Vietnam M&A Guide for Foreign Investors: Buying Shares or Capital in Local Companies

Why Choose M&A Instead of Establishing a New Company?

Key Advantages of M&A – Accelerated Market Entry

Foreign investors can quickly enter the Vietnamese market and immediately acquire an existing business—bypassing lengthy licensing procedures, facility setup, and initial recruitment stages.

Leverage Existing Assets and Capabilities

• Licenses and Compliance: Inherit existing business licenses and sub-licenses already granted to the target company.
• Facilities: Instantly own premises, factories, and machinery.
• Human Resources: Retain the management and staff familiar with local market practices and operational procedures.
• Customer Network & Brand Reputation: Gain immediate access to an established customer base, suppliers, and a trusted market brand.

Potential Drawbacks and Risks

Alongside the speed of market entry, foreign investors must also assume potential risks inherited from the target company’s past operations. To minimize these risks, thorough M&A due diligence should be conducted on key areas such as:

• Legal Risks: Unresolved litigation, past legal violations, or non-compliance obligations.
• Financial and Tax Risks: Hidden debts (overdue or off-book), tax non-compliance (transfer pricing, tax evasion), and undeclared liabilities.
• Labor Risks: Employee disputes, unpaid social insurance, or unfulfilled commitments with key personnel.

Key Steps in an M&A Transaction for Foreign Investors

A successful M&A transaction for foreign investors in Vietnam typically involves four core stages:

Step 1: Due Diligence (DD)

Due diligence is the most critical step, helping investors identify the true value, opportunities, and potential risks of the target company. It forms the foundation for price negotiation and protection clauses. Key due diligence areas include:

• Legal: Review the Enterprise Registration Certificate, Investment License, ownership structure, and company charter. Assess the legality of major contracts, ownership of assets (especially land-use rights), and any litigation or dispute history. Check compliance with data protection and reporting obligations.

• Finance & Tax: Analyze financial statements, asset quality, and cash flow. Verify compliance with tax obligations (CIT, VAT, FCT, etc.) and identify risks related to transfer pricing or associated-party transactions.

• Labor: Review employment contracts, social insurance records, internal labor regulations, and HR management policies to ensure full compliance with labor laws.

Step 2: Negotiation and Signing of the Main Agreement

After completing due diligence, both parties proceed to negotiate and sign the Share Purchase Agreement (SPA) or Sale and Purchase Agreement. Key provisions that foreign investors should pay attention to include:

• Purchase Price: Pricing method (e.g., Enterprise Value, Equity Value) and price adjustment or escrow mechanisms.
• Payment Method: Timing and conditions for fund disbursement (Completion Conditions).
• Representations and Warranties (Reps & Warranties): Seller’s commitments regarding the accuracy of disclosed information. This is a crucial clause protecting buyers from post-transaction risks (e.g., undisclosed liabilities).

Step 3: Governmental Approval

This is a mandatory step for M&A transactions involving foreign investors.

Under the Law on Investment, foreign investors must register their capital contribution or share acquisition with the investment registration authority (Department of Finance or Industrial Zone Management Board) if any of the following applies:

• The acquisition increases the foreign ownership ratio from below 50% to 50% or higher, or from 50% to a higher percentage.

• The target company operates in a business sector subject to foreign investment conditions.

• The target company holds a Land Use Right Certificate in sensitive areas (border zones, coastal areas, islands, etc.).

Step 4: Completion and Business Registration Update

This is the stage of transaction execution and administrative completion:

• Payment: The investor transfers payment to the seller, typically via a Direct Investment Capital Account (DICA) or Indirect Investment Capital Account (IICA).

• Transfer Confirmation: Both parties sign a Transfer Completion Minutes or Share Transfer Agreement Termination Record.

• Internal Procedures: The target company records the buyer’s information in its shareholder or member register, updates the company charter, and aligns internal documents accordingly.

• Administrative Procedures: The target company submits an application to the Business Registration Office under the Department of Planning and Investment to update the foreign shareholder/member information on its Enterprise Registration Certificate (ERC).

Only by carefully executing each phase—especially due diligence and SPA negotiation—can foreign investors maximize their benefits and ensure legal safety in an M&A transaction in Vietnam.

Special Notes for Foreign Investors

1. Foreign Ownership Limit (FOL)

Foreign investors must always check the ownership limits applicable to the target company’s business sector, especially those with foreign investment restrictions (e.g., logistics, advertising, finance, etc.). Exceeding these limits will result in rejection of approval.

2. Tax Obligations After the Transaction

Foreign investors should be aware of Corporate Income Tax (CIT) arising from the capital transfer:

• The seller (individual or entity) is responsible for declaring and paying CIT (or Personal Income Tax, if applicable) on the transfer of capital.

• The target company must withhold or monitor tax payment before completing the procedure for changing shareholders or members with the business registration authority.