Insight
Top 10 issues when foreign investors invest in Vietnam and how to deal with them
Below are some of the general risks that foreign investors tend to consider and to attempt to mitigate where necessary. Depending on the transaction and sector, there may be other risks to bear in mind.
1. Unpredictability
Vietnamese laws contain many gaps, contradictions and internal inconsistencies, and many Vietnamese parties to a contract are not used to detailed international standard contracts.
Given the absence of a meaningful system of binding case laws or other interpretative aids of binding precedential value, as well as the lack of experienced judges and arbitrators, the results of court and arbitral proceedings tend to be more unpredictable than in many other jurisdictions.
Mitigation:
- Foreign investors should spend time and resources building strong relationships with contractual counterparties, so as to avoid disputes to the extent possible.
- For contracts involving a foreign “element”, choose a foreign law and a foreign dispute resolution forum to limit the risk of needing to resort to the Vietnamese legal system. This may not always be possible.
2. Dispute resolution
The judgment or decision of a foreign court from most developed jurisdictions will not be recognised in Vietnam. The award or decision of a foreign arbitration cannot be directly enforced but has to go through the court’s recognition process.
The courts in Vietnam are generally not independent from the Government, and observers frequently question how free they are from inappropriate influences.
Although Vietnamese arbitration is generally considered to be more neutral than the Vietnamese courts, the quality of arbitration laws and centres is generally poor and arbitrators hearing the case will be free from inappropriate influences.
Even if an investor did prevail in court or arbitration, it would have to rely on the local judgment enforcement body to enforce the judgement or award, meaning that there is no guarantee that it will be able to enforce the award.
Mitigation:
- As legal action is a last resort, as well as being of dubious value, it is more important to ensure that the interests of all parties are aligned, such that Vietnamese counterparties are incentivised to comply with contractual terms. There should be a solid meeting of the minds at the beginning on the purpose and goals of the transaction.
- The transaction documents should also be well drafted to reflect such intentions. The corporate documents should also embed realistic management rights.
3. Licensing
Vietnam is a bureaucratic country. Numerous licences, permits and approvals are required by every business. This results in delays and additional costs to businesses.
For large greenfield projects or those in sensitive areas, developments can take a long time. This is because large numbers of governmental bodies are involved in the licensing process and because the administrative system is neither transparent nor efficient.
Mitigation:
- Before making an investment, an investor should understand the licensing parameters upfront and get to know those responsible for implementing them.
- If investing in Vietnamese companies with large developments, the investor should review their track record.
4. Foreign Ownership Limitation
Foreign ownership in numerous sectors is restricted (or prohibited) under international treaties (such as the WTO commitments or free trade agreements) or domestic law. If international treaties and domestic laws are silent, the licensing authority has the discretion to decide whether or not to allow foreign investment into the relevant sector.
Mitigation:
- An investor should understand the business of the target before the investment and, to the extent that any business is subject to foreign ownership limitations, ask for a pre-sale restructuring or use appropriate investment structures.
5. Foreign Exchange
The Vietnamese Dong is not a freely convertible currency and may not be taken out of Vietnam. Foreign-owned projects which receive revenue in Vietnamese Dong will be exposed to: (i) devaluations in the value of the Vietnamese Dong until such revenues can be converted into foreign currency; (ii) the risk that there is no foreign currency available at the time of conversion; and (iii) the fact that currency cannot be converted or remitted except for permitted purposes (e.g. repatriation of investment proceeds or dividends, repayment of foreign loans) and at specific times (e.g., once a year in respect of dividends).
The currency is currently appreciating slightly. Over the last 25 years there have been very few periods when foreign currency flows were delayed.
Dividends and capital gains can be freely remitted as long as tax liabilities were paid, and the investor contributed its capital through the correct channels.
Mitigation:
- To achieve greater flexibility in respect of the timing of foreign exchange payments, it is often possible to use shareholder loans and other agreements.
6. Corruption
Corruption remains a problem in Vietnam. In Transparency International’s Corruption Perceptions Index, Vietnam ranks poorly (although its ranking has improved in the recent years).
Vietnam has strict anti-bribery laws which, despite general appearances to the contrary, are sometimes enforced.
Businesses that do not engage in corrupt acts are widely respected. But this can be easier or harder depending on the sector involved and the level of demand for each company’s products or services.
Mitigation:
- Before investing in a Vietnamese target, investors should undertake a thorough due diligence of the target’s business activities, reputation and relationships. In sensitive situations, a full analysis of the implications is only possible with extensive cross-checks.
- Once an investment has occurred, directors and employees should be appropriately trained in how to do business without bribery.
7. Due diligence
An appropriate due diligence shall help parties in considerably migrating other risks. There are however certain difficulties associated with the due diligence process in Vietnam. The first being that there are no reliable public search systems or databases in Vietnam so the purchasers must rely heavily on the vendors to provide the necessary documents and fully disclose the legal, tax, financial and operational information sought to conduct a proper due diligence exercise.
In addition, Vietnamese companies often employ sub-standard recordkeeping and document management practices, which can result in long delays in document production or, in some cases, the inability to produce relevant documents.
Mitigation:
- Regular contacts with the management and meetings between all strands of the due diligence team in order for each work stream to know the findings of the others in real time.
- Plan for the due diligence, including its anticipated deficiencies.
8. Poor corporate governance and lack of knowledge/understanding
Many companies in Vietnam are family-run companies or developed from family-run companies. Corporate governance, corporate structure and capital structure are not always transparent and sometimes really messy.
In addition, many Vietnamese companies enter into a transaction without knowing exactly what they are doing. They agree to sign an agreement, give undertakings, make commitments but they do not know exactly what they undertake and commit.
Mitigation:
- If necessary, pre-sale restructuring of the target company should be undertaken.
- Engaging appropriate legal support and maintaining good relationships with the Vietnamese parties shall be also the keys for promptly discovering and effectively resolving issues.
9. Title to the assets
Vietnamese law does not require all movable assets to be registered so it is not possible to determine through a registry search that the target company has good title to all of its assets. With respect to registrable assets such as land, due to historical issues, origin of land to be used to develop a project in Vietnam is complicated and sometimes the users may not have sufficient documents to evidence their title over the land.
Mitigation:
- A prudent investor should always carry out appropriate due diligence on the assets of the target company before making an investment. Representations and warranties of the target company with respect to its title over assets should be also obtained.
10. Post-closing integration difficulties
When there are different persons with many cultural differences living in the same house, it is always difficult because there are many incompatible things. This issue will definitely being more considerable for a non-buyout transaction between foreign purchaser and Vietnamese seller.
Mitigation:
- It is very important for the parties to spend time to understand the counterparties rather than rushing forward, investing substantial amounts of time and money before realising that they will not be able to get along after the transaction closes.
