Sở Hữu Trí Tuệ, Bản Quyền Tác Giả
Lưu ý: “bài viết này chỉ phát hành tiếng Anh cho các tạp chí nước ngoài”
Vietnam is member of the World Intellectual Property Organization (WIPO) and a signatory to various international treaties and agreements relating to protection of intellectual property rights. Its legal system on intellectual property is deemed meeting with TRIPS regulations, providing legal framework for registration, establishment, protection and enforcement of intellectual property rights (IPRs).
However, it is recognized that the legal system of Vietnam on intellectual property is rather complicated. Matters related to IPRs in Vietnam are not concentrated in one or two laws. They are governed by different laws and regulations depending on different aspects of IPRs. The 2005 Civil Code (Code No. 33/3005/QH11) and the 2005 Intellectual Property Law (Law No. 50/2005/QH11) as amended by the 2009 Law (Law No. 36/2009/QH12) are deemed the most important laws, providing general, basic but important regulations on registration, protection and IPRs-related transactions. Other issues related to IPRs would be also governed by other laws and regulations, such as the Law on Enforcement, Law on Customs, Law on Telecommunications, Law on Internet Management, Law on Medical Service Practice, Code of Civil Procedures, Code of Criminal Procedures, and Law on Quality of Goods.
Under the Intellectual Property Law and the aforesaid Laws, a series of Decrees, Decisions, Circulars are promulgated by the Government, Prime Minister, Supreme’s Court, General Customs Department, National Office of Intellectual Property, Ministry of Science and Technology and various other central Ministries and provincial authorities, for guiding the implementation. Below are some main Decrees and Circulars on registration and protection of IPRs:
- Decree 100/2006/ND-CP dated 21 September 2006 on copyright and related rights;
- Decree 103/2006/ND-CP dated 22 September 2006 on registration and protection of industrial property rights;
- Decree 104/2006/ND-CP dated 22 September 2006 on registration and protection of plant varieties;
- Decree 105/2006/ND-CP dated 22 September 2006 on protection and enforcement of intellectual property rights;
- Decree 97/2010/ND-CP dated 21 September 2010 on sanctions to administrative violations in industrial property;
- Decree 154/2005/ND-CP dated 15 December 2005 guiding the implementation of the Law on Customs on customs control on intellectual property to importing goods and exporting goods;
- Circular No. 02/2008 jointly issued by the Supreme’s Court, Supreme’s Procuracy, Ministry of Culture, Sports and Tourism, Ministry of Technology and Science and Ministry of Justice on 3 April 2008 guiding the procedures for settlement of disputes on intellectual property rights at the courts;
- Decree 54/2000/ND-CP dated 3 October 2000 on protection of industrial property rights on trade secret, geographic indications, trade names and protection of anti-unfair competition rights.
Vietnam is member of the following international agreements on intellectual property:
- Paris Convention for the Protection of Industrial Property, 30 April 1975
- Patent Cooperation Treaty (PCT), 10 March 1993
- Madrid Agreement on International Registration of Marks, 15 May 1973
- Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks, 11 July 2006
- Berne Convention on Copyright Protection of Literary and Artistic Works, 26 October 2004
- Geneva Convention for the Protection of Producers of Phonograms Against Unauthorized Duplication of their Phonograms, 6 July 2005
- Brussels Convention Relating to the Distribution of Programme-Carrying Signals Transmitted by Satellite, 12 January 2006
- International Convention for the Protection of New Varieties of Plants (UPOV), 24 December 2006
- Rome Convention for the Protection of Artists, Performers, Phonograms Producers and Broadcasting Agencies: to be acceded
- Member of the World Trade Organization (WTO), acceded to WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS).
- US-Vietnam Bilateral Trade Agreement, Chapter II on Intellectual Property;
- Vietnam-U.S. Copyright Agreement;
- Swiss-Vietnam Agreement on Protection of Intellectual Property Rights.
Application of International and Bilateral Agreements
Article §5 of the Intellectual Property Law stipulates that if provisions of international treaties to which Vietnam is a signatory contravene the provisions of the Intellectual Property Law on the same issue or the Intellectual Property Law of Vietnam does not regulate any issue which is regulated in such international treaties, relevant provisions set forth in such international treaties shall apply.
Objects to be protected
Under the Intellectual Property Law, the following objects are protected:
- Inventions, utility solution is a technical solution, in form of a product or a process, to resolve a specific issue by utilizing laws of nature.
- Industrial designs is appearance of a product expressed in shapes, lines, dimensions, colors or any combination thereof
- Trademark includes trade mark and service mark, is any sign used to distinguish goods or services of different organizations and individuals. Collective mark is a mark used to distinguish goods or services of members from those of non-members of an organization that is the owner of the mark. Certification mark is a mark licensed by its owner to other organizations, individuals to use for their goods or services in order to certify characteristics in respect of origin, materials, raw materials and methods of goods production or methods of services supply, quality, accuracy, safety or other characteristics of such goods or services. Associated marks are marks that are registered by the same owner, identical or similar to each other and are used for identical or similar or inter-related goods and services. Well-known mark is a mark widely known throughout territory of Vietnam.
- Layout of semiconductor integrated circuits is a three-dimensional disposition of circuitry elements and interconnections of such elements in a semiconductor integrated circuit.
- Business secret is information obtained from financial, intellectual investment which is undisclosed and susceptible to application in business.
- Trade name is a designation of an organization or individual used in business to distinguish the business entity bearing such designation from other business entities acting in the same field and area of business. The area of business stipulated in this paragraph shall be the geographical area where business entity has business partners, clients or reputation.
- Geographical indication is a sign used to indicate a product originating from a specific area, locality, region or country.
- Plant varieties is a plant grouping within a single botanical taxon of the lowest known rank, uniform of morphological, stability in the propagation circle, which can be distinguished by the phenotype expressed by a genotype or the combination of genotypes and distinguished from other plant grouping in at least one genetic phenotype. Rights to plant varieties are the rights of organizations, individuals to the new plant varieties which are created or discovered and developed by and fall under the ownership right of such organization or individuals.
- Copyright (literary, artistic and scientific works) and related rights (performances; sound recordings; video recordings; broadcasting programs; satellite signals carrying encrypted programs).
“First Come First Serve” principle
In case of more than one applications filed by different applicants for patents for one invention or for Patent for more than one industrial designs which are identical or not distinctive with each other or for Registration Certificate of more than one trademarks which are identical with or confusingly similar to each other for goods/services which are identical with or similar to each other, Patent/Registration Certificate will only be granted to application which is legitimate and which has earliest priority date or filing date among the applications which satisfy conditions for being granted Patent/Registration Certificate.
In case all of such applications satisfy conditions for being granted Patent/Registration Certificate and have same earliest priority date or filing date, Patent/Registration Certificate will only be granted to only one application among those in accordance with mutual agreement of all applicants; if no agreement is reached, all applications shall be refused.
How foreign applicants will file applications in Vietnam?
Under the Intellectual Property Law, foreign applicants cannot file applications for registration of their IP rights directly with the National Office of Intellectual Property. Foreign applicants shall authorize Vietnamese IP law firms under power of attorney to file such applications or represent them to complete other procedures for acquiring their intellectual property rights in Vietnam.
Vietnamese IP law firms who can represent foreign applicants to file applications must be licensed to practice in intellectual property in Vietnam. General law firms which are not licensed to practice in intellectual property are not permitted to represent foreign applicants to file applications for registration of industrial property rights in Vietnam. Foreign law firms practicing in Vietnam are not licensed to practice in intellectual property.
Applicant for registration of an invention, an industrial design or a trademark is entitled to claim priority right on the basis of the first application for registration of the same objects if the following conditions are fully satisfied:
- The first application has been filed in Vietnam or a country which is member of an international treaty having provisions on such priority right to which Vietnam is a party, or which is a country having agreement with Vietnam to apply such priority right provisions;
- Applicant is a national of Vietnam or such a country as mentioned in the preceding subparagraph (a), who permanently resides or has production/business establishment in Vietnam or such a country as mentioned in the preceding subparagraph (a);
- Claim for the priority right is clearly stated in the application and a copy of the first application, which is certified by patent and trademark office receiving such first application;
- The application has been filed in Vietnam within the time-limit prescribed in the international treaty to which Vietnam is party.
In a single application for Patent for invention, industrial design or Certificate of Registration of trademark, the applicant may claim priority right based on different earlier applications, provided that such claim must indicate the corresponding contents of such earlier applications and the application.
An application enjoying priority right shall have priority date being the filing date of the first application.
Duration of Examination
Vietnam applies the system of substantive examination of IP objects for registration. The applications shall first be examined in term of their formality and then substantially.
All applications for registration shall be checked in terms of their formality to ensure their compliance with requirements of the Intellectual Property Law on documents. Duration of formality examination is 1 month from the filing date. If the application satisfies with such requirements, the application will be accepted legitimate and passed to publication and substantive examination phases.
Applications for registration shall be examined as to its substantive contents within the following time limits:
- As to application for invention, 12 months from its publication date if request for substantive examination is filed prior to publication date or from the date of request for substantive examination if such request is filed after the publication date;
- As to application for trademark, industrial design, geographical indication, 6 months from its publication date.
The time limit for re-examination of application shall be equal to two thirds (2/3) of, and in complicated cases extendable up to, the time limit of its initial examination.
Time for amendment of or supplement to application shall not be counted in the time limits of formality, substantive examination and re-examination.
Bases of establishment and protection of intellectual property rights
Industrial property rights to inventions, layout of semiconductor integrated circuits, industrial designs and trademarks are established and protected on the basis of decision issued by the Vietnam National Office of Intellectual Property to accept protection of such objects, in form of Protection Title or written decision on acceptance of protection (applicable to trademarks internationally registered in Vietnam under Madrid Agreement and Madrid Protocol).
Industrial property right to geographic indication is established and protected on the basis of Certificate of Registration of such geographic indication, granted to organization managing such geographic indication.
Industrial property rights to well-known trademark is established on the basis of bona fide use of such mark, which makes such trademark become famous, without registration with the Vietnam National Office of Intellectual Property.
Industrial property right to trade name is established on the basis of legitimate use of such trade name without registration with National Office of Intellectual Property of Vietnam.
Industrial property right to business secret is established on the basis of financial, investment and intellectual activities or results of other legitimate activities to find out, create or acquire information which creates business secret and protect confidentiality of such information without registration with National Office of Intellectual Property of Vietnam.
Titles of Protection
An invention is protected in form of a Patent of Invention.
An industrial design is protected in form of a Patent of Industrial Design.
A trademark is protected in form of a Certificate of Trademark Registration.
A layout of semiconductor integrated circuit is protected in form of a Certificate of Registration of Layout of Semiconductor Integrated Circuit
An appellation of origin is protected in form of a Certificate of Registration of Appellation of Origin.
Patents and Certificates are collectively called as “Titles of Protection” under the Intellectual Property Law.
Duration of Protection
- Invention. A Patent for an invention becomes effective as of the granting date thereof and continues its effect for 20 years from the application filing date.
- Utility Solution. A Patent for a utility solution becomes effective as of the granting date thereof and continues its effect for 10 years from the application filing date.
- Industrial Design. A Patent for an industrial design becomes effective as of the granting date thereof and continues its effect for 5 years from the application filing date. A Patent can be renewed two consecutive times each 5 years.
- Trademark. A Certificate of Registration of a trademark becomes effective as of the granting date thereof and continues its effect for 10 years from the application filing date. A Trademark Registration Certificate can be renewed unlimited times, each 10 years.
