer of the acquired company;
• Company culture;
• Corporate management;
• Perform the obligations of the acquired company unless otherwise agreed by the two parties;
• Other legal procedures for the company to operate in accordance with the provisions of law.

This is some basic information about the process of M&A in Vietnam. In case you have any questions or need legal advice, please contact AZLAW.