State-owned enterprises (SOEs) play an important role in Vietnam’s economy, with their valuable resources, including land, labor force, brand name and market share. Investment in SOEs has become more attractive to foreign investors when Vietnam widened the door for foreign investment and hastened the equitization of SOEs.
Recently, the Government published the list of SOEs subject to equitization, the roadmap for equitization and the State ownership maintained in those SOEs after the equitization. Accordingly, for the period from 2016 to 2020, 103 SOEs remain wholly owned by the State; four SOEs wherein the State will maintain its ownership above 65% (including Vietnam Bank for Agriculture and Rural Development, Vietnam National Coal-Mineral Industries Holding Corporation Limited and PetroVietnam Exploration Production Corporation); 27 SOEs wherein the State will maintain its ownership above 50% up to 65% (including Vietnam National Tobacco Corporation, Vietnam Coffee Corporation, and MobiFone); and 106 SOEs wherein the State will hold less than 50% (including Vietnam Paper Corporation, Shipbuilding Industry Corporation, and Vietnam Cable Television). The published list created a new wave of attention by foreign investors into the equitized SOEs, and it is expected that there will be rush in foreign investment in such SOEs in the next few years. However, to optimize their investment and minimize potential risks when investing in the SOEs, the foreign investors need to take into consideration the following crucial points:
(1) Challenges in the legal framework on equitization
The legal regulations governing the equitization of SOEs are numerous, including the law on securities, law on management and utilization of State capital invested in enterprises, law on investment and the law on enterprises, and these regulations, on one hand, overlap and are inconsistent with each other, and on the other hand, are also insufficient and ambiguous, which present a challenge in their implementation. Therefore, seeking specific guidance from competent authorities in a particular circumstance is sometimes required when a foreign investor acquires shares in an equitizing SOE.
(2) Difficulty in obtaining information
Foreign investors may encounter several difficulties in collecting sufficient information and studying investment opportunities prior to and during the equitization process due to lack of information or access to it. Normal due diligence process in an M&A transaction is not feasible for the acquisition of SOE’s shares. Though the information of the equitizing SOE is legally required to be published, however, the extent of disclosure is not sufficient for the investors to determine potential risks and the value of such SOEs.
(3) Difficulty in appraisal of SOEs
Due to the difficulties in obtaining adequate information, foreign investors normally find it difficult to evaluate the value of the SOE accurately, and accordingly, also the purchase price.
In addition, lack of detailed guidance on evaluation of the SOEs for equitization purposes, such as the evaluation of value of the land use rights and intellectual property rights, including cultural value, historical value and value of brands, gives rise to uncertainty on the actual value of the SOE.
Lastly, the value of the SOE may decrease even after the equitization, subject to the conclusion of competent State authorities. This is because for SOEs that initially used the State budget for its operation, when it is equitized, the State authority has the power to check whether the equitization is compliant with the law and preserve the State budget. Therefore, it is common for SOEs to have contingent liabilities toward the State.
(4) Stricter foreign cap
Foreign ownership in SOEs is likely subject to stricter restrictions, given the fact that SOEs normally conduct several businesses with different requirements on foreign ownership ratio at the same time. To that end, instead of the common cap of maximum 49% of enterprise’s charter, the foreign ownership ratio shall not exceed the lowest [minimum] level of the business line (which such company operates) with foreign ownership ratio requirements. Thus, divestment from non-significant businesses that hinder higher foreign ownership in the SOE should be considered by foreign investors as a condition to effectively deal with this issue when negotiating their investment.
(5) Control issues
Without a shareholder agreement, a foreign investor which is the new shareholder must, by itself or with a group of shareholders holding 10% or more of the total of ordinary shares for at least six consecutive months in the target SOE, nominate their authorized representative to the Board of Director and Board of Inspectors in the target company. Normally, after the share acquisition, the foreign investors must wait for 6 months to exercise its management activities in the target company, unless the shareholder agreement provides other mechanisms to enable their immediate involvement. However, one problem is that unlike ordinary enterprises, negotiation of a shareholder agreement with SOEs would be more complicated and time-consuming since it would involve State agencies which are the representative of State capital in the SOEs.
(6) Human resource issues
SOEs normally have a huge number of employees, however, the efficiency of its human resource is not high due to the old mechanism where preference subsidies from the State are a guarantee for maintaining the employment. Maintaining a huge yet ineffective employees may affect the profitability of the SOEs. Also the management system of human resource in SOEs is totally different from those of the private sector and this may cause complexity in understanding, developing and optimizing the labor force within the SOEs.
Given the above issues, when acquiring shares of the equitized SOEs, foreign investors need to carefully consider the applicable regulations, closely monitor and work with competent State agencies and advisers in order to have a complete and accurate information and suitable investment plan.