- Layout of Semiconductor Integrated Circuits. A Certificate of Registration of a layout of semiconductor integrated circuit becomes effective as of the granting date thereof and terminates its effect on earlier of the following dates:
- Expiration of 10 year period, counted from the application filing date;
- Expiration of 10 year period, counted from date of registration or first use in commerce at anywhere in the world;
- Expiration of 10 year period, counted from the date of creation of the layout of semiconductor integrated circuit.
- Geographic Indication. A Certificate of Registration of a geographical indication is valid indefinitely from the granting date.
- Copyright. Generally, a moral right (or personal rights) of authors is protected indefinitely, except moral right to publish or permit others to publish the works. Duration of protection of the material rights (or property rights) and the moral right (to publish or permit others to publish the works) is as follows:
- As to cinematographic work, photographic work, theatrical work, applied fine art work, anonymous work, the time-limit of protection shall be 50 years from the first publication date thereof. Within 50 years from the fixation date of cinematographic work, theatrical work, if those works have not yet been published, the time-limit of protection thereof will be counted from the fixation date of those works (it should be noted that on 1 January 2010, this time-limit is revised as follows: the time-limit of protection of cinematographic work, photographic work, applied fine art work, anonymous work shall be 70 years from the first publication thereof; as to cinematographic work, photographic, applied fine art work which are not published within a duration of 20 years from their fixation, the time-limit of protection thereof will be 100 years from their fixation);
- Works other than the above-mentioned works shall be protected for the lifetime of the author and for another 50 years after the death of the author. With respect to a work of co-authors, the time-limit of protection of such work will end on the 50th year after the death of the last surviving author.
- The time-limit of protection shall end at the 24 hour on 31 December of expiration year of copyright.
Termination of Validity of Title of Protection
The validity of a Title of Protection would be terminated in the following cases:
- The owner of a Title of Protection do not pay the annuities or do not apply for renewal of such Protection Title as prescribed;
- The owner of a Title of Protection has declared to relinquish the rights conferred by the Protection Title;
- The owner of a Title of Protection has no longer existed or the owner of Trademark Registration Certificate has no longer engaged in business without a lawful successor;
- A registered trademark has not been used by its owner or owner’s authorized users without justifiable reasons for a term of 5 consecutive years prior to a request for termination, except in case where the use is commenced or resumed at least 3 months prior to date of request for termination;
- The owner of Registration Certificate of a collective mark fails to supervise or ineffectively supervises the implementation of the rules on use of collective mark;
- The owner of Registration Certificate of a certification mark violates the rules on use of certification mark or fails to supervise or ineffectively supervises the implementation of such rules;
- Specific geographical conditions attributable to the reputation, quality or characteristics of the products bearing a geographical indication have been changed, modified which result in a loss of the reputation, quality or characteristics of such products.
Invalidation of Title of Protection
A Title of Protection would be entirely invalidated in the following cases:
- Applicant neither has right to register nor has been assigned such right to register inventions, industrial designs, layout of semiconductor integrated circuits and trademarks;
- Industrial property object fails to satisfy conditions for protection at the granting date of Title of Protection.
A Title of Protection would be partly invalidated if that part fails to satisfy conditions for protection.
Any organizations or individuals shall be entitled to request the National Office of Intellectual Property to invalidate a Title of Protection. The time limit for filing of such request is the whole duration of protection. With respect of trademark, the time limit shall be 5 years as from the granting date of Title of Protection, except in case where the Title of Protection was granted due to the applicant’s dishonesty and bad fair.
Doing Business in Vietnam
Mua Bán và Sáp Nhập Doanh Nghiệp
Lưu ý: “bài viết này chỉ phát hành tiếng Anh cho các tạp chí nước ngoài”
1 Types of transaction
How may businesses combine?
The most common forms of business combinations in Vietnam are acquisitions, joint ventures, mergers and consolidations.
Generally, an acquisition includes share deals and asset deals. In terms of legal definitions, ‘acquisition’ does not have one common legal definition. It is defined across various laws of Vietnam, as follows:
the Law on Investment provides for a partial share transfer or subscription as one form of investment. It is distinctive from an ‘acquisition’, which is a complete share transfer;
- according to the Law on Competition, the acquisition of an enterprise means the purchase by one enterprise of all or part of the assets of another enterprise sufficient to control or govern all business lines or one business line of the acquired enterprise; and
- acquisition of a credit institution is, however, differently regulated, being the purchase of all of the assets, rights and obligations of the target credit institution. After the acquisition, the target becomes a subordinate entity of the acquiring entity.
An asset transfer, as opposite to a share transfer in the M&A context, is nevertheless not regulated. Asset transfers, including business transfers, are usually structured as share transfers whereby the target business is intentionally separated and transferred to a special-purpose vehicle, the shares of which would then be acquired by the investor. An asset transfer could also be straightforward between the seller and the buyer, which includes one or numerous sale and purchase transactions. An asset transfer is also mentioned in the Law on Investment through the term ‘project transfer’. The Law on Investment passed on 26 November 2014 also mentions ‘partly or wholly project transfer’. The project transfer may be followed by the liquidation of the transferring entity.
A joint venture is interpreted as a form of enterprise which foreign investors may enter into with domestic investors to establish limited liability companies with two or more members, joint-stock companies or partnerships under the provisions of the Enterprise Law and relevant laws. Under the new Law on Investment and new Law on Enterprises, the term ‘joint venture company’ no longer exists. Nevertheless, the form of enterprise to which foreign investors and domestic investors jointly contribute capital (or called as a foreign invested enterprise (FIE)) still exists under the form of investment by establishing a new entity (with partial foreign investment capital) or investment by partial share transfer or subscription of new shares. An FIE shall have legal person status under Vietnamese law, be established and operate from the date of grant of the enterprise registration certificate.
A merger means a situation where one or more companies (merging companies) may be merged into another company (merged company) by way of transfer of all lawful assets, rights, obligations and interests to the merged company and, at the same time, termination of the existence of the merging companies.
Consolidation means a situation where two or more companies (consolidating companies) may be consolidated with each other to form a new company (consolidated company) by way of transferring all lawful assets, rights, obligations and interests to the consolidated company and, at the same time, terminating the existence of the consolidating companies.
The Law on Enterprises (effective from July 1, 2015) allows companies of different types to be merged or consolidated without a change of company type before the merger or consolidation.
2 Statutes and regulations
What are the main laws and regulations governing business combinations?
In addition to any sector-specific legislation, business combinations are mainly governed by the Law on Enterprises, the Law on Investment, the Law on Securities and the Law on Competition. Particularly, the Law on Enterprises and the Law on Investment are the two main laws generally governing business combinations and applicable to all companies incorporated in Vietnam. The government recently promulgated decrees and circulars to guide these laws (ie, Decree No. 78/2015/ND-CP and Decree No. 118/2015/ND-CP). Specific regulations addressing private equity transactions are Decree No. 96/2015/ND-CP, Decree No. 58/2012/ND-CP (as amended by Decree No. 60/2015/ND-CP), Decision No. 88/2009/QD-TTg and Circular No. 131/2010/TT-BTC. If the transaction involves a transfer of shares of a public company, the Law on Securities, Decree No. 60/2015/ND-CP, Circular No. 123/2015/TT-BTC and related rules and regulations will apply. If the deal involves credit institutions, Circular No. 04/2010/TT-NHNN (as amended by Circular No. 36/2015/TT-NHNN) shall apply. Cross-border transactions will be subject to the Law on Investment, the Ordinance on Foreign Exchange (and its guiding Circulars No. 05/2014/TT-NHNN and No. 19/2014/TT-NHNN), and the Vietnam’s World Trade Organization (WTO) commitments. Where an M&A transaction triggers a competition concern, the Law on Competition must be observed.
3 Governing law
What law typically governs the transaction agreements?
Generally, the law of the jurisdiction in which the target company is established or where the assets for sale are located is selected as the governing law of the agreements. The specific law and regulations will vary depending on the particulars of the transaction. The choice of foreign law rather than Vietnamese law is accepted to the extent that it is not contrary to the basic principles of Vietnamese law.
4 Filings and fees
Which government or stock exchange filings are necessary in connection with a business combination? Are there stamp taxes or other government fees in connection with completing a business combination?
M&A transactions involving companies that are active in certain industries such as banking and finance, aviation or insurance may require the approval of their industry regulator. When state-owned assets or equity are involved, the approval of the relevant state bodies is required. In addition, the transaction may have to be conducted through a competitive method such as tender or bidding if it involves in a project funded by 30 per cent or more or 500 billion dong or more state capital.
For acquisitions of public companies, except for the exceptional cases listed in question 9, the Law on Securities requires an acquirer who wishes to acquire from 25 per cent of the shares of the target company, or a shareholder and related parties holding 25 per cent or more of the voting shares continue the purchase of 10 per cent or more of the voting shares, or a shareholder and related parties holding 25 per cent or more of voting shares continue the purchase of 5 per cent to less than 10 per cent of the voting shares in less than one year after the completion of a previous general tender offer, to file a tender offer application with the State Securities Commission (SSC). The process for conducting a tender offer includes three major steps as follows: (i) registering the tender offer application to the SSC; (ii) making a public announcement regarding the tender offer and conducting the tender offer; and (iii) reporting to the SSC. The application comprises the registration application, the shareholders’ or board’s resolutions of the purchaser regarding the tender offer and the shareholders’ resolutions of the target in the event it redeems its shares to reduce its charter capital (if any). Upon completion of the tender, the offeror must report to the SSC about the tender results within five days. For the listing of companies after merger and consolidation, there are several conditions with regard to operation duration, number of profitable fiscal years, number of accrued loss fiscal years, overdue debts and so on.
In certain circumstances, a business combination involving a Vietnamese company may be subject to the reporting requirements of the Vietnam Competition Authority (VCA). Under the Law on Competition, if the parties to a business combination have a combined market share of between 30 per cent and 50 per cent of the relevant market they must notify the VCA before the proposed combination. The proposed combination can only be carried out after written confirmation has been received from the VCA that the combination is not prohibited, which will be issued within 45 days from the registration. The combination shall be prohibited if the combined market share is above 50 per cent in the relevant market.
There are two exemptions to this rule, such as where one or more of the parties participating in the economic concentration is or are at risk of being dissolved or of becoming bankrupt; or where the concentration has the effect of extension of export or contribution to socio-economic development or to technical and technological progress. These exemptions, however, are not automatically granted. The relevant parties must file with the VCA a request for an exemption for economic concentration.
In the case of a merger or consolidation, the investor must comply with the procedures under the Law on Enterprises regarding the liquidation of a company and the formation of a new company. Such events must be registered with the business registration authority and the relevant authorities.
If the acquisition results in a shareholder directly or indirectly owning upwards of 5 per cent of a public company, then information about such shareholder shall be reported to the SSC, the stock exchange where the shares are listed within seven days.
A business combination may require a change to be made to the investment certificate or investment registration certificate or business registration certificate or enterprise registration certificate of the target company, or both. A government fee of about US$10 may be paid to register such change. Under the Law on Investment, an acquisition of 51 per cent shares or more in a local company or acquisition of shares of a local company engaging in conditional business sector shall subject a foreign investor to a registration formality with the Department of Planning and Investment before proceeding. In addition, the transaction will be subject to various Vietnamese taxes depending on the structure of the transaction, as further specified in question 18.
