Developments in securities legislation
Mark Fraser and Juniper Cheng
Frasers Law Company
Ho Chi Minh City
The past year has been interesting in terms of the development of the securities market in Vietnam with regulators addressing the need to develop regulations to match the growing numbers and increasing sophistication of investors.
Investments in enterprises may be made through investment in limited liability companies or through the purchase of shares in joint stock companies. We examine here the development of regulations relating to shares and what this will mean for investors into the country.
Currently, there are three ways in which foreign investors may hold shares in Vietnamese enterprises:
(i) by purchasing shares in companies listed on one of Vietnam's two stock exchanges;
(ii) by purchasing shares in State owned enterprises (SOEs) in the course of being converted (equitised) into joint stock companies; or
(iii) by purchasing shares in unlisted Vietnamese joint stock companies.
There is a plethora of legislation governing investment in securities in Vietnam, but in 2010 the Government passed two important pieces of legislation with the goal of better regulating the operations of the share market. The Law on Securities No. 70 of 2006/QH11 (Securities Law 2006) was amended by the Law on Securities No 62 of 2010/QH12 (Securities Law 2010) which came into force on July 1 2011 and Decree 102/2010/ND-CP (Decree 102) which came into force on November 15 2010.
Securities Law 2010 wider reach
The Securities Law 2010 broadens the definition of securities and brings unlisted company shares under its aegis. Under the Securities Law 2006, 'securities' had been defined as evidence from an issuing organisation certifying the lawful rights and interests of an owner with respect to an asset or capital portion. In the definition, an 'issuing organisation' was described as an organisation making a public issue of securities. Therefore, shares of non-public enterprises had not been considered to be securities.
However, this changed with the Securities Law 2010 under which, an issuing organisation comprises all organisations conducting offers of securities. This means that non-public companies will also be considered to be issuing organisations and shares of such companies shall be considered to be securities. This will have an impact not only in terms of regulation but also related areas such as taxation, however, by creating a unified regime it simplifies the market for investors.
Share offerings
In respect of public companies, the Law on Securities 2010 also regulates private offers of shares and convertible bonds issued by public companies. This is addressed by three main concepts: (i) limitations on the conditions for issue – a private placement will generally be a placement to less than 100 non-institutional investors which is not made via the mass media (including the internet), (ii) limitations on the time for transfer – after completion of the private placement, shares and convertible bonds may not be transferred (save for certain limited circumstances) for at least one year; and (iii) specifying the time for offerings – private offerings of shares and offerings of convertible bonds must also be carried out at least six months apart.
Mandatory offer rules
In an attempt to create a new legislative framework for the securities market, the Securities Law 2010 sets out the situations in which offers to acquire must be undertaken publicly, as well as cases which are not required to offer publicly, (such as inheritance or transfer by court order). We note that the Law on Securities 2010 requires an investor holding 25% or more of the voting shares or investment fund certificates (IFCs) of a public company or a closed investment fund to make a public offer for the shares where:
- it purchases a further 5-10% of the currently circulating voting shares or IFCs of a public company or closed investment fund within the period of one year from the date of completion of the previous tranche; or
- it purchases a further 10% or more of the currently circulating voting shares of IFCs of a public company or closed investment fund.
The mandatory offer process will also not apply in circumstances where the acquisition is an assignment between companies in a corporate group structure or where the relevant acquisition is approved by a general meeting of shareholders.
Decree 102
Decree 102 generally aims more at enterprises, yet is important from the perspective of understanding the securities regime in Vietnam by clarifying the forms of investment into enterprises and the definitions of certain terms. In recent years, there has been confusion about the definitions of 'charter capital' and 'the number of shares the company has the right to issue'. Furthermore, a problem of 'phantom' charter capital (i.e. shares that the company has registered and issued, but are not actually paid up) has emerged. These points are obviously important for an investor into a joint stock company as it needs certainty as to what investment it is making and what capital input that company has actually received.
Resolving this confusion, Decree 102 clarifies the definitions of Issuable Shares, Issued shares and Charter Capital:
Issuable shares are defined as shares that have been authorised for issue by a general shareholders meeting.
Issued shares are those which have been acquired (and paid for) by shareholders, while charter capital is defined as the total nominal value of issued shares.
Charter capital at the time of registration of a shareholding company is defined as the total nominal value of the issued shares for which founding and subsequent shareholders have subscribed at the time of registration. These must be paid in full within 90 days from the date of issuance of the enterprise registration certificate. Where shareholders have committed to buy only a portion of the issuable shares the remainder may be offered for subscription for three years from the date of the enterprise registration certificate.