LDD in M&A transactions in Vietnam (Chapter III)

Chapter III: Business Conditions and Regulatory Compliance; Litigation; Intellectual Property; and Labour

Author: Bao Trang & Minh Tien

Business Conditions and Regulatory Compliance

An essential aspect of the LDD is business conditions and regulatory compliance requirements that specifically apply to several business lines of the Target. Therefore, the lawyers need to delve into the specialized laws governing the Target’s business lines to explore the business conditions and/ or regulatory compliance requirements that the laws expect the Target to satisfy.

Firstly on business conditions, by laws, business conditions can be applied either in writing form or not. Business conditions in writing can be applied in the various forms such as license, certificate of satisfaction of conditions, practising certificate, certificate of professional indemnity insurance cover, and written confirmation.

For example about business conditions in the form of license: foreign-invested enterprises that conduct retail business are required to obtain a business license to retail some types of goods; enterprises that produce industrial liquorsare required to have an industrial liquor production license.

For example about business conditions in the form of practising certificate: enterprises which produce industrial liquors must have professional and qualified technical personnel suitable to the liquor production business line (in the form of professional certificates or degrees of the technical personnel); securities enterprises must have at least three securities practitioners suitable for each licensed business operation (in the form of securities business practising certificates suitable for each licensed business operation of these securities practitioners).

Additionally, enterprises can be bound by business conditions that do not require confirmation or approval in the written form to carry out business activities. For example, some educational institutions must ensure a certain proportion of learners per lecturer and a floor area built on learners according to the laws on education.

Additionally, the specialized laws require enterprises to meet some specific conditions in environment and fire prevention and fighting…. Notably, for manufacturing enterprises, the environmental aspect becomes very crucial in the LDD process. Because the laws on environment require enterprises to satisfy and comply with many conditions such as preparing and obtaining approval for environmental impact assessment reports (usually referred to as EIA reports), preparing and obtaining confirmation for environmental protection plans, obtaining confirmation for completing environmental protection works, having waste treatment agreements, preparing registry of hazardous waste source owners, or registering permits for discharge wastewater into water sources. In fact, enterprises often fail to fully satisfy the environmental conditions, such as failure to revise the EIA reports when increasing the scale and capacity of the projects. Besides the environmental aspect, the lawyers also need to bear in mind the fire prevention and fighting matter, especially for enterprises having many offices, warehouses, and factories... Pursuant to the laws on fire prevention and fighting, enterprises must satisfy many regulatory compliance requirements, including approval of fire prevention and fighting design, acceptance of fire prevention and fighting works, and purchase of compulsory fire and explosion insurance.

Secondly, in terms of regulatory compliance, along with business conditions required in the specialized sectors, many enterprises also have to comply with the competent authorities’ reporting regime, such as enterprises established under the IRC or enterprises operating in certain specific business lines(such as education, securities, and animal feed production). Non-compliance with this reporting regime is an administrative violation and may especially breach enterprises’ commitments to the competent authorities when conducting these certain business activities. For example, on the IRC of some foreign-invested enterprises (specifically in Article 3 – provisions for the investor implementing the project), enterprises generally undertake to comply with the reporting regime with the competent authorities fully. Subject to the foreign investment in enterprises, their reporting obligations vary, for example, report on investment (for foreign-invested enterprises), report on the production of animal feed (for enterprises having animal feed production facilities), and report on postal production, business, and service provision (for some enterprises providing postal services).

Consequently, in terms of business conditions and regulatory compliance obligations, the lawyers need to understand the Target’s business activities and study the specialized laws related to those business lines. Accordingly, the lawyers can make a list of business conditions and regulatory compliance obligations that the Target needs to satisfy to carry out these business activities and then require the Target to provide statutory supporting documents corresponding to these requirements.

Litigation

One of the most popular questions of foreign investors when investing in enterprises in Vietnam is whether the Target has gone through any dispute or sanction recently or whether there is any ongoing or upcoming potential dispute in which the Target is a party. In reality, Vietnam does not officially have a public channel to provide complete and transparent information about disputes in courts or administrative sanctions of individuals and organizations. Currently, the Supreme People’s Court has published some court judgments and decisions at the Court’s Portal (link). However, the drawbacks of such a portal are that information about the parties to the dispute is encrypted, and that this site does not publish the judgments and decisions of cases heard by the Court in confidentiality, or cases having contents in the list of State secrets, or cases having no legal effect yet... Given this, information to be searched will not be complete. In addition to this website, there are also several non-Governmental websites providing court judgments and decisions, but they are also limited to uses for academic and research purposes. Thus, names and addresses of some individuals and organizations mentioned in these court judgments and decisions may have been changed and/ or omitted.

In light of the above, the lawyers will need to look up public sources to get information related to disputes and administrative sanctions of the Target (such as searching on the Internet) or through interviews with the Target’s authorized persons. For administrative sanctions, in addition to the mentioned methods, the lawyers may look through audited financial statements of the Target if sanctions for such violations are penalty.