In addition, the fee for registering supplemental stock is about US$250, and in case the listed stock, which is required by law to exchange via the central stock exchange, is occasionally allowed to be transferred via an off-exchange transaction between parties, a fee of 0.1 per cent of the transaction value shall be charged when the buyer returns to the Vietnam Securities Deposit to register its ownership.
5 Information to be disclosed
What information needs to be made public in a business combination? Does this depend on what type of structure is used?
The information that needs to be made public in a business combination will depend on the type of structure used. As mentioned above, the offeror must file a registration application with the SSC that contains various information such as the name, address and historical business performance of the offeror and its market share in the relevant business; the name and address of the target; the relationship between the offeror and the target; the current shareholdings of the offeror in the target; the number of shares to be acquired; the intention of the acquirer post-acquisition with respect to the target’s operation and employees; the sources of capital to fund the acquisition, etc. Upon receiving the approval of the SSC, the offeror must make public disclosure of the offer in three consecutive issues of an electronic newspaper or printed newspaper. Furthermore, if the target is a listed company, the offeror is also required to make an announcement on the portal of the stock exchange in which the target company’s shares are listed in accordance with the recent regulations on disclosure of information of the Ministry of Finance – Circular No. 155/2015/TT-BTC, effective from 1 January 2016 and replacing Circular No. 52/2012/TT-BTC.
Any 5 per cent shareholder of a public company must make a report to the SSC if there is any change of 1 per cent or more in the shareholding or if he or she is no longer regarded as a major shareholder of the public company within seven days from the date of change. Information to be disclosed includes:
- the name, address and business lines of corporate shareholders;
- the full name, age, nationality, place of residence and occupation of individual shareholders;
- the number and percentage of shares owned by such shareholders; and
- the reason and date of change.
Besides, a listed company and a large-scale public company must publicise information relating to capital contribution valued at 10 per cent or more of total assets of the company into other organisation; capital contribution valued at 50 per cent or more of charter capital of receiving companies receiving capital contribution; as well as purchasing, selling assets valued at more than 15 per cent of the company’s total assets according to the latest audited financial statement or the latest reviewed semi-annual financial statement.
In case there is a merger or consolidation of companies, the companies must notify their creditors and employees of the merger or consolidation within 15 days from of the merger or consolidation resolution.
Furthermore, if the merger or consolidation triggers competition concerns then the companies must notify the VCA or the Competition Council thereof. Information to be disclosed includes financial statements of the past two years; a report on the market share in the relevant market of the parties in the past two years, list of subsidiaries, list of goods and services supplied, etc.
6 Disclosure of substantial shareholdings
What are the disclosure requirements for owners of large shareholdings in a company? Are the requirements affected if the company is a party to a business combination?
A shareholder owning 5 per cent or more of a public company must report to the public company, the SSC, the stock exchange where the shares are listed within seven days from the date of acquiring such large shareholdings. Where there is any material change with respect to the previously reported information or a change in the shareholdings that exceeds 1 per cent of the outstanding shares, such shareholder must also submit the amended report to the public company, SSC and the stock exchange where the shares are listed within seven days of the changes being made.
A shareholder owning from 5 per cent of the voting shares of a public company must also report to the public company, the SSC, the stock exchange where the shares are listed within seven days from the date of his or her no longer being a major shareholder of the public company.
7 Duties of directors and controlling shareholders
What duties do the directors or managers of a company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination? Do controlling shareholders have similar duties?
Under Vietnamese law, a director manages the day-to-day business operations of the company; shall be supervised by the board of management and shall be responsible to the board of management and before the law for the exercise of his or her delegated powers and the performance of his or her delegated duties.
Besides the fiduciary duties that the directors of a company will assume under the Law on Enterprises, they also have the following duties.
Directors, senior management and large shareholders with knowledge of information about a takeover situation shall not abuse such information to trade shares for their personal benefit or supply such information, encourage or solicit others to trade shares before the official public disclosure of the tender offer. In addition, the board of the target must notify the SSC and its shareholders of its opinion about the offer to acquire.
Depending on the type of structure applied and the value of transaction, a business combination of a shareholding company may fall within the authority of the shareholders or the board of management. Normally, a business combination in the form of acquisition or joint venture with value of less than 35 per cent of total asset value of such company (or a smaller percentage stipulated in the company charter) is under the authority of the board of management. The board of management is required to exercise their powers and duties honestly and diligently to the best of their abilities in furtherance of the best lawful interests of the company. A merger or consolidation or business combination through acquisition or joint venture with substantial value is a matter under the shareholders’ authority, thus a decision to make such business combination must be passed by the shareholders in a convened meeting. The chairman of the board is responsible for convening such meeting pursuant to the procedures stipulated by law in order to obtain the shareholders’ approval. Specifically, the chairman shall send notice of the meeting, the agenda and documents to the shareholders well in advance of the scheduled meeting at least 10 working days.
The law provides that the contract for a business combination in the form of merger and consolidation must be sent to creditors within 15 days from its being approved. It does not specify the responsible persons but usually it is the legal representative of the companies. Besides, the business combination shall be announced to the employees within the above-specified time limit.
Directors and managers must also declare the details of companies in which they own shares and companies in which their related parties own more than 35 per cent of the equity interest. Such declaration must be conducted within seven working days from the date of arising of the relevant interest. A business combination involving either of these companies must be approved by the shareholders or the board, as the case may be. A party who has an interest in such transactions cannot vote.
A director (general director) of a shareholding company is now allowed to concurrently hold the position of director or general director of other companies. However, from 1 July 2015, this restriction no longer exists.
With respect to controlling shareholders, except the reporting obligation mentioned in question 6, basically, they do not owe any duty to the company or the minority shareholders in the context of a business combination.
Generally, the Law on Securities prohibits the following conduct:
- directly or indirectly acting fraudulently or cheating, creating false information or omitting essential information that causes a serious misunderstanding and adversely affects a public offering, listing and trading securities, conducting business and investing in securities, securities services and the securities market;
- disclosing false information with the aim of persuading or provoking the purchase and sale of securities, or disclosing incomplete or out-of-date information about events that have a major effect on the price of securities on the market;
- using inside information to purchase or sell securities for oneself or for a third party; disclosing or supplying inside information or advising another person to purchase or sell securities on the basis of inside information;
- colluding in the purchase and sale of securities aimed at creating a false supply and demand; trading securities in the form of colluding with or persuading others to continuously purchase and sell in order to manipulate the price of securities; combining the aforementioned methods or using other trading methods in order to manipulate the price of securities; and
- implementing the securities trading activities without the SSC’s approval.
8 Approval and appraisal rights
What approval rights do shareholders have over business combinations? Do shareholders have appraisal or similar rights in business combinations?
Under the Law on Enterprises, any proposals for the issuance of new shares or disposing of assets of material amounts of the company, or a merger or consolidation shall require the approval of shareholders present and voting in person or by proxy representing at least 65 per cent of the voting rights. From the effective date of the Law on Enterprise 2014 (1 July 2015), the percentage for the adoption of the above business combination as a
In addition, a shareholder is entitled to demand for cancellation of resolutions of the shareholders in the following cases:
- the order and procedures for convening the shareholders meeting did not comply with the Law on Enterprise and the charter of the company; or
- the order and procedures for issuing a resolution and the content of the resolution breach the law or the charter of the company.
Within 90 days from the date of receipt of the minutes of the shareholders meetings, a shareholder or a group of shareholders holding more than 10 per cent of the total ordinary shares for a consecutive period of six months or more shall have the right to request a court or an arbitrator to consider and cancel such resolution of the shareholders.
There is no regulatory appraisal right of shareholders towards a business combination.
9 Hostile transactions
What are the special considerations for unsolicited transactions?
The Securities Law establishes three situations where the investor acquiring voting shares, fund certificates of the public company or closed-end fund must tender a general offer to acquire:
- if the proposed acquisition results in the investor owning 25 per cent or more of voting shares, fund certificates that are issued and outstanding;
- organisations or individuals and related persons holding 25 per cent or more of voting shares, fund certificates to purchase 10 per cent or more of voting shares or fund certificates, which are issued and outstanding; and
- organisations or individuals and related persons holding 25 per cent or more of voting shares, fund certificates of closed-end fund to continue the purchase of 5 per cent to less than 10 per cent of the voting shares, fund certificates in less than one year after the completion of a previous general tender offer.
In addition, the law provides for seven exempted situations that are not subject to public offering:
- if the proposed acquisition results in the investor owning more than 25 per cent or more of the newly issued voting shares, fund certificates according to the issuance plan already passed by the shareholders of the public company or fund representative board of the closed-end fund;
- if the proposed acquisition results in the investor owning 25 per cent or more of the voting shares, fund certificates that are already approved by the shareholders of the public company or fund representative board of the closed-end fund;
- internal transfer of shares between holding company and subsidiaries;
- gift, inheritance or share certificates;
- when participating in a public auction of securities for sale is not required to implement the provisions on public offers to acquire if such entity intends to purchase shares with share ownership ratios at or exceeding the threshold subject to a tender offer;
- transfer under the court’s decision; and
- other transactions as provided by the Ministry of Finance.
Generally, the investor must follow the following process in a takeover:
- submit a tender offer to the SSC and send a copy to the target;
- the target makes an announcement of the offer within three days;
- the SSC gives its opinions within 15 days;
- the board must send its opinions regarding the offer to the SSC and shareholders of the target within 10 days. The board’s opinions must be in writing and signed by majority of the board members;
- the investor must make an announcement in three consecutive issues of a printed or online newspaper and the website of the stock exchange where the shares are listed, within seven days from its receipt of the SSC’s opinion;
- the investor must report the results of the offer to the SSC within five days from completion of the offer and at the same time make a public announcement on the result of the offer;
- the investor must appoint a securities company as an agent conducting the offer; and
- the offer period must be no shorter than 30 days and no longer than 60 days. It is noted foreign ownership of shares of a public company is now removed from the overall 49 per cent cap. Particularly, on 26 June 2015, the government issued Decree No. 60/2015/ND-CP and among the changes, the most welcomed point is the relaxation of the overall 49 per cent cap on foreign ownership in Vietnamese public companies. From 1 September 2016, in general, foreign ownership of public companies will not be limited. Decree 60, however, lists certain cases where foreign ownership will still be restricted, such as certain sectors under Vietnam’s international treaties (eg, Vietnam’s WTO commitments); and sectors restricted to foreign investors under the Law on Investment. If specific foreign ownership limitations for such conditional sectors have not yet been set, the foreign ownership in such cases will be capped at 49 per cent. In addition, where an investor acquires newly issued shares of a company in a private share placement the investor is restricted from selling the shares within one year.
10 Break-up fees – frustration of additional bidders
Which types of break-up and reverse break-up fees are allowed? What are the limitations on a company’s ability to protect deals from third-party bidders?
