Investors should know this before buying a Vietnamese company

According to the Investment Law 2020, foreign investors can take part in direct investment activities through company acquisition, such as buying a Vietnamese company. Besides the advantages of speediness and cost efficiency, investors also need to pay attention to the following issues.

1. Regarding the legal aspect

The legal system regulating buying a Vietnamese company activities by foreign investors in Vietnam is often dispersed in many legal documents, including Investment Law, Competition Law, Enterprise Law and other regulatory documents and relevant laws. To minimize risks, investors need to understand regulations to ensure full compliance with Vietnamese legislation when conducting the business acquisition process. Investors should consider the following factors: 

Finance

Before deciding to acquire a company, investors should analyze the target company’s audited financial statements for the past three years to evaluate the overall financial status of the target. 

Labor

Quality human resources are a decisive factor in the success and sustainability of each business. Key personnel, with a focus on technical skills and leadership abilities, play a decisive role in building strategy and shaping the future of the company. Investors need to evaluate the professional skills and future development potential of the workforce, especially key personnel. 

Customers

Business acquisitions are frequently carried out with the primary goal of capitalizing on current conditions to create opportunities for investors to develop in a new market. As a result, investors must understand the quantity of customers and partner relationships. Following an acquisition deal, this will be a key foundation for maintaining, increasing, and developing the business’s customer base.

Brand

Brand plays an important role as an intangible asset of a business. It is not uncommon for investors to opt for the acquisition of businesses that own famous brands in the target market. Acquiring a branded business helps investors save time, effort, and significant costs compared to building a brand from scratch. And of course, the transaction value upon repurchase is also directly influenced by the brand’s commercial reputation in the relevant market.

Documents to prepare

Investors need to pay attention to the necessary documents when preparing buying a Vietnamese company documents such as: 

• Decision of the owner, the Board of members or the General Meeting of Shareholders on the sale of the company; 
• Document requesting to acquire the company; 
• Acquisition contract; 
• Charter of the target company; 
• Draft the Charter of the company after acquisition (if there are any changes); 
• Document confirming the legal status of the foreign investor.

2. Legal risks

Legal risks include: 

• Risks may arise during operations, including suspension or forced bankruptcy due to violations of tax obligations or debts, as well as non-compliance with legal regulations; 
• Risks emanating from state management agencies and administrative decisions can severely affect the business’s ability to operate; 
• Potential risks arising from complaints by business partners; 
• Risks can stem from inadvertent, deliberate, or negligent actions by personnel within the business, as well as from disputes, potentially entangling in legal issues.

3. Financial risks

These risks can be: 

• Capital-related risks (such as insufficient charter capital contribution or lack of transparency in capital sources);
• Asset-related risks (stemming from potential discrepancies between asset valuation and actual value);
• Risk of debts to partners or state agencies. 

Normally in the execution of extensive M&A transactions, effective financial risk management relies on the assistance of independent audit units. These units are tasked with checking and verifying financial statements, assets, as well as related issues of the business to generate a financial appraisal report. This process ensures the precision and completeness of information, furnishing stakeholders with a robust and dependable database for decision-making in M&A transactions.

Besides, hiring professional valuation units becomes essential in cases where parties disagree on the valuation process. Based on these reports, buyers can assess financial risks, aiding in their decision-making regarding the acquisition and serving as the foundation for negotiating the purchase price.

4. Legal due diligence of target businesses

During the process of buying a Vietnamese company, the buyer needs to conduct legal due diligence on important factors including: Capital, personnel, business licenses, environment, and important contracts.

Effective legal due diligence will help businesses bring the following benefits: 

• Minimize risks that may arise during the transaction process. 
• Create a competitive advantage for the buyer and maximize the value of the deal by clearly defining your position in the transaction. 
• Create favorable conditions for negotiation, leading to a reasonable purchase price. 

When performing legal due diligence, buyers need to pay attention to the following points:

• Have a detailed appraisal plan with timelines, scope, and appraisal objects. Then, present this plan in detail to the company being acquired to ensure overall agreement; 
• Clearly identify key and secondary risk issues, outlining strategies for problem resolution and establishing acceptable boundary points; 
• Specify detailed and clear requirements, possibly quantifying them with numbers to ensure the results provide precise and accurate information; 
• Propose a specific schedule for each appraisal task to maintain coherence and effectiveness.

5. Conclusion

As stated above, the business acquisition process involves numerous risks and precautions. To secure a successful deal, sellers must conduct meticulous appraisals of legal and financial issues. A legal due diligence throughout the M&A process is like a must for all of these transactions to succeed, since there are many underlying risks that business owners cannot recognize and control.

At PLF Law Firm

Buying a Vietnamese company could be a great idea for investors to expand business in Vietnam, as it actually saves a lot of time comparing to investment from the start. However, the transaction is only secured if they address well the legal and financial risks, and get support from a partner knowing to handle carefully the legal due diligence.

At PLF, we consistently advises and supports all parties involved in the M&A transaction throughout every step and stage. For the best results, we also provide a comprehensive service for Mergers & Acquisitions, supporting companies from Buy and Sell sides to handle their pre, during and post-M&A. Depending on the situation, we can flexibly tailor the legal strategy, among Restructuring, Legal Due Diligence, Banking & Finance and Deal Execution.

Contact PLF Law Firm today via email at inquiry@plf.vn or +84913 902 906 or Zalo | Viber | WhatsApp to receive a free 30-Initial Minute Consultation.

Article completion date: November 07th, 2024.

PLF Law Firm