Nevertheless, it will also be onerous for the lawyers and the Acquirer to identify disputes or sanctions related to the Target if the Target is unwilling to disclose this piece of information.

Intellectual Property

Regarding the intellectual property aspect, the lawyers need to check whether the Target has any assets that need to be registered or notified under the laws on intellectual property and e-commerce or not, for example, a trademark and website. For trademarks, the lawyers have to examine whether the trademark(s) used by the Target has been registered for protection. This concern can be resolved by checking at the website of the National Office of Intellectual Property of Vietnam (link). If the Target uses trademark(s) of another enterprise (usually its related enterprise), the lawyers should verify whether the Target has a trademark licensing agreement with the enterprise owning the trademark or not. In respect of the domain name of the Target’s website, the lawyers need to check whether the Target is the domain owner. This check can be performed at websites of enterprises operating in domain name service accredited by the Vietnam Internet Network Information Center (a center directly under the Ministry of Information and Communications) as National Domain Registrar, such as https://whois.inet.vn/.

Additionally, a prevalent violation of intellectual property rights in many Vietnamese enterprises is the use of "pirated" software. This violation is also a worth-noting point when conducting the LDD.

Employment

When conducting the LDD in the field of employment, at first, the lawyers need to gather general information about employment usage of the Target by requesting it to provide a list of employees with key information about the employees’ nationality (Vietnamese or non-Vietnamese), position, type of labor agreements (seasonal/ definite/ indefinite employment agreements), date of signing/ renewing the employment agreements, and the number of their extensions. Based on this list, the lawyers can understand the Target's employment situation and, at the same time, analyze its employment obligations (such as applying for work permits for their foreign employees or registering internal labor rules (ILR)).

After accessing information about the nationality of the employees, the lawyers can assess whether the Target employs any foreigner and whether such a foreigner (if any) possesses a work permit or a document certifying that such a foreign employee is not required to obtain a work permit and whether these documents are still valid. Failure to comply with these requirements may result in severe administrative consequences such as the expulsion of such foreign employees.

In case of having ten or more employees, the Target is required to register the ILR. The ILR is a legal corridor that provides fundamental regulations to govern the relationship between the Target and its employees, such as working hours, rest breaks, and occupational safety and hygiene in the workplace. The ILR is also the ground for disciplining employees. The lawyers need to check whether the ILR has been registered with the competent authorities and whether its contents are in line with the laws on employment or not.

Based on the type of employment agreements and the number of employment agreement extensions, the lawyers should note the expired and unextended agreements. According to the laws on employment, if the definite employment agreements are not extended, they will be converted into indefinite employment agreements. Also, the laws lay down that definite employment agreements can be extended only once. Issues related to the types and extensions of employment agreements will have a direct impact on the Acquirer’s employment usage after completing the acquisition and merger transactions.

Besides, the lawyers need to request the Target to provide employment agreement templates for each type of agreements (seasonal/ definite/ indefinite employment agreements) and employment agreements of senior positions to examine whether the contents therein are consistent with the ILR, the collective labor agreement (if any) and the laws on employment. In particular, for employment agreements of senior positions, the lawyers should pay close attention to non-competition and confidentiality clauses. These clauses are commonly described in employment agreements of senior positions, while the legality and enforcement of these clauses are still a big question mark in practice.

The Target (as an employer) and its employees must follow compulsory insurance policies, including social insurance, health insurance, unemployment insurance, and insurance for labor accidents and occupational disease. The lawyers should compare the number of insured employees with the number of employees provided by the Target to verify whether the Target has fully settled these compulsory insurances. Currently, the Criminal Code has criminalized the act of evading social insurance, health insurance, and unemployment insurance, so the lawyers need to inspect the Target’s insurance payment carefully.

If the Target has a collective labor agreement with its employees, the lawyers also need to examine whether the contents therein adhere to the laws and whether the Target has submitted this agreement to the competent authorities. In addition to the benefits for employees specified in the employment agreements, the ILR, and the collective labor agreement, the lawyers also need to identify other benefits that the Target offers to its employees, especially for senior positions (such as rewarding policies and tuition support for children) to give the Acquirer a heads-up about its obligations after the completion of the merger and acquisition transaction.

The final concern is regulatory compliance with the laws on employment, such as the obligation to report to the competent authorities on the employment of foreigners; occupational safety and hygiene activities; and technical inspection of occupational safety. Specifically, for enterprises using dangerous equipment, they need to ensure regulatory compliance with the conditions on occupational safety and hygiene, for example, identification and assessment of hazardous and harmful factors at the workplace; and periodic inspection and maintenance of machines, equipment, factories, warehouses. As such, the lawyers need to explore if the Target is subject to such compliance regulations.