Vietnamese law does not prohibit or otherwise regulate break-up fees and reverse break-up fees. Generally, breaches to the break-up fee agreements may lead to contractual penalties whereby the breaching party has to pay a pre-determined amount to the other parties. It is critical to note that a liquidated damages clause is not specifically provided under Vietnamese law. As a general understanding, the amount of the liquidated damages is determined by reference to an estimate of the likely loss suffered by the non-defaulting party as a result of the breach. In other words, the amount of damages is pre-agreed and does not depend on the non-defaulting party demonstrating the amount of loss actually suffered. On the other hand, Vietnamese law provides for two types of monetary remedies for breach of contract, namely penalty for breach and compensation for damages. In term of penalty for breach, the parties may agree on the penalty amount, but the amounts may not be more than 8 per cent of the value of the contractual obligation which is the subject of the breach if they are considered as a penalty. Furthermore, the aggrieved party can request for damages for loss. The value of damages for loss shall comprise the value of the actual and direct loss that the aggrieved party has suffered due to the breach as well as the direct profits the aggrieved party would have earned had such breach not been committed. Additionally, although not specifically regulated, the fees should be fully disclosed in the offer document that is registered with the SSC and the offer announcement. The break-up fees would also be approved by the shareholders of the target. Where the transaction is between affiliated companies, issues such as transfer pricing and related-party transactions should be considered. If the fees are to be paid to a foreign party it will also raise a foreign exchange issue.
We are not aware of any provisions that prohibit or restrict financial assistance in business combinations.
Vietnamese law does not place limitations on a company’s ability to protect deals from third-party bidders. As mentioned above, the board of the target must send its opinions regarding a takeover offer to the SSC and shareholders within 10 days. The board’s opinions must be in writing and signed by majority of the members of the board. If the board objects to the offer, it is unclear whether the deal can proceed or be aborted. We note that except for some special circumstances, shareholders are not restricted from selling their shares.
11 Government influence
Other than through relevant competition regulations, or in specific industries in which business combinations are regulated, may government agencies influence or restrict the completion of business combinations, including for reasons of national security?
The Vietnamese government may restrict or bar certain cross-border transactions for reasons of national security or public policies of Vietnam.
Cross-border M&A transactions shall comply with the commitments of Vietnam upon accession to WTO. Transactions involving a Vietnam-incorporated company active in multiple businesses usually require appraisals of various line ministries and satisfaction of numerous industry specific conditions. Business lines that are not required to be to open to foreign investment under the WTO framework are subject to the sole discretion of the Vietnamese authorities. Owing to the workload in some big cities, a lack of inter-agency coordination and a lack of implementing regulations in several sectors, these reasons may break deals or delay business combinations in some situations.
12 Conditional offers
What conditions to a tender offer, exchange offer or other form of business combination are allowed? In a cash acquisition, may the financing be conditional?
A tender offer must ensure that:
- all conditions specified in a tender offer must apply equally to all shareholders in the target company;
- the relevant parties can fully access the tender offer information;
- the self-determination right of the shareholders of the target company is fully respected;
- the law on securities and securities market and other relevant laws are observed; and
- the party making tender offer must appoint a securities company as an offering agent.
A tender offer must be between 30 and 60 days. A tender offer may be supplemented or revised with terms no less favourable than those of the previous offers.
During a tender offer process, the offeror shall not:
- directly or indirectly purchase or undertake to purchase the subject shares of the offer outside the offer tranche;
- sell or undertake to sell the subject shares of the offer;
- treat shareholders holding the subject shares unfairly;
- supply separate information to a sub-group of shareholders or provide a different level of information to different groups of shareholders or at different times;
- refuse to purchase the subject shares of target company or fund certificates of investors from target investing fund; or
- purchase target company’s shares or fund certificates of target investing fund which is contrary to the terms disclosed in the registration of tender offer.
After making a public announcement, the offeror may only withdraw the offer in the following circumstances:
- the total number of shares registered to sell is less than that intended to be purchased by the offeror as announced;
- the target company increases or reduces the number of its voting shares via a share split, share consolidation, or conversion of preference shares;
- the target company reduces its shareholding capital;
- the target company issues additional securities to increase charter capital; or
- the target company sells all or a part of its business or assets.
In a cash acquisition, the purchaser must specify in its disclosure report to the SSC the sources of funds it uses for the acquisition.
If a buyer needs to obtain financing for a transaction, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing?
Generally speaking, the buyer should provide in the transaction documents the requisite approval of the financing entity, this being a condition precedent upon closing of the transaction. The payment schedule must be commensurate with that of the financing arrangement between the buyer and the financing entity. In addition, foreign exchange regulations must be observed depending on whether the investment is regarded as indirect or direct, which shall determine the flow of cash to be directed to an indirect investment capital Vietnamese dong account opened by the buyer with a licensed bank in Vietnam, from which the purchase price will be paid to the seller’s designated account, or directly to the investment capital account of the company or target from the buyer’s offshore account.
The Vietnamese authorities usually require evidence of payment before an approval is granted. The approval, however, is usually one of the conditions required by the financing entity before the disbursement. This conflict maybe solved in practice in a number of ways, such as escrow arrangements, payment guarantees or the buyer granting security over the equity in the target to the seller from the date of issuance of the approval until the payment of the purchase price.
It appears that a Vietnamese-incorporated company is not prohibited from giving financial assistance (directly or indirectly) to the purchaser in a M&A transaction, such as giving security to the bank loan obtained by the purchaser to finance the acquisition of shares in itself or its holding company. Note that a loan or a guarantee granted by a public company to the members of the board of directors, the control board, the executive director (general director), other managers, and persons related to these members is not allowed, unless otherwise decided by the general meeting of shareholders.
Vietnamese law is silent on the seller’s obligations to assist the buyer’s financing in an M&A deal. In practice, the seller may, upon mutually agreement by the parties, assist the buyer in its financing by recommending some sound financing entities to the buyer or signing necessary documents relating to the buyer’s financing purposes. The seller may also give security to the bank loan obtained by the buyer in case the buyer wishes to use the acquired shares or assets as secured assets for the bank loan.
14 Minority squeeze-out
May minority stockholders be squeezed out? If so, what steps must be taken and what is the time frame for the process?
Vietnamese law does not specifically regulate situations where minority shareholders are squeezed out. Since the law does not require the consent of all shareholders, a business combination may still occur against the will of the minority shareholders. In the case of a merger where it is approved by a supermajority in number representing 65 per cent of the voting rights of the shareholders present or by proxy, the merger plan will be binding on all the shareholders. If the merger plan calls for the transfer of all of the company’s shares, then the entire share capital of the company will be transferred to the acquirer (including the shares of any dissenting shareholder). There are no regulations specifying the steps to be taken and time frame for the process in this particular minority squeeze-out.
The minority shareholders of a public company are nevertheless protected in a takeover situation where they can refuse to sell the shares to the offeror or are even entitled to withdraw the subject shares at any time during the offer process. They also have the put option to compel the acquirer to buy their shares at the announced transaction price if, as a result of the acquisition, the acquirer owns more than 80 per cent of the outstanding shares of the target.
15 Cross-border transactions
How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions?
Cross-border transactions may be structured as an asset or equity deal.
Asset acquisitions usually involve the establishment of a wholly owned entity specifically for the purpose of acquiring the business and undertaking of the target. Asset deals used to be the preferred choice due to the complexity and legal loophole of the equity deal.
From 1 July 2015, acquisitions upwards of 51 per cent in a Vietnamese domestic company or a foreign investor contributes capital, purchases shares or equity interests in an economic organisation operating in conditional industries and trades applicable to foreign investors will need to undergo the procedure for registration of capital contribution, purchase of shares or equity interests.
Equity acquisitions may be onshore transactions whereby the equity of a shareholder in a Vietnamese domestic company or FIE is acquired directly. An onshore equity deal is subject to the approval of the relevant Vietnamese authorities and governed by the Law on Investments, Decision No. 88/2009/QD-TTg of the Prime Minister and its guiding Circular No. 131/2010/TT-BTC of the Ministry of Finance. These regulations may be changed upon effectiveness of the new Law on Investment and the new Law on Enterprise.
Equity transactions may be conducted offshore at the investor level, which would involve the sale of the equity of the foreign shareholder in an offshore company. They will usually need to register the change in the investor with the Vietnamese authorities. Where a Vietnamese resident invests in an offshore entity that has been established to make round-trip investments back into Vietnam, the investor needs to conduct the offshore investment procedures with respect to the establishment of such offshore entity and periodically report the offshore investment activities to the competent authorities of Vietnam, including subsequent disposal of any equity in it.
16 Waiting or notification periods
Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations?
For a normal merger:
- notify the shareholders of the scheduled meeting regarding a merger at least seven days in advance;
- notify creditors of the merger resolution and make a public announcement; and
- the authorities decide on whether to approve a domestic merger within five working days after receipt of all the required documents.
For a merger with a foreign element, the prescribed approval period is between 15 and 45 working days.
For a takeover deal:
- the target makes an announcement of the offer within three days from the receipt of the tender documents;
- the SSC reviews the tender documents within seven days;
- the board must send its opinions regarding the offer to the SSC and the shareholders of the target within 10 days from receipt of the tender documents;
- the acquirer makes an announcement on three consecutive issues of a newspaper and the website of the stock exchange where the shares are listed, within seven days from its receipt of the SSC’s opinions;
- the length of the offer period is between 30 and 60 days; and
- the acquirer reports the results of the tender to the SSC within five days of completion.
Companies in specific industries are subject to industry-specific regulations that stipulate different waiting and notification periods for completing business combinations. Specific legal advice should be sought regarding such mergers.
17 Sector-specific rules
Are companies in specific industries subject to additional regulations and statutes?
M&A transactions involving companies in specific industries are subject to additional and specific regulations and statutes. In principle, approval is usually required before a business combination may proceed. Foreign equity in certain industries is capped (for example, at 30 per cent for banking) or subject to industry-specific approvals (namely, distribution services), or both.
Transactions between credit institutions established and operating in Vietnam are currently governed by Circular 04/2010/TT-NHNN (as amended by Circular No. 36/2015/ TT-NHNN), which allows various forms of credit institutions to be merged or consolidated with one bank. There is one form of acquisition that is defined as the purchase of the entire legal assets, rights, obligations and interests of the target credit institution. After the acquisition, the target credit institution becomes a subsidiary company of the acquiring institution. The acquisition requires the consent of the State Bank. The recently issued regulations (ie, Circular 36 focuses only on mergers and consolidations). Partial and full acquisitions are left out of its scope and may be guided in a separate regulation. Circular 36 also introduces a new requirement that a copy of the merger or consolidation agreement be sent to the merging or consolidating credit institutions’ creditors and notified to the employees within 15 days following the in-principle approval of the merger or consolidation by the SBV.
Specifically, with regard to distribution services, there has been concern that the requirement of economic need test, which is only required for any retail sales outlet outside the first one, might be applied retroactively to an existing chain of retail sales outlets of domestic enterprises in the case of capital assignment to foreign investors.
Business combination in certain investment sectors requires approval of the relevant authorities at ministerial level. Opinions of those central ministries have considerable impact and can determine whether the business combination can be approved.
18 Tax issues
What are the basic tax issues involved in business combinations?
The tax treatment will depend on the structure of the transaction and legal status of the seller. If the seller is a legal person, corporate income tax (CIT) at 20 per cent will be levied on the capital gains generated from the transfer of assets. The tax base would be the actual sales price less the cost of acquiring the assets and direct expenses of transferring such assets. In addition, an asset transaction (except for special assets such as land use right, intellectual property, etc) will be subject to VAT ranging from zero per cent up to 10 per cent. In the case of transfer of certain property transactions such as real estate will be subject to a property registration fee at 0.5 per cent or those of vehicles will be charged at 2 per cent. The CIT rate of 20 per cent will also apply in the case of a share transfer. Noted that a share transfer will not be subject to VAT.
