2018 is expected to be the year of the equitisation and listing of companies equitised in 2017.Equitisation will allow for more foreign investment and competition which is needed for the economy to grow and the country to develop. Companies such as VNPT, Saigon Trading Corp (Satra), PetroVietnam Oil Corporation (PVOil), PetroVietnam Power Corporation (PVPower), Power Generation Joint Stock Corporation 3 (EVN Genco 3), Binh Son Refining and Petrochemical Group (operator of Dung Quat oil refinery), Saigon Jewelry Company, Vietnam Cement, Becamex and Mobiphone are expected to be (finally) equitised or get listed this year.
The Government issued Decree No. 126/2017/ND-CP (Decree 126) on the conversion from state-owned enterprises (SOEs) and single-member limited liability companies with 100% of charter capital invested by the state into joint-stock companies (JSC). Decree 126 came into effect on 1 January 2018 and replaces Decree 59/2011/ND-CP (Decree 59) and all its amendments.
We highlight the key points of Decree 126 below.
The requirements for strategic shareholders in Decree 126 differ from those provided in Decree 59, a strategic investor:
a. has the status of a legal entity;
b. has adequate financial capacity and a profitable business in the past 2 years before the date of subscribing for shares without accumulated loss; and
c. must state in writing that: i. the primary business line(s) and brand(s) of the equitised enterprise will be maintained for at least 3 years from the date it becomes the strategic investor, and in case the brand of the equitised SOE is on the list of national brands the Prime Minister shall determine the period for maintaining the primary business line(s) and brand(s); ii. the purchased shares will not be transferred within 3 years from the day of issuance of Enterprise Registration Certificate (ERC); iii. there is a plan to assist the SOE with technology exchange, material supply, market development and financial management; and provide training for personnel; and iv. compensation shall be paid for damage in case commitments are violated; in which case the State can dispose of the shares purchased by the strategic investor.
Appendix 1 of Decree 126 sets out the procedure to select strategic investors in the equitised enterprise. This is to ensure that strategic investors are selected, and shares are subscribed before the initial public offering (IPO). The procedure consists of 6 steps and includes the timeline when each step will take place.
Decree 59 provided for a lock-up period of 5 years for strategic investors in which they were not permitted to transfer their shares. This has been reduced to 3 years.
Decree 126 provides that only SOEs in which the State will continue to hold more than 50% of the charter capital after equitisation may offer their shares initially to a strategic investor. This provision seems to imply that other SOEs may not offer their shares to a strategic investor.
Note that under Decree 59 the equitised SOE could offer shares to a strategic investor after or before the Initial public offering (IPO). Under Decree 126 the selection of a strategic investor and offer of shares to a strategic investor must be completed after the IPO. Also, of importance is that the price paid by the qualified strategic investors shall not be less than the average price of the IPO and subscription must be completed prior to the first general shareholders meeting.
Decree 126 provides detailed guidance for calculating the value of an SOE which is relevant for the price in the IPO, including specific exclusions in calculation of an SOE's value prior to equitisation such as leased assets, receivables, payables, investments, goodwill and the SOEs stakes in other companies.
The regulation on handling the financial issues prior to and in the process of equitisation, including how to determine the assets and liabilities of the equitised SOE, has been strengthened. Equity investments by the SOE that remain with the SOE after equitisation, will be taken into account when the SOE is evaluated. If the equity investments do not remain with the SOE, this must be reported to the relevant authority representing the State capital to:
a. reach an agreement with capital contributors to transfer the equity investment to another SOE; or
b. sell the equity investment to another partner or investors; or
If at the time of valuation, the equitised SOE fails to transfer or sell the invested capital, such equity investment will remain with the SOE post-equitisation.
5.2 Equity investment in foreign-invested enterprise
If the SOE has any equity investment in a foreign invested enterprise (FIEs), and there is a provision in the capital contribution contract or investment license stating that after the expiry of the operating term the FIE will hand over all assets without compensation to the Vietnamese party, such equity investment shall be taken into account when evaluating the SOE.
When the beforementioned operating term of the FIE expires, the JSC will transfer these assets to the State without compensation in accordance with the regulations on management and use of the State’s assets. The equitised company must inform the investor about this and specify these assets in the asset transfer record and the charter of JSC.
In addition to public auction, underwriting, direct negotiation, Decree 126 provides for an additional method of IPO, namely book building.
Basically, the conditions under which employees can buy shares have remained the same. However, more employees qualify as now also from subsidiaries of an SOE.
Mark Oakley / Managing Partner
Hieu Pham / Special Counsel
This legal update is not an advice and should not be treated as such.
If you would like to receive an update on latest developments, please subscribe to our newsletter