M&A is a popular method of developing, implementing investment projects and restructuring businesses. Currently, the demand for M&A transactions in Vietnam is increasing, developing strongly with increasingly flexible and complex methods, requiring in-depth knowledge and experience in legal, financial and operational management. Especially in the context of international integration and market fluctuations, M&A transactions are further complicated by the participation of many entities in the same transaction, including investors, credit institutions, domestic and international banks.
In fact, there is no sample transaction for all M&A transaction but the structure of each transaction is often different, depending on the objectives of the seller, the buyer and the results of the DD on the purposed project or the target company. Therefore, this article only provides several highlights for the buyer in the process of performing the DD as the basis to decide the method and route of M&A transactions through the transfer of all shares/contributed capital in the company having project using land (“Target company”).
The DD on the project or the company is the requisite step for the buyer to determine the purchase price, method and roadmap of the M&A transaction. Here are our highlights for the legal assessment of the purposed project and the Target company:
1. DD on legal dossiers of the project (or projects) of the Target company:
At the outset, the buyer needs to collect and request the seller to provide complete and accurate information and documents related to the project (or projects) of the Target company. These projects include projects in which the Target company is already the investor, or is in the development stage, implementing legal procedures to be recognized as the investor, and also projects in which the Target company is cooperating to develop, invest, manage and operate, etc.
A number of key points need to be focused and appraised related to the project(s) of the Target company include:
- the legal compliance of the planning:
In practice, we encountered many cases where although the Target company has completed the legal procedures of investment, construction, even completes the construction phase and process the business phase of the project, but due to the adjustment of the project’s planning (to update or to adjust to be accordance with the higher-level planning or by the invvestor’s decision), the project’s owner is required to proceed an adjustment procedure of the project, that affect the business and financial plan of the buyer after acquiring the project. As a result, the DD on the legal dossier of the project’s planning is very important.
- the legal compliance of the investment documentation:
Whether the Target company has been approved for investment policy/issuance of investment registration certificate or other decision/certificate having the same validity in accordance with the laws on investment, real estate trading, housing, relevant specialized regulations from time to time; Whether the project is implemented by the Target company according to the schedule and other investment as approved by the authorities.
The DD on the legal compliance of the investment documentation is a very important for the buyer to assess the conditions, legal issues and potential risks of investment procedures that the buyer will face to, after taking over the company/project, as well as to set out the conditions and commitments required to the buyer in the transaction documents.
- legal compliance of the land using:
Whether the Target company has completed the land-use procedures of the project(s); whether there are enough legal documents to record the land use rights and ownership of assets on the land of the project’s owner; whether the Target company has fulfilled its land financial obligations; whether the Target company is facing to any dispute or complaint of her individuals and organizations related to the land use right, property ownership right attached to the land.
In practice, we find that mostly the transferred projects during the investment preparation phase, or during the construction phase, or have not been officially operated, have legal issues on land-use right and obligation, but each project has its own legal issues and characteristic. Nevertheless, the buyer does not have full access to land’s documents, thus, requiring legal consultants having depth knowledge and practical experience on laws on land, investment and construction to be able to identify and assess the legal issues and potential risks related to land using right of the project. For example: The seller can provide documents showing that the seller has fulfilled its financial obligations on land, but the project is subject to planning adjustment, it is necessary to consider whether the adjustment of the project’s planning will lead to the need to adjust the land price of the project and the investor must fulfill additional financial obligations on land for the authority or not.
- the legal compliance of construction, environment, fire protection and other necessary approval/licensing procedures:
The DD on these contents is very important for the buyer to be aware of the legal issues of the project procedures, potential risks for the buyer in case the project has not or cannot complete the above legal procedures. This is, in most cases, the key points for the buyer to decide on the purchase price, as well as set conditions precedent for the seller during transaction negotiations.