Where the seller is a natural person, personal income tax is usually levied on profit derived from the transfer of shares. For the capital contribution of liability limited company, the tax rate is 20 per cent of the income. For the shares of joint stock company, including listed and unlisted company, the tax rate of 0.1 per cent of the transaction value shall be applied.
Furthermore, special adjustment rules that govern transfer pricing may apply if the transaction involves affiliated parties. The parties may also take advantage of various double-taxation agreements that Vietnam has entered into with other countries in cross-border transactions involving Vietnam-incorporated companies.
19 Labour and employee benefits
What is the basic regulatory framework governing labour and employee benefits in a business combination?
Under the Labour Code, where an enterprise undergoes restructuring the succeeding employer is responsible for continuing the performance of the labour contracts with the employees. Where the succeeding employer cannot employ all of the existing employees, the employment plan must be worked out with the participation of the trade union representatives.
An employee who has been serving for 12 months or more must be paid allowance for loss of work based on their seniority, which is equivalent to an aggregate amount of one month’s wages for each year of employment, but no less than two months’ wages. The length of period for calculating the allowance means the total working time that the employee has actually worked for the employer minus the period for which the employee participated in the unemployment insurance regime in accordance with the Law on social insurance and the working period for which the employer already paid the allowance.
20 Restructuring, bankruptcy or receivership
What are the special considerations for business combinations involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring?
Bankrupt companies are subject to the Bankruptcy Law, which took effect on 1 January 2015. The Bankruptcy Law applies to all entities in Vietnam that have legal person status. There are special provisions applicable to companies in the financial sector such as banking, securities or insurance. In these circumstances, the State Bank, the Ministry of Finance or the State Securities Commission, as the case maybe, shall have the right to apply available methods to restore the payment ability of the bankrupt companies.
Where there is a decision to start the bankruptcy procedures, the Bankruptcy Law does not allow a bankrupt company to sell or exchange its shares or transfer its property without the prior written consent of the presiding receivers.
Certain transactions entered into by a bankrupt company within six months or 18 months in case of internal transaction prior to the court accepting a bankruptcy application may be invalid, such as where the bankrupt company has donated its property, paid undue debts, mortgaged or pledged property for debts or carried out other transactions aiming to disperse its property. In addition, within five days upon the court accepting a bankruptcy application, if it is deemed that a suspension of the performance of valid contracts that are being performed or have not yet been performed will be more beneficial for the bankrupt company, the performance of such contracts shall be suspended. Therefore, investors dealing with such entities should take care to ensure that their dealings are conducted in a manner that will not expose them to the risk of a transaction being suspended or terminated.
21 Anti-corruption and sanctions
What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations?
The Law on Anti-corruption of Vietnam does not refer to business combinations.
A fine up to 10 per cent of the total revenue in the financial year prior to the year in which a breach of the provisions of business combinations was committed shall be imposed on each enterprises participating in carrying out a prohibited merger, consolidation, acquisition or joint venture, as stipulated in the Law on Competition.
A fine up to 10 per cent of the total revenue in the financial year prior to the year of each enterprise in which the breach was committed shall be imposed on each enterprise participating in given economic concentration that was not notified as required by law.
UPDATE & TRENDS
What are the current trends in mergers and acquisitions in your jurisdiction? What can we expect in the near future? Are there current proposals to change the regulatory or statutory framework governing business combinations or the financial sector in a way that could affect business combinations? Briefly, how has the credit crisis affected M&A activity and the regulatory regime in your jurisdiction?
There was a significant increase in M&A activity in Vietnam during the past year. A number of large M&A deals have been announced in the year of 2016, with retail and real estate continuing to dominate the market. Most notably, in April 2016, Thai company Central Group overcame numerous large-scale groups to officially become the new owner of Big C Vietnam. In mid-December 2016, F&N Beverages Manufacturing Sdn., Bhd. and F&N Dairy Investments Pte., Ltd., spent VND11.3 trillion ($499.56 million) on buying a total of 5.4 per cent stake in Vietnam Dairy Products Joint Stock Company (Vinamilk). The effect of the free trade agreements (especially the Trans-Pacific Partnership (TPP) treaty) and the positive changes from Vietnam’s legal framework governing business combinations (Law on Enterprises and Law on Investment) will further enhance the opportunities for successful M&A transactions in 2017.
The Government is also speeding up the restructure and equitization of state-owned enterprises to improve performance and offer a higher rate of selling their stakes to investors. The Governor of the State Bank of Vietnam also issued Directive No. 04/CT-NHNN dated 27 May 2016 to instruct the credit institutions to continue implementing the restructuring plan.
Besides, based on the 2017 Law-Making Program of the National Assembly of Vietnam, there are the proposals to change the regulatory framework that could affect business combination, for examples, the amended Law on Competition and the new Law on Securities would be adopted in 2017.
Author and Contact Information
BIZCONSULT LAW FIRM
20 Tran Hung Dao Street, Hoan Kiem District, Hanoi, Vietnam
T: +84 (0) 24 3933 2129
F: +84 (0) 24 3933 2130
Room 1103, 11th Floor, Sailing Tower, 111A Pasteur Street, District 1, Ho Chi Minh City, Vietnam
T: +84 (0) 28 3910 6559
F: +84 (0) 28 3910 6560
Nhượng Quyền Thương Mại
Lưu ý: “bài viết này chỉ phát hành tiếng Anh cho các tạp chí nước ngoài”
Franchise Sale Laws in Vietnam
Authors: Mr Nguyen Anh Tuan, Partner, Bizconsult Law Firm and Mai Minh Hang, Partner, Russin & Vecchi Vietnam.
Table of Contents
- What Is a Franchise?
- Scope of Law
- Applicability to Master Franchises
- Discretion of Regulatory Authorities
- Who Must Provide Disclosure?
- Master Franchisee
- Franchise Consultant/Agent/ Broker
- Franchisor or Others in Master Franchise Arrangement
III. Who Must Receive Disclosure?
- Scope of Law
- Types of Franchisees
- When Must Disclosure Be Furnished?
- Timing of Disclosure
- Letters of Intent
- Methods for Delivery of a Disclosure Document
- Ongoing Disclosure Obligations
- Information to Be Included in Disclosure Document
- The Franchisor and Other Parties
- Business Experience of Management of Franchisor
- Litigation History
- Initial Fees
- Other Fees
- Initial Investment
- Sources of Products and Services
- Franchisee Obligations
- Franchisor Financing
- Franchisor Obligations
- Protected Territory
- Trademarks and Domain Names
- Patents and Copyrights
- Participation in Business
- Restrictions on Sales
- Renewal, Termination, Transfer, and Dispute Resolution
- Public Figures
- Financial Performance Representations
- Information on Outlets
- Financial Statements
- Franchise Contracts
- Other Information/Documents
- Other Legal Disclosures
- “Material” Information
- Use of Supplemental Disclosure Documents
- Updating Requirements
- Governmental Filings
- Initial Filing Requirements
- Other Filing Requirements
- Discretion of Governmental Agency
- Licensing of Brokers and/or Franchise Sales Personnel
- Ongoing Filing Requirements
- Filing or Registration of Executed Documents
VII. Other Requirements
- Language Requirements
- English Language
- Filing of Trademark Licenses
VIII. Franchisor-Franchisee Relationship Laws
- Applicable Laws and Regulations
- Remedies for Violation
- Other Applicable Relationship Requirements
- Time Period for Commencing Legal Action
- Violations of Franchise Disclosure Laws
- Penalties for Failure to Comply with Disclosure Laws
- Who May Bring a Legal Action?
- Time Period for Commencing Legal Action
- Enforcement by Government
- Judicial Trends
About the Authors
I. What Is a Franchise?
A. Scope of Law
In Vietnam, the basic regulations on franchising are provided in the Commercial Law, adopted by the National Assembly on June 14, 2005. These regulations are elaborated in Decree No. 35/2006/ND-CP of the government, dated March 31, 2006 (Decree 35), as amended by Decree 120/2011/ND-CP of the government dated December 16, 2011 (Decree 120) and Circular No. 09/2006/TT-BTM of the Ministry of Industry and Trade (MOIT) (MOIT was formerly known as the Ministry of Trade), dated May 25, 2006 (Circular 09). Related regulations on franchising can also be found in the Intellectual Property Law, adopted by the National Assembly on November 29, 2005, and the Technology Transfer Law, adopted on November 29, 2006.
The Vietnamese franchise law adopts a familiar regulatory model with prior disclosure obligations supplemented by moderate registration and relationship requirements. It nevertheless demonstrates a high level of official involvement in franchising activities, which is not unusual in developing countries. However, the general obligations of the Commercial Law are prefaced with the words “unless otherwise agreed,” thus raising some doubt as to the mandatory prescriptions of Decree No. 35 and Circular No. 09.
The Commercial Law defines franchising as a commercial arrangement under which the Franchisor grants the Franchisee the right to conduct on its own behalf the business of selling goods or supplying services under the following conditions: (1) the Franchisee may carry out the business in a format determined by the Franchisor and may affix the trademarks, trade names, business logos, slogans, and advertisements of the Franchisor at the Franchisee’s business premises; and (2) the Franchisor has the right to control and assist the Franchisee in the conduct of the franchised business. The definition does not incorporate any “fee” or “payment” requirement.
Decree 35 further expands the definition of franchising to include master franchising and sub-franchising as well as area development arrangements. The definition of “franchise” includes: (1) rights received by the Franchisee from the Franchisor to carry out the business of selling goods and supplying services under a system determined by the Franchisor, and to affix trademarks, trade names, business logos, slogans, and advertisements of the Franchisor at the Franchisee’s business premises; (2) rights received by a primary Franchisee from a Franchisor under which the primary Franchisee may sub-franchise to other Sub-franchisees; (3) rights received by a Sub-franchisee from a Sub-franchisor (i.e., the primary Franchisee) under a master franchise agreement; and/or (4) rights received by a Franchisee from a Franchisor under a franchise contract, which allows a Franchisee to carry out the franchised business at more than one location within a territory.
The legal relationship between the Franchisor and the Franchisee is established by a franchise agreement that is made in writing and is governed by the Commercial Law. Although foreign Franchisors must register “franchising activities” prior to the offer and sale of franchise agreements to a Vietnamese Franchisee, the franchise agreement itself need not be registered.
In addition to registration, Decree 35 imposes two further prerequisites to franchising: (1) the business system to be franchised must have been operating for at least one year, and (2) the goods and services of the franchise must not be on the list of prohibited goods and services. The only prerequisite for a Franchisee is that it must have a business registration appropriate to the subject of the franchise.
B. Applicability to Master Franchises
A Franchisor is defined to include: (a) a person who grants a franchise, and (b) a Sub-franchisor in its relationship with a Sub-franchisee. Under Decree 35, a Master Franchise is defined as a franchise in which the Franchisor grants to a Sub-franchisor or Master Franchisee the right to grant a sub-franchise. That is, the terms “Master Franchisee” and “Sub-franchisor” have the same meaning: they are a Master Franchisee in relation to a Franchisor, or a Sub-franchisor in relation to a Sub-franchisee.
When a master franchise originates from abroad, the local Master Franchisee cannot sub-franchise to a Sub-franchisee unless that local Master Franchisee has already run the franchised business for at least one year and has obtained a written consent from the Franchisor to sub-franchise. The purpose of this restriction, as we understand, is to help ensure the sustainable development of a franchising network. The theory is that the Master Franchisee should gain certain experience to run the franchised business before sub-franchising to others.
