Lawyer in Vietnam Oliver Massmann Equitization Quality over Quantity

1. Lawyer in Vietnam Oliver Massmann Equitization Quality over Quantity
VIETNAM - Comment on a recent draft from the Ministry of Finance on strategic investors
purchasing stakes from equitized state-owned enterprises (SOEs)
Author: Oliver Massmann – Chairman of the Legal Sector Committee – European Chamber
of Commerce in Vietnam
On 4th August, the Ministry of Finance announced a Draft Decree on converting 100% state-
owned enterprises (SOEs) into joint stock companies, which will replace Decree No.
59/2011/ND-CP, Decree No. 189/2013/ND-CP and Decree No. 116/2015/ND-CP.
Although the currently in force Decrees have brought positive results in the re-structuring of
state-owned enterprises since the beginning of the process in 2011, the restructuring quality
has proven to be inefficient considering the small percentage of private participation in the
company’s charter and management after the privatization. In addition, many big
corporations with long financial history will need much more time and have to follow
specialized rules to complete the privatization procedure. Many strategic investors have thus
found it less attractive to participate in the process.
In order to tackle the above issues and bring substance to the equitization process in the
context of new Enterprise Law, Investment Law, etc., there is a need to introduce a new Draft
Decree on converting 100% state-owned enterprises into joint stock companies.
In particular, the draft’s Article 6 stipulates that a strategic investor must have the same
business sectors as equitized SOEs. In addition, the strategic investor must have at least two
years of profits (as of the time for buying stake of SOEs). Moreover, its equity in the latest
financial report (which has to be audited by an independent auditing firm) must be sufficient
for purchasing the stakes that it registers to buy.
Under the current regulations in Decree 59/2011/ND-CP, the strategic investor is only
required to have sound financial capacity, and have a written commitment endorsed by an
authorised agency. The commitment must state that after SOEs are equitized, the strategic
investor must support SOEs in terms of technology transfer, human resource training,
corporate governance, material supply and development of output markets.
This new stricter regulations in the draft will affect foreign firms who wish to buy stakes
from SOEs and become strategic partners. In particular, foreign firms must be aware that they
are not allowed to freely invest in any SOEs that have business activities not relevant to what
they are doing, despite their strong interest in those sectors. This is to prevent cases where
inexperienced foreign investors get into the management of the SOEs without having track
record ability to manage them, and for example, aim at targeting Vietnam as a trial market for
their business expansion.

2. In addition, we believe that the Government is showing its strong effort to select eligible
investors to improve the equitization quality, and to make sure that the investors have proven
financial status to efficiently recover the operating at loss status of SOEs. With stricter
requirements, the Government will be able to attract investors with serious investment targets
and with ability to contribute to the long-term development of SOEs.
Considering these new proposed stricter requirements, it is highly recommended that foreign
investors conduct sufficient due diligence on the targeted SOEs, prepare themselves ready in
terms of financial capacity and proven management skills, obtaining knowledge about
Vietnam’s stock exchange market as well as regulations on bidding to come to a smart
investment decision. We expect that with more substantive equitization, foreign investors will
have more voice in the SOEs, via which being able to adopt development plans that serve the
equitized companies’ future business outcomes, not any individual’s benefits.
Please do not hesitate to contact Oliver Massmann under omassmann@duanemorris.com if
you have any questions or want to know more details on the above. Oliver Massmann is the
General Director of Duane Morris Vietnam LLC.
THANK YOU !