Vietnam: Merger Control
This is an Insight article, written by a selected partner as part of GCR's co-published content. Read more on Insight
Under Vietnam’s Competition Law (VCL), economic concentration includes company mergers, consolidations and acquisitions, and the creation of joint venture. Since it was created in 2005, the Vietnam Competition Authority (VCA) has not officially rejected any proposals for economic concentration that have been notified. However, this does not necessarily mean that this aspect of competition law is overlooked in Vietnam. According to the VCA’s reports, since 2011, it has dealt with an average of three to four notifications per year. In addition, the VCA is closely monitoring merger and acquisition activities in the market by cooperating with the licensing authorities and administering the structural changes of enterprises to ensure that all economic concentration is properly controlled by the competition authority. Notably, on 22 December 2014, the prime minister issued Decision 2327/QD-TTg (Decision 2327), granting an exemption to a merger between the only two card networks, resulting in a monopoly in the relevant market. This is remarkable for being the first exemption granted by the prime minister after 10 year’s enforcement of the VCL.
In this chapter, we shall revisit the merger control regime under the VCL, focusing particularly on the application of exemption rules. We shall comment on the merger control policy in Vietnam through the case study of the Card Union merger, and recommend some lesser-known solutions that investors may consider in the early stages to get the deal through.
Overview of the economic concentration regime
Certain merger controls may impose these economic concentrations (ie, a statutory notification or prohibition). The applicable form of merger controls shall be subject to the combined market share of a transaction.
If the combined market share of an economic concentration in the relevant market is below 30 per cent, then there are generally no restrictions. Such non-restriction also applies if the resulting merger is considered a small or medium-sized enterprise. Under the current applicable regulations, the criteria for determining the size of business are based on investment capital and number of employees, depending on the line of business. For example, a medium-size trading or service enterprise will have an investment capital of from approximately US$500,000 to US$1 million and a number of employees from 50 to 100.
If the combined market share is between 30 per cent and 50 per cent, the economic concentration must be notified to and approved by the VCA before the parties may proceed with the merger.
If the combined market share is more than 50 per cent, the economic concentration will be prohibited unless exempted by the prime minister or the minister of industry and trade (minister), as the case may be.
A violation of economic concentration regulation would result in a penalty of up to 10 per cent of the turnover of the participating parties. Other remedies, including divestiture or separation of a merged company, may be applied subject to the authorities’ decision.
The market share of a company is calculated by reference to its percentage of turnover from sales or inwards purchases over the total turnover from sales or inwards purchases of all companies in the business of the same type of goods in the relevant market for a month, quarter or year. The combined market share is the total market share in the relevant market of all companies participating in the economic concentration.
The data necessary for determining market share may be obtained from various government agencies, such as the General Statistics Office (in general), the Ministry of Finance (for the insurance industry), the Ministry of Information and Communications (for the telecommunications industry) or the State Bank of Vietnam (for the banking industry). Data published by reputable market researchers can also act as a useful starting point. Interestingly enough, the Vietnam Competition Authority (VCA), a governmental competition watchdog, will predominantly look at the extent of the combined market share when assessing whether an economic concentration shall be notified or prohibited in accordance with the VCL.
The prime minister has the authority to exempt an economic concentration that would otherwise be prohibited if it is considered to contribute to the nation’s socio-economic development or technology advance. Such exemption authority shall be under the minister in case a party of the prohibited economic concentration is at risk of dissolution or bankruptcy. The decision to grant an xemption shall consider, among others, the duration of the exemption, and the conditions on and obligations of the parties.
The VCA is responsible for evaluating requests of exemption and proposing that the minister grant exemption within its authority. If the prime minister authorises such exemption, the minister is required to send official letters seeking opinions on the exemption request from ministries, ministerial equivalent bodies, government bodies and other organisations and agencies concerned before submitting an evaluation report to the prime minister for his consideration and decision. Nevertheless, the VCL does not provide further guidance or criteria on determining such duration, conditions and obligations.