Vietnam’s franchise law does not regulate territorial development obligations or a contractual right/obligation to open and operate more than one franchised unit in a Master Franchise granted by a foreign Franchisor.
The definition of a franchise is broad. Although the law does not express exceptions to what is a “franchise,” partnership relationships, trademark licensing, and wholesale and distribution agreements are most likely not considered to be a franchise. A partnership relationship is governed by the Enterprise Law, trademark licensing is governed by the Intellectual Property Law, credit card service arrangements are governed by the Law on Credit Organisations, and a distribution agreement is simply seen as a sale and purchase agreement governed by the Commercial Law.
D. Discretion of Regulatory Authorities
The authorities that regulate franchise activities include the MOIT and provincial offices of the Department of Industry and Trade (DOIT). The MOIT has the power (a) to provide guidance for implementation of policies and legislation on franchising and (b) to organize the registration of franchises.
The MOIT registers franchises from abroad to Vietnam, and franchises from an export processing zone, a non-tariff area, or a separate customs area within Vietnam to other locations within Vietnam. A Vietnamese franchisor, whether it grants a franchise to a foreign or domestic franchisee, is not required to register its franchising activity. Instead, it must report its franchising activity to the DOIT. Decree 120, however, does not elaborate on the contents of the report, nor the procedures by which the report is filed. It seems that such reporting requirement is not yet enforced until further guidance by the MOIT or DOIT of provinces.
Based on the documentation that is submitted for registration, the MOIT has discretion to determine whether or not a particular distribution or licensing arrangement qualifies as a “franchise.” If the proposed business is found to be a distribution arrangement, it is considered a sales arrangement, rather than a franchise, and will be subject only to the condition that the distributor must have registered its retail or wholesale business.
Vietnam’s franchise law applies to franchising activities between Vietnamese parties. It also applies to a foreign Franchisor who grants a franchise to a Franchisee in Vietnam, or a Vietnamese Franchisor who grants a franchise to a Franchisee in a foreign country.
The franchise law does not govern relationships involving the sale of goods, including sales to individuals, sales to franchised businesses, and sales that occur in Vietnam. Purchase and sale of goods is simply a commercial activity and is generally subject to the Commercial Law.
II. Who Must Provide Disclosure?
The Franchisor must provide a prospective Franchisee or Master Franchisee with a Disclosure Document entitled Introduction of the Franchise Business and a copy of the form of franchise agreement at least 15 working days prior to the execution of a franchise agreement, unless the parties otherwise agree. The Introduction of the Franchise Business must be prepared according to the standard form provided in Circular 09.
B. Master Franchisee
The Master Franchisee and Sub-franchisor are defined as entities that are Franchisees in relation to a master franchise and Franchisors in relation to a sub-franchise granted under a master franchise. Accordingly, a Sub-franchisor must comply with pre-sale disclosure requirements as if it were a primary domestic Franchisor. In addition, the domestic Sub-franchisor is also required to provide a Sub-franchisee with the contents of the master franchise agreement and information about the Franchisor. A Sub-franchisor is also required to inform a Sub-franchisee of remedies in case the master franchise agreement is terminated.
C. Franchise Consultant/Agent/ Broker
There is no requirement that a franchise consultant, agent, or broker disclose information to a prospective Master Franchisee or Franchisee.
D. Franchisor or Others in Master Franchise Arrangement
As mentioned in Section II.B., in a sub-franchise agreement, pre-sale information disclosure to Sub-franchisees is the obligation of the Master Franchisee/Sub-franchisor only. Vietnam’s franchise law does not require a foreign Franchisor to disclose pre-sale information to a Sub-franchisee who receives the franchise from the Sub-franchisor under a sub-franchise agreement. If a foreign Franchisor franchises its business to a local Master Franchisee, the local Master Franchisee becomes a Sub-franchisor and has the sole responsibility to its Sub-franchisees in Vietnam to disclose the required information.
III. Who Must Receive Disclosure?
A. Scope of Law
Decree 35 provides that the Introduction of the Franchise Business must be sent to prospective Franchisees, including a primary Franchisee and a Master Franchisee who has a direct relationship with the Franchisor, and to a Sub-franchisee who is granted the franchise by the Master Franchisee/Sub-franchisor.
A prospective Franchisee must receive the Introduction of the Franchise Business. However, it is unclear who may accept the Introduction of the Franchise Business on behalf of the Franchisee. Generally, as the prospective Franchisee must be a company incorporated under the Enterprise Law, the company’s legal representative must receive the Introduction of the Franchise Business on behalf of the Franchisee. The business registration certificate of the company identifies the full name and signature of its legal representative.
B. Types of Franchisees
Vietnam’s franchise law does not have clear disclosure requirements in the case where a franchise agreement is renewed or is transferred to another Franchisee. In the case of renewal, the disclosure requirement does not seem to apply. This is because the law requires the Franchisor regularly to update its Franchisees on changes in the franchise system. See Section V.BB., below. Therefore, a Franchisee should be aware of all information about the Franchisor and the franchise system that may have an impact on the Franchisee’s business until its franchise agreement expires.
Decree 35 requires a Franchisee who intends to transfer a franchise to another prospective Franchisee to make a written request to do so to its direct Franchisor. The direct Franchisor must give a written response within 15 working days from the date on which it receives the request. If the direct Franchisor approves the transfer, the transferee of the franchise will replace the transferor in the relationship. However, it is unclear whether the disclosure requirement must be repeated in order for the transferee to become a Franchisee.
Just as the original Franchisee, a Master Franchisee must also receive the Introduction of the Franchise Business.
Vietnam’s franchise law does not distinguish among Franchisees for purposes of the disclosure requirement. Disclosure must be made even if a Master Franchisee or an existing Franchisee is buying an additional franchise, if the prospective Franchisee is a sophisticated, large, or experienced Franchisee, and if the prospective Franchisee is the sole Franchisee or a Master Franchisee.
IV. When Must Disclosure Be Furnished?
A. Timing of Disclosure
Decree 35 requires that disclosure be made at least 15 working days before a franchise agreement is executed, unless the Franchisor and Franchisee agree on a longer time. That is, the Franchisor and Franchisee can agree on the timing for disclosure, but it cannot be less than 15 working days.
B. Letters of Intent
Letters of intent are not specifically included in the definition of a franchise agreement, but they could easily fall within the broad definition of a franchise agreement.
If the effect of a letter of intent is to bind the parties to sign a definite franchise agreement, upon, say, the clear occurrence of certain events, we believe that disclosure must be made to a prospective Franchisee/Master Franchisee before it signs such a letter of intent.
C. Methods for Delivery of a Disclosure Document
Vietnamese franchise law does not prescribe how a Disclosure Document is delivered to a prospective Franchisee. However, given the requirement for strict adherence to the time frame, the need to obtain signed receipts from the Franchisee, and the importance of ensuring that the franchise agreement and related documents are correctly signed, in almost all situations, disclosure should be given in hard copy by hand or by normal mail.
D. Ongoing Disclosure Obligations
As mentioned in Section III.B, a Franchisor is required to update its Franchisees with all significant changes related to its franchise system. A “significant change” is defined as any change that may have an impact on the franchised business activities of a Franchisee.
Circular 09 further requires the Franchisor to report to the MOIT any change in the (a) name of the Franchisor; (b) address of the head office; (c) telephone and fax number; (d) scope of business; (e) type of business to be franchised; or (f) industrial property rights associated with the franchise. The report must be made within 30 working days from the date on which the change occurs and must be enclosed with all documents that support such changes. The report must be made on the standard form provided in Circular 09.
V. Information to Be Included in Disclosure Document
Information to be disclosed is specifically described in the standard form of the Introduction of the Franchise Business attached to Circular 09. A prospective Franchisee is urged to look at all relevant regulations on franchising, to talk with existing Franchisees, and to seek advice from independent legal, accounting, and business advisors before entering into a franchise agreement.
A. The Franchisor and Other Parties
The Introduction of the Franchise Business must contain the Franchisor’s name, head office address, incorporation date, scope of business, and type of business to be franchised. The Franchisor must indicate whether it is a primary Franchisor or a Sub-franchisor, and whether it has registered the franchising activities with the appropriate agencies. The Introduction of the Franchise Business must also contain a description of the Franchisor’s organizational structure, including the department in charge of the franchising activities of the Franchisor.
The law requires the Franchisor to provide a prospective Franchisee with a description of the general market and the Vietnamese market for the products and services being franchised, including the geographic market where the franchise business will operate. The Franchisor must provide the Franchisee with information on prospects for development of these markets.
The law does not require the Franchisor to disclose information regarding its parent, affiliates, and predecessors.
B. Business Experience of Management of Franchisor
The Introduction of the Franchise Business must provide a prospective Franchisee with information on the business and management experience of the Franchisor. The Franchisor must disclose background information on members of its board of directors, including their names, positions, and business experience. In addition, the Franchisor must provide information on its experience in the franchised business. However, Vietnam’s franchise law and the Introduction of the Franchise Business do not require a minimum amount of relevant business experience.
C. Litigation History
The Franchisor is required to disclose pending lawsuits in which it is involved and that relate to its franchising activities, as well as all lawsuits that occurred during the preceding year. This includes disclosure of civil actions by Franchisor against a Franchisee or vice-versa. The Franchisor is not required to disclose information on civil, administrative, or criminal proceedings that are not related to its franchising activities. We note that a corporate entity, such as a Franchisor, is not subject to criminal liability under Vietnam’s Penal Code.
Because the law refers only to disclosure of “litigation,” it appears that a Franchisor is not required to disclose information about governmental orders to which the Franchisor is subject because of past conduct. However, we believe that information on litigation both in the courts and before arbitrators must be disclosed.
A Franchisor is not required to provide information on its bankruptcy history, nor information on liquidation or reorganization.
E. Initial Fees
The Introduction of the Franchise Business must specify the types and amount of initial fees that the Franchisee must pay. It must also specify the time of payment and conditions for reimbursement of fees paid.
There is no requirement that fee-sharing arrangements or commissions paid to consultants, agents, or a Master Franchisee be disclosed.
F. Other Fees
Other fees to be paid to the Franchisor must also be disclosed, including periodic payment of franchise fees (royalty fees), advertising fees, training fees, service fees, and rent. For each type of fee, the Franchisor must provide either a fixed amount or a method of calculation, as well as the time of payment and conditions for reimbursement.
G. Initial Investment
The Introduction of the Franchise Business must provide information on the money that a prospective Franchisee must initially invest in the business. It includes costs for the business premises, facilities and equipment, decoration, and the security system of the franchise. It must also specify costs that a prospective Franchisee has to pay for the initial inventory required to operate the franchise. Necessarily, some of these costs will be estimates.
Vietnamese franchise law does not provide guidance for a foreign Franchisor that has neither operational nor franchising experience, nor an understanding of the cost of establishing a business in Vietnam.
H. Sources of Products and Services
The law does not require disclosure as to whether the Franchisee must buy products or services only from the Franchisor, its affiliates, or other approved or designated suppliers. However, Circular 09 requires that the Introduction of the Franchise Business include a description of goods, services, and equipment that the Franchisee must purchase or lease in order to ensure the consistency of the franchise system. The Franchisor is also required to indicate if the Franchisee may adjust standards and regulations within the franchise system. If permitted, the Franchisee must be informed of procedures necessary to make adjustments.