(Source: Vietthink)2. DD on business records, loans and transactions related to the project(s)
The buyer is recommended to review the following important contents related to the financial status of the project:
- Documents, contracts, transactions related to existing loans, bonds that the Target company has issued to raise capital for the implementation of the Target company’s projects; and the assets and property rights of the project have been used to secure existing loans and bonds issued by the Target company.
- Whether the assets formed from the project, products of the project, whether the investment/business rights of the project are being used as collateral, guarantee or security for any payment obligations, whether they are restricted from transferring/buying and selling and the time and conditions for conducting M&A transactions if this case, conditions of settlement, etc;
- Outstanding obligations to third parties, construction contractors, suppliers of the project; the situation of financial implementation of land and taxation, etc. with competent authorities and inspection conclusions, minutes/decisions on sanctioning violations of competent Authorities (if any); etc.
The above legal reviews are key findings for determining the financial obligations, as well as other outstanding obligations and potential disputed risks of the Target company, as the results for the buyer to decide the purchase price, conditions and payment schedule, asfor other trading conditions with the seller.
In our consulting practice, we encounter many cases where the buyer has subjectively failed to conduct thorough legal review and appraisal of the above contents, leading to the loss of big resources and costs to handle outstanding problems and obligations from unknown transactions which has not been appraised prior to the transaction. For transactions involving third parties such as banks, credit institutions financing loans, project financing institutions or bondholders, or owners of assets securing loans of the Target company, it is especially important to be aware of the legal issues of the transaction conditions and commitments of the seller in completing relevant procedures and obligations.
However, in reality, the DD on the Target company’s transactions depends on a lot on the provision of documents and information of the seller. Therefore, in order to minimize unidentifiable risks due to lack of information and transaction records provided by the seller, we often work closely with the buyer's independent consultant, financial appraisal and audit unit to identify transactions that have not been provided by the seller.
3. DD on the Target company
It is necessary to review the status and rights of shareholders/capital contributors for shares/contributed capital in the Target company such as: Shareholders/capital contributors in the Target company to ensure that they have fully contributed charter capital at the Target company and are entitled to transfer part or all of their shares/contributed capital at the Target company in accordance with regulations or not; whether it is subject to transfer restrictions or has made any transactions related to the transfer of shares/contributed capital, etc.; to avoid arising disputes and may lead to prolongation of procedures for completing the recognition of the transfer of shares/contributed capital to the buyer.
It is also necessary to review and assess agreements, contracts, transactions, and other business activities of the Target company as well as outstanding obligations with third parties such as agreements with suppliers, pledge/mortgage/loan agreements signed with credit institutions and/or other third parties, labor contract, etc.; the performance of financial obligations to competent authorities, etc.
We recommend that the buyer should review and appraise the legal status of shares/capital contributions of shareholders/capital contributors and/or assets of the Target company being used for guarantee, mortgage, security for any obligations and related satisfaction of mortgage conditions.
We also note that the buyer needs to perform a legal review of whether the dividend payout/profit distributions has been made (if any) at the Target company in accordance with the laws and the Target company’s charter to avoid the risks of recovering dividends/profits distributed in accordance with Article 70 and Article 136 of the Law on Enterprise 20201.
LLM, Lawyer. Nguyen Thanh Ha, Lawyer. Ngo Dieu Linh - Vietthink Law Firm
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1 Article 70 of the Law on Enterprise 2020: Recovery of returned capital or distributed profit: In case part of contributed capital is returned against the regulations of Article 68.3 of this Law or profit is distributed to members against regulations of Article 69 of this Law, the members shall return the money or assets they received from the company and are jointly responsible for the company’s debts and liabilities in proportion to the amount or assets that have not been returned until they are fully returned.
Article 136 of the Law on Enterprise 2020. Return of payments for repurchased shares or dividends: In case repurchased shares are paid for against the regulations of Article 134.1 of this Law or dividends are paid against regulations of Article 135 of this Law, the shareholder shall return the money or assets received. Otherwise, all members of the Board of Directors shall have a joint liability for the company’s debts and liabilities which is equal to the value of unrecovered money or assets.