According to Decree 116/2005/ND-CP of the government dated 15 December 2015, providing detailed regulations for implementation of a number of articles of the Law on Competition, the following basic particulars must be included in the evaluation report:
- compliance by the explanatory report of the merging parties with satisfaction of the criteria for entitlement to exemption for a definite period;
- issues on which there are differing opinions and a plan for dealing with such issues; and
- the opinion of the VCA or minister where the economic concentration falls within the category for which the prime minister has authority to make a decision on exemption.
The exemption decision must be made public within seven days from the date of issuance. The exempting authority (ie, the prime minister or the minister) may revoke the exemption at any time during the exemption period in certain circumstances, such as if the conditions for granting exemption no longer exist.
The Card Unions merger
Decision 2327 concerned the merger of the only two card unions in Vietnam: Smartlink Card Services JSC to Vietnam National Financial Switching JSC (Banknet). The two companies are the result of a joint venture established by commercial banks operating in Vietnam to provide payment services for bank and payment cards and other related services (ie, card unions). It is worth noting that the State Bank of Vietnam (SBV) became a major shareholder of Banknet in March 2010. Since these companies are exclusive providers for banks in Vietnam, the merger would result in a card union monopoly. As such, its initial proposal of merging Smartlink into Banknet in 2012 was considered controversial, despite the SBV’s endorsement.
The main concern was that the monopoly status of Banknet would effectively eliminate the competition in the market and relieve the banks from pressure of innovation. Furthermore, the monopoly may create commercial advantages for the bank members against those that have yet joined the system. In response to this concern, a representative of SBV assured the public that after the merger, Banknet would have various business plans to serve the nation and consumer interest. According to SBV, certain benefits of the merger include:
- developing infrastructure for retail banking and non-cash payments in Vietnam;
- providing better services to customers without interfering with the banking services; and
- developing the national chip card standard set copyrighted by Vietnam which is also compatible with international standards.
As the combined market share of the participating parties exceed 50 per cent, an exemption is required for this merger. Upon a lengthy process of preparation, the application for exemption was finally submitted to the VCA in July 2014.
Conditions and duration
Under Decision 2327, the exemption was granted conditionally and for a limited period of time. Accordingly, the exemption is conditional upon the following obligations, whereby the post-merger Banknet is required to:
- develop and implement a roadmap for the use of modern technology in ensuring the quality of the payment infrastructure service;
- not discriminate among customers (eg, banks and other payment service providers);
- register with the VCA the template of intermediary payment service agreement before contracting such agreement with the customer – this register is a guarantee to remove any disadvantageous terms and conditions, if any, that the company may impose to customers;
- comply with the regulations and instructions of the State Bank of Vietnam when adjusting the service fee; and
- report to the VCA on the performance of each of these items above every five years.
The exemption is granted for an initial term of five years, which will be automatically renewed every five years subject to the monopoly’s compliance with the aforementioned conditions.
As the first economic concentration exemption issued under the VCL, Decision 2327 presents positive signals for the enforcement of the competition law regime in Vietnam. With Decision 2327, it is expected that there will be more compliance with the law, particularly in the public sector. It is worth noting that in the past, economic concentrations between State-Owned Enterprises often bypassed the competition procedures that are much more complicated and time-consuming than administrative procedures. In 2011, a controversial acquisition of Viettel (a corporation wholly owned and operated by the Ministry of Defence) over EVN Telecom (a subsidiary of Vietnam Electricity (EVN)), which had the alleged effect of increasing Viettel’s market share to over 50 per cent in 3G frequency resources, was conducted without the exemption procedures from the competition authority. Similarly, in 2012, the largest national air carrier, Vietnam Airlines, took over the state shares in low-cost carrier Jetstar Pacific without a competition exemption, although the acquisition has increased its share of the domestic market to over 90 per cent. These acquisitions were approved by the government decisions.