I. Franchisee Obligations
The Commercial Law generally provides that a Franchisee has the following obligations: (a) to pay the franchise fees and other expenses stipulated in the franchise agreement; (b) to make the initial investment necessary to acquire the rights and business know-how of the Franchisor; (c) to be subject to the supervision, monitoring, and guidance of the Franchisor; (d) to comply with the Franchisor’s requirements regarding design and layout of the franchised business; (e) to keep the franchised business information confidential during and after termination of the franchise agreement; (f) to stop using trademarks, service marks, trade names, business slogans, business symbols, and other intellectual property rights of the Franchisor upon termination of the franchise agreement; (g) to operate in conformity with the franchise system; and (h) not to sub-franchise without the prior consent of the Franchisor.
However, the Introduction of the Franchise Business does not require a description of the Franchisee’s obligations, except for the Franchisee’s financial obligations (see Sections V.E. to V.G.). Decree 35 only generally requires a prospective Franchisee to disclose information that the Franchisor reasonably requires in order to consider granting the franchise.
J. Franchisor Financing
There is no requirement that the Franchisor provide Franchisees with information on its own financing arrangements.
K. Franchisor Obligations
The Commercial Law and Circular 09 generally require a Franchisor to describe the Franchisor’s obligations to the Franchisee, including (a) obligations prior to entering into the franchise agreement; (b) obligations during the Franchisee’s participation in the franchise system; (c) obligations to consider the Franchisee’s proposed premises for the franchised business; and (d) obligations to provide initial and ongoing training, and other training programs.
The Franchisor does not have an obligation to disclose advertising activities or to provide computer and cash register systems for the Franchisee.
L. Protected Territory
The Franchisor is not required to describe the Franchisee’s territorial rights, nor the Franchisor’s reservation of rights to engage in businesses that compete with the Franchisee.
M. Trademarks and Domain Names
In the Introduction of the Franchise Business, the Franchisor must disclose information on its trademarks, service marks, and any other intellectual property rights that will be used in association with the franchised business. It must indicate whether trademarks are registered. If so, details of registration must be provided. However, it is not a condition requirement for establishing the franchise that the trademarks or service marks must be registered. Under the Intellectual Property Law, a trademark licensing agreement need not be registered in order to be effective vis-à-vis the two parties.
Circular 09 also generally requires that the Franchisor describe the Franchisee’s rights to use the marks.
There is no provision specifically requiring disclosure of pending legal actions related to the marks. However, if there is any such legal action, it must be disclosed under the category of litigation history as discussed in Section V.C.
The Introduction of the Franchise Business need not provide detailed information on the use of domain names owned by the Franchisor.
N. Patents and Copyrights
As mentioned in Section V.M, the Franchisor must describe its intellectual property rights, including patents and copyrights, in the Introduction of the Franchise Business. Details of duly registered intellectual property rights must be disclosed to the prospective Franchisee. The Introduction of the Franchise Business is silent on the extent to which information on a patent or copyright must be described.
O. Participation in Business
The Franchisor is not required to describe obligations of the owner of the Franchisee to participate personally in the management of the franchised business.
P. Restrictions on Sales
The Franchisor is not required to describe restrictions on types of goods or services the Franchisee can provide or types of customers to whom the Franchisee can sell.
Q. Renewal, Termination, Transfer, and Dispute Resolution
The Introduction of the Franchise Business must provide the major terms and conditions of the franchise agreement. These include conditions for renewal, as well as conditions for termination of the franchise agreement by either the Franchisor or the Franchisee, and the respective obligations that arise out of such termination. The Introduction of the Franchise Business must also set out conditions under which a Franchisee can transfer the franchised business to another Franchisee.
R. Public Figures
The law does not require the Franchisor to provide information on a public figure who promotes the sale of the franchised business.
S. Financial Performance Representations
The Franchisor is not required to provide information as to a specific level or range of actual or potential sales, income, or profit that the Franchisee may hope to achieve in operating the franchised business. Vietnamese franchise law has no provision stating whether financial performance representations are permitted or prohibited.
T. Information on Outlets
The Franchisor is required to disclose the number of business establishments that the Franchisor itself operates as well as the number that have ceased operation. The Franchisor is also required to disclose the number of franchised outlets as well as the number of contracts that franchisees have assigned (to third parties or the Franchisor), the number of contracts that have been terminated (by Franchisor or Franchisee), and the number of contracts that have and have not been renewed or extended. However, there is no requirement for the Franchisor to disclose names and contact information of franchisees, or of geographical distribution.
U. Financial Statements
The Introduction of the Franchise Business requires the Franchisor to provide a prospective Franchisee with the Franchisor’s audited financial statements for the preceding year. The Introduction of the Franchise Business does not specify the types of financial statements that need be disclosed by the Franchisor. However, as generally understood in Vietnam, financial statements include (1) balance sheet; (2) profit and loss statement; (3) cash flow statement; and (4) a written explanation of the financial statements.
V. Franchise Contracts
The Introduction of the Franchise Business must include a summary of the franchise contract, but not the contract itself. The summary must contain: (a) headings of terms and conditions of the franchise contract; (b) duration of the franchise contract and conditions for renewal; (c) conditions and obligations of the Franchisor/Franchisee in connection with a unilateral termination of the franchise contract; (d) circumstances under which the franchise contract can be modified; (e) conditions under which the Franchisee can transfer the franchise contract to another prospective Franchisee; and (f) circumstances under which neither the Franchisor nor Franchisee is legally entitled to be a party to the franchise contract.
This summary of the franchise contract is only for purposes of registration with the regulatory authorities. For purposes of disclosure to a prospective Franchisee, Decree 35 requires that a complete draft franchise contract be delivered together with the Introduction of the Franchise Business at least 15 working days before the date the agreement is (intended to be) signed.
The form that accompanies Introduction of the Franchise Business contains no place for the Franchisee to sign in order to acknowledge receipt. However, as noted above, given the requirement for strict adherence to the time frame, it is certainly advisable to obtain a signed receipt.
X. Other Information/Documents
As noted above, the Franchisor is required to provide a prospective Franchisee with a draft of the franchise contract and its audited financial statements, together with the Introduction of the Franchise Business.
The Introduction of the Franchise Business may disclose information on awards or recognition that the Franchisor may have received.
Y. Other Legal Disclosures
Neither Decree 35 nor Circular 09 requires the Franchisor to provide a description of laws relating to franchising, or laws restricting termination or noncompetition arrangements. However, the Introduction of the Franchise Business must advise a prospective Franchisee to do research on franchise legislation and related regulations. Further, as noted in Section V., the Introduction of the Franchise Business must include a summary of clauses in the franchise contract that provide the conditions and obligations of the Franchisor and the Franchisee in connection with unilateral termination of the franchise contract.
Z. “Material” Information
The preamble of the Introduction of the Franchise Business must recommend that, before entering into a franchise agreement, a prospective Franchisee must (1) look carefully at the Commercial Law, Decree 35, and Circular 09; (2) consult with existing Franchisees; and (3) seek advice from independent legal, accounting, and business advisors.
AA. Use of Supplemental Disclosure Documents
Some information may be provided in a separate or supplemental disclosure document. Evidence of receipt of the supplemental document is highly recommended.
BB. Updating Requirements
Decree 35 and Circular 09 require the Franchisor to report to the MOIT any change in information described and registered in the Introduction of the Franchise Business; information on the Franchisor, such as (a) name of the Franchisor, (b) address of the head office, (c) telephone and fax number, (d) scope of business, and (e) type of business to be franchised; and the intellectual property rights used in association with the franchised business. The report must be made within 30 days from the date of the change.
Although the law does not explicitly require the Franchisor to inform a Franchisee of these particular changes, because Decree 35 generally requires that the Franchisor inform the Franchisee of any significant change relating to the franchise system that may have an impact on the Franchisee’s business, it can be inferred that the Franchisee should be specifically informed of such changes.
Circular 09 requires that, before January 15th of each year, the Franchisor make an annual report to the MOIT on the matters described in the Introduction of the Franchise Business, including (a) information on the organizational structure of the Franchisor, as well as information on members of its Board of Directors; (b) information on litigation proceedings; (c) initial franchise fee and other financial obligations of a prospective Franchisee; (d) initial investment for a franchised business; (e) obligations of the Franchisee to purchase or rent specific equipment; (f) obligations of the Franchisor; (g) the market of the franchised business; (h) the franchise agreement form; (i) the franchising system; (j) the annual financial statement; and (k) any awards or recognition that the Franchisor has received during that year.
VI. Governmental Filings
A. Initial Filing Requirements
A foreign Franchisor must register its franchising activity with the MOIT before franchising its business to a prospective Vietnamese franchisee.
The registration dossier must include:
(a) standard registration form as provided in Circular 09;
(b) legalized Introduction of the Franchise Business;
(c) certified copy of the Franchisor’s business registration; and
(d) certified copy of patents and certificates of intellectual property rights of the Franchisor, if any.
Certified copy of documents (b), (c) and (d) must be authenticated by the Vietnamese Embassy or Consulate of the country granting the registration.
If any of these documents is in a foreign language, a Vietnamese translation is required. The Vietnamese translation must be certified by a Vietnamese notary public, except for the Vietnamese translation of document (c), which must be certified by the Vietnamese Embassy or Consulate of the country granting the registration.
In addition, if the applicant is a Sub-franchisor, it must present a document issued by the Franchisor permitting it to sub-franchise the business.
B. Other Filing Requirements
The prospective Franchisor must register the dossier and pay a registration fee as stipulated in Decision 106/2008/QD-BTC issued by the Ministry of Finance on November 17, 2008. The fees are as follows: (i) the fee to register is VND 16,500,000; (ii) the fee to amend a registration is VND 6,000,000; and (iii) the fee to re-issue a registration is VND 500,000 (US $1 = VND 21,000).
C. Discretion of Governmental Agency
As noted in Section I.D, the MOIT have discretion to determine whether the documentation submitted for registration meets disclosure and filing requirements. The MOIT may reject or require the Franchisor to make appropriate amendments or supplements to the Introduction of the Franchise Business.
The regulatory time frame for the MOIT to register the franchising activity is five working days from the date on which a registration dossier is submitted by the Franchisor, provided that no amendments or supplements to the registration dossier are required.
If any amendments or supplements are required, the MOIT must inform the Franchisor in writing within two working days from the date on which it receives the registration dossier. In such case, the time frame of five working days is counted from the date the Franchisor submits the amendments and supplements to the dossier.
Circular 09 requires MOIT to upload the franchise registration information to the MOIT’s website within five working days from the date on which the franchise is registered or the franchise registration is changed or cancelled.
E. Licensing of Brokers and/or Franchise Sales Personnel
Brokers and/or Franchise sales personnel are not required to obtain a license in order to sell franchises.
F. Ongoing Filing Requirements
There is no ongoing filing requirements other than those are discussed in Section IV.D. and Section IV.B. of Part IV.
G. Filing or Registration of Executed Documents
There is no requirement to file or to register the executed franchise agreements or any other related documents with either the MOIT.
VII. Other Requirements
A. Language Requirements
Under Decree 35, a franchise agreement must be made in the Vietnamese language. This restriction does not apply to a franchise agreement under which a Vietnamese Franchisor grants a franchise to a Franchisee in a foreign country.
As the Introduction of the Franchise Business must be registered with the MOIT, it must be written in Vietnamese. According to Circular 09, if the Introduction of the Franchise Business is written in a foreign language, it must be translated into Vietnamese and the Vietnamese translation must be certified by a notary public.
