In addition mergers and acquisitions (M&A) under assets acquisition to hold important assets of the target company, purchase of shares and capital contributions (“shares”) is another option that the buyer can choose when participating in M&A deal. It is easy to see that after the Covid-19 pandemic, many businesses fell into a state of loss and bankruptcy, along with the digital technology trend that has impacted the market for share and capital contribution purchasing to be vibrant again. Currently, enterprises operating in the fields of real estate, finance and e-commerce are receiving a lot of attention from foreign investors who have intention that through the acquisition of shares of the target company to become the rightful owner and hold its financial advantages.
M&A under share and capital distribution purchasing is understood as the buyer becoming the owner of shares/capital contribution in the target company and thereby gaining control in finance and operations management with a sufficient ownership ratio to dominate and make decisions on key issues, depending on the needs of the buyer as well as the conditions that the law allows.
If in M&A under asset acquisition the buyer only holds and has the right to decide with the asset, with share/capital contribution purchasing the buyer is entitled to control all activities of the target company, make important decisions related to the organizational structure, business activities, finance, securities, labor, etc. in the target company. For foreign investors, this is considered a priority option since it helps investors reduce investment costs, bypass the initial infrastructure construction, administrative procedures and quickly operate in Vietnam.
In 2021, finance, real estate, and retail purchases were considered attractive market areas for M&A transactions, with some notable M&A deals such as Sumitomo Group buying 49% of PE Credit’s capital; SHB transferring the entire financial company to a bank from Thailand; Thaco acquired Emart supermarket chain in Vietnam. This also predicts a vibrant period of the M&A market after Vietnam as well as other countries around the world are gradually looking to live together and develop right in the context of the epidemic.
If in M&A under asset acquisition the responsibility of the buyer is encapsulated only within the scope of the asset including the rights and obligations of an asset owner in accordance with the law, in M&A under share/capital contribution purchasing the buyer will be the successor and receive all obligations of the seller without limit on whether such obligations arise before or after the deal, including obligations of contracts, labor obligations, taxes, state agencies. In some cases there will arise disputes that the buyer may face such as commercial business disputes, labor disputes, shareholders disputes, etc. In order to minimize the potential risks, the initial due diligence and review during the execution of the M&A transaction should be considered as a “critical issue” beside price and payment term.
To ensure that the operating status of the target company after the completion of the M&A transaction is in accordance with the buyer’s plan but also to minimize the potential risks, the buyer should pay attention particularly to some elements such as:
– Compliance relating to the operation of the target company in terms of the conditions of establishment and operation, notably the licenses;
– Compliance in the dossier on member/shareholder status, capital/share, capital contribution, previous transfer transactions, capital raise, capital reduction, etc. from establishment to the execution of M&A transaction, as well as financial obligations and risks arise when shareholders/members fail to contribute sufficient capital or fail to fulfil their obligations in the transfer transaction;
– The assets of the target company, including tangible and intangible assets, particularly the legality of ownership, the legal right to use of the target company for the assets, documents proving the ownership rights, legal use rights of the target company. The buyer should note that these must be legal documents on ownership and use rights recognized by law respectively for each type of asset at a specific time;
– Compliance with labor. This is not only in terms of the internal regulations , as it also takes into account the current labor records, with the recruitment – implementation – the termination of the labor contract, the performance of insurance obligations, the allowances for employees, the outstanding disputes between the target company and its employee;
– Contracts, transactions in which the target company is a party, backlog obligations and accompanying disputes as well as potential risks related to the contract.
Thus, in order for the M&A under share/capital contribution purchasing to be fast and favourable, at the initial stage, the buyer needs to appraise all the matters that may affect the final objectives of the buyer in the deal as well affect the purchase price. During the appraisal process, experts and lawyers with their experience will review all legal issues that will likely affect the intended objectives. In addition, the consultant will provide both buyers and sellers with appropriate solutions to consider and choose to find a common solution to achieve their respective goals in the transaction.
The article is based on applicable law at the time noted as above and may no longer be appropriate at the time the reader approaches this article as the applicable law has changed and the specific case that the reader wishes to apply. Therefore, the article is only for reference.