Missing the chance
Despite its positive outlook, Decision 2327 missed the chance to clear the murky water of the exemption rules under the VCL. The decision fails to present the authorities’ viewpoint on the economic benefits and potential anti-competitive effects of the merger. In particular, the decision did not provide any rationales for exemption (eg, factors that would be deemed to contribute to the nation’s socio-economic development or technology advance resulting from the merger). Likewise, since no potential effect on the restraint of competition was identified, it is hard to say whether or not the conditions listed in Decision 2327 are adequate or even necessary to ensure that the merger would not cause any harm to consumers. Finally, Decision 2327 does not devise a sound mechanism to monitor and control the compliance of the post-merger company with the exemption condition. It leaves doubt on the enforceability of the decision because such mechanism is not available in the VCL.
Given the lack of a cost–benefit analysis in Decision 2327, it does not provide much implication for others cases. In addition, it may arguably create potential discrimination among cases given Vietnam does not have a binding precedent system.
The VCL is silent on pivotal issues and accordingly provides a leeway for the authorities to determine such issues at their discretion. Such leeway may be justified because the exemption should be granted on a case-by-case basis, subject to the industry, form of economic concentrations and so on. As such, the consultation with the VCA is one of the key factors for ensuring compliance with competition law requirements, especially in cases where investors have doubts or concerns over whether their proposed transaction will be prohibited or require notification to the VCA.
This consultation function of the VCA has proved successful and, in numerous cases, the VCA has even assisted in the accurate calculation of the combined market share. There were cases for which the VCA consultation has provided its worth, including a state company in the oil and gas industry and a Korea-invested company in Vietnam. These companies were advised not to make any notification as the combined market share of the participants did not meet the threshold stipulated by law.
However, despite this function being readily accessible and available (and, in fact, free of charge), only a small handful of companies have utilised it to date. Surprisingly, from 2008 to 2011, consultation from the VCA had only been requested nine times – an insubstantial figure considering the number of major economic concentrations closed in Vietnam during this period.
The VCA currently offers two types of consultation: general consultation and specific consultation. The former, which can be done by e-mail or phone, is primarily used for clarifying general concerns over the provisions of the VCL. The latter is used when considering the threshold of whether the proposed transaction requires notification or is prohibited. By providing the VCA with the salient details of the proposed transaction (to the extent sufficient), the VCA will be able to assist in ascertaining the relevant market share and its potential impact on the market.
While consultation does not eliminate the need for companies to legally notify the VCA for larger economic concentrations, they are an invaluable resource for investors in navigating the country’s complex merger control regime. When the free consultation has the potential to save millions of dollars in penalties and legal headaches, as well as save time and costs in ascertaining whether there may be a breach, it is surprising as to why many investors have not utilised it.
Past experience has shown that the VCA does not act as a roadblock to transactions upon receiving a notification. In fact, to date, the VCA has not objected to any economic concentrations that have been notified to it. These include substantial economic concentrations that have resulted in a considerable increase to local market share, such as the merger of Nippon Steel and Sumikin Bussan Corporation, and the proposed merger of AIA and Prudential.
For this reason, prospective investors are advised to put these fears behind them and notify the VCA to close the transaction to the extent that they comply with competition laws. In addition, companies are not bound to proceed with their transactions after receiving approval by the VCA. Therefore, this notification can be provided as soon as the commercial terms of the transaction have been reached or even earlier during the deal negotiations.
While Vietnam’s competition law (particularly, its merger controls) arguably lack the sophistication of other developed jurisdictions, with their substantial penalties and potential to make or break a deal, they are often the overlooked elephant in the room for larger transactions.
Investors are reminded that competition law compliance should always be on the agenda when proposing and negotiating an upcoming economic concentration. However, these complex regulations need not be daunting and in fact, to ensure prospective transactions proceed as smoothly as possible and comply with competition law, the VCA should be considered as a friend, not a foe.
After all, to carry out the state’s overarching goals of promoting foreign investment and bolstering Vietnam’s economic growth, the VCA serves to promote healthy competition and foreign investment in the market to the extent permissible under the competition law.