B. English Language
English is acceptable only for a franchise agreement between a Vietnamese Franchisor and an offshore Franchisee. The Introduction of the Franchise Business can be written in English, but, as noted above, the dossier must be submitted in Vietnamese.
C. Filing of Trademark Licenses
A trademark licensing agreement need not be registered to be effective. However, according to Article 148 of the Law on Intellectual Property, a trademark licensing agreement is effective vis-à-vis a third party only if it has been registered with the National Office of Intellectual Property (NOIP). Therefore, the Franchisor and the Franchisee should register the trademark licensing agreement with the NOIP so that third parties are also bound.
VIII. Franchisor-Franchisee Relationship Laws
A. Applicable Laws and Regulations
The Commercial Law provides that a franchise agreement “must be made in writing or in another form with equivalent legal validity.” The agreement is not subject to any restriction relating to choice of law. The Commercial Law allows parties to a commercial contract to apply foreign law, provided that the foreign law does not conflict with the laws of Vietnam. Decree 35 provides that the franchise contract may contain the following main items if the parties choose to apply Vietnamese law: the subject of the franchise, rights and obligations of the Franchisor, rights and obligations of the Franchisee, price and periodic franchise fee and payment method, term of the contract, extension and termination of the contract, and dispute resolution.
The Franchisee may terminate a franchise agreement unilaterally if the Franchisor breaches any of its obligations enumerated in Article 287 of the Commercial Law. These obligations include (a) to provide the Franchisee with the Introduction of the Franchise Business; (b) to provide initial training and regular technical assistance; (c) to design and arrange business outlets; (d) to grant intellectual property rights under the agreement; and (e) to treat all Franchisees equally.
The Franchisor may terminate a franchise agreement unilaterally if the Franchisee (a) no longer holds a business license to carry on the franchised business; (b) is liquidated; (c) becomes bankrupt; (d) commits a serious breach of the law, which breach may cause substantial damage to the goodwill of the franchise system; or (e) fails to rectify a material breach of the franchise agreement within a reasonable period of time after receipt of a written request from the Franchisor.
The Civil Code requires that the party that wishes unilaterally to terminate the franchise agreement must immediately inform the other party of its intention to terminate. The law is silent on the form and delivery of such notice. However, it is advisable that the terminating party send a written notice indicating the cause of the proposed termination and the date on which the agreement is considered terminated.
As noted in Section III.B., the Franchisee may transfer the franchised business only with approval of the Franchisor. The Franchisor may refuse if (a) the transferee has failed to fulfill its financial obligations under the existing franchise agreement; (b) the prospective transferee cannot satisfy Franchisor’s criteria for its Franchisees; (c) the transfer of the franchise may have an adverse impact on the existing franchise system; (d) the prospective transferee declines in writing to fulfill the obligations of the Franchisee under the franchise agreement; and (e) the existing Franchisee has not yet fulfilled its obligations toward the Franchisor and the prospective transferee does not provide a written commitment to fulfill the obligations it is about to assume.
The Competition Law and its implementing regulations restrict territorial protections. If, under a franchise agreement, the Franchisor supplies products for resale by the Franchisee in a limited territory, the Franchisor might be seen to violate the Competition Law if it has a dominant market share (i.e., 30 percent or more) for that product.
Similar to territorial protections, “sale” restrictions (such as on price) imposed by the Franchisor in respect of a product it supplies to a Franchisee are prohibited under the Competition Law if the Franchisor has a dominant market share (i.e., 30 percent or more) for that product.
The Competition Law prohibits a seller of goods and services with a dominant market share from requiring its customers, as a condition to purchasing its goods and services, to purchase products and services from another identified seller. We believe, however, the Franchisor-Franchisee relationship is not subject to this restriction under the Competition Law.
As defined in the Competition Law, unfair terms and practices include, among others, terms or practices that cause another party to participate in the business involuntarily. However, as required in Circular 09, the Introduction of the Franchise Business must include a statement urging the prospective Franchisee to examine the law and to seek advice from lawyers, consultants, and current or former Franchisees. That is, a franchise agreement should be executed in good faith and is subject to fair dealing.
B. Remedies for Violation
Generally, a breach of the Franchisor-Franchisee relationship is subject to remedies that are available in a commercial dispute. These remedies include (a) specific performance; (b) penalty for breach; (c) damages for loss; (d) stay (or adjournment or temporary cessation) of contractual performance; (e) suspension of contractual performance; (f) rescission of contract; and (g) other remedies as agreed by the parties, provided that such remedies are not contrary to the fundamental principles of law.
There are no criminal remedies for a breach of the Franchisor-Franchisee relationship.
If the Franchisor violates the Competition Law, it is subject to sanctions delineated in Decree 71/2014/ND-CP of the Government, dated July 21, 2014. The sanctions include monetary and supplementary penalties. A monetary penalty is imposed on a dominant supplier. The penalty amounts to 10 percent of the supplier’s total turnover (including turnover received from both legitimate activities and activities that violate the Competition Law) for the fiscal year prior to the year in which it committed the violation. Supplementary penalties include disgorgement of all profit received under the agreement, and the parties are required to remove the anti-competitive clauses from the agreement.
C. Other Applicable Relationship Requirements
The agreement between a Franchisor and a Franchisee is not subject to any restriction relating to choice of law. The Commercial Law allows parties to a commercial contract to apply foreign law, provided that the foreign law does not conflict with the laws of Vietnam. In addition, a dispute relating to a commercial relationship like the Franchisor-Franchisee relationship is not subject to mandatory arbitration or venue.
D. Time Period for Commencing Legal Action
Generally, the period during which a party may initiate legal proceedings in a commercial dispute is two years from the date on which the violation occurs.
IX. Violations of Franchise Disclosure Laws
A. Penalties for Failure to Comply with Disclosure Laws
Decree 35 states generally that a Franchisor that fails to comply with the disclosure requirement is subject to administrative sanctions. The details of administrative sanctions for failure to comply with the disclosure requirement are provided in Decree 185/2013/ND-CP of the Government dated November 15, 2013, providing the administrative sanctions in commercial activities (Decree 185). Article 95 of Decree 185 provides that if the Franchisor provides incorrect or false information in the registration application or other documents, the Franchisor may be imposed with a monetary fine ranging from VND 3 to 5 million.
While a Franchisor’s failure to comply with disclosure requirements, by itself, does not void the franchise agreement, Decree 35 grants the Franchisee the right unilaterally to terminate the franchise contract if the Franchisor breaches its obligations under Article 287 of the Commercial Law. These obligations include the provision of a disclosure document as well as initial training and ongoing technical assistance.
The Civil Code outlines the circumstances under which a contract is considered to be null and void. These circumstances, among others, include a contract that is executed on the basis of misleading information or misunderstood information. In particular, a party to a contract may request a court to declare a contract void if (i) it has a reason to believe that the counter-party intentionally misled it to sign that contract or (ii) it believes that the counter-party unintentionally caused it to misunderstand the subject of that contract, but now refuses to change the contract. Therefore, a Franchisee may, through judicial process, claim a franchise to be void if a Franchisor fails to comply with the disclosure requirement and the failure to disclose has caused the Franchisee to misunderstand the franchise agreement.
According to the Civil Code, if a contract is void, a party to that contract must return to its counter-party what it has received from the counter-party or the equivalent in kind or in money. In addition, the defaulting party must compensate the other party for damages the other party has sustained. Since a franchise agreement is a commercial contract, compensation for damages is subject to provisions of the Commercial Code. That is, the damages include actual and direct damages caused by the Franchisor’s failure to comply with the disclosure requirement, as well as the loss of income that the Franchisee would otherwise have received if the Franchisor had complied with the disclosure requirement.
There are no criminal penalties for a Franchisor’s failure to comply with disclosure requirements. The Franchisor, as a corporate entity, is not subject to criminal penalties in any circumstances.
B. Who May Bring a Legal Action?
The injured party (e.g., the Franchisee/Sub-franchisee) may request the courts to declare that the franchise agreement is void and award damages if (i) it has reason to believe that the Franchisor intentionally misled it to sign the franchise agreement or (ii) it believes that the Franchisor/Sub-franchisor unintentionally caused it to misunderstand the franchise agreement, but now refuses to change its terms.
As there are not yet specific regulations on sanctions against violation of the disclosure and filing requirements, it is unclear which authority may impose such sanctions.
C. Time Period for Commencing Legal Action
The statute of limitations for legal action by a Franchisee/Sub-franchisee against the Franchisor/Sub-franchisor for providing misleading information is two years from the date on which the Franchisee discovered or should reasonably have known of the misleading information.
The statute of limitations for an administrative sanction against a Franchisor who violates the disclosure and filing requirements is one year from the date on which the Franchisor starts franchising its business without having registered, or one year from the date on which the Franchisor entered into the franchise contract without disclosing required information to the Franchisee.
A Master Franchisee or a Sub-franchisor is liable to a Sub-franchisee as if the Master Franchisee were an independent Franchisor. According to Decree 35, a Master Franchisee or a Sub-franchisor must prepare its own Disclosure Document. A Franchisor is not liable to a Sub-franchisee for misrepresentations made by a Master Franchisee in its Disclosure Document.
E. Enforcement by Government
According to the MOIT’s website, to date (May 2015) there are 129 foreign franchisors who have registered the franchise activities with the MOIT and four Vietnamese Franchisors have registered franchising abroad. There is no report on the operation and compliance history of such foreign Franchisors. The list of the foreign Franchisors operating the franchise system in Vietnam can be found at the following link: http://www.moit.gov.vn/vn/Pages/Thongke.aspx?Machuyende=TK&ChudeID=61.
F. Judicial Trends
There is nothing to report at this time on judicial claims against a Franchisor. However, our impression is that none have been filed.
About the Authors*
Mai Thi Minh Hang is the partner in charge of the Hanoi office of Russin & Vecchi. She advises on commercial issues, foreign investment, and financial markets. She has advised offshore clients who want to franchise their businesses in Vietnam. She assists a wide variety of clients on all aspects of business operation in Vietnam, including distribution in the form of direct selling. She assisted the Ministry of Industry and Trade in drafting regulations to implement the Commercial Code, which included government decrees on franchising and direct selling. She has published several articles on franchising and direct selling. Ms. Hang graduated from Hanoi Foreign Trade University in 1997 and from Hanoi University of Law in 2002. In 2003, she earned an M.B.A. from Washington State University.
Tuan Anh Nguyen is the managing partner at bizconsult law LLC in Vietnam. His principal areas of practice include corporate & commercial, investment projects (inbound & outbound), mergers and acquisitions, cross-border loan transactions, intellectual property & franchising, real estate & construction/EPC, employment, and litigation. He has been practicing business law since 1988, providing legal advice and services to a wide variety of local and international clients on all aspects of establishing, acquiring, and operating businesses in Vietnam. He has advised numerous clients on franchise issues and has assisted American- and Japanese-based companies in establishing their franchising operations in Vietnam. He is admitted to the Hanoi Bar Association of Vietnam and is a member of the International Bar Association, International Trademark Association, and the Asian Patent Attorneys Association, which he serves as country reporter of the Anti-Counterfeiting Committee. He is the author of various articles published in international and regional magazines, such as Mergers & Acquisitions of Getting the Deal Through, Corporate-UK International, Asian Legal Counsel, Asia Law & Practice, and Lawasia) and speaker at several international and local conferences on legal developments in Vietnam.
* The editors would like to thank Tao Xu (DLA Piper in Reston, Virginia), who assisted as regional editor for this chapter.