> INTRODUCTION

Equitisation’ is the terminology used in Vietnam for the conversion of State-owned enterprises (SOEs) into companies with capital divided into shares, with those companies simultaneously undergoing partial privatisation by sale of a portion of such shares through public auction or by private treaty to ‘strategic’ investors. After a slowdown resulting from the 2007 global financial crisis, equitisation is once again high on the Government’s agenda and is intended to play a key role in restructuring the Vietnamese economy. The Government hopes that equitisation will improve the management and operation of the dominant but inefficient SOE sector, as well as raising much needed capital to address the State’s budget deficit. The equitisation process offers opportunities for both domestic and foreign investors. The Government’s original target was to equitise 430 SOEs by 2016. However, only 160 of those SOEs have been equitised to date and the remaining SOEs (with an estimated book value of US$17.5bn) are expected to be equitised in the period 2016-2020.

In a new move to accelerate the equitisation process and improve its efficiency and transparency, in December 2016 the Prime Minister issued a new decision setting out the criteria for classifications of SOEs and a list of 137 specific SOEs to be equitised in the 2016-2020 period. According to the list, the State will retain a stake of over 65% equity in four of these SOEs, 50-65% in 27, and below 50% in the other 106. The State will retain full ownership in 103 SOEs operating in sectors of national importance, such as national defence and security, nuclear power and money printing. This offer an array of opportunities for private investors – particularly foreign investors – to tap into the Vietnamese market by investing in companies with leading market positions in key areas such as telecommunications, retail, oil and gas trading, infrastructure and power. Below is a snapshot of some of the current equitisation opportunities the, key legal issues that need to be considered and practical tips for foreign investors when weighing up these opportunities.

> INVESTMENT OPPORTUNITIES VIA UPCOMING EQUITISATIONS

> LEGAL ISSUES FOR FOREIGN INVESTORS

FOREIGN OWNERSHIP PERCENTAGE Foreign investors can participate in the equitisation process as an ordinary investor at the public sale of shares (IPO) or as a strategic investor by way of a direct negotiation with the target SOE. Most of the major foreign investment is expected to be made by strategic investors, who are willing to commit to the minimum five year term of investment required by law and who can assist with improving management and operations of the SOE though the transfer of technology and industry knowledge. A key question is: what proportion of the SOE will the State sell to foreign strategic investors? The laws on equitisation require the percentage of shares sold to strategic investors to be capped at 50 per cent of the total shares to be sold to external investors. The ratio may be adjusted in certain cases, such as that of large SOEs and those operating in specific sectors such as banking, telecommunications and mining with approval from the Prime Minister. In practice, the ratio of shares earmarked to be sold to one or more strategic investors usually ranges from 10% to 35%.

MANAGEMENT CONTROL A related issue is whether the level of shares sold to strategic investors will be enough to enable the investors to have some degree of control in the management of the company following its equitisation. There will be no control via voting if the foreign strategic investor’s ownership is limited to 10 to 20 per cent of the total shares, as was the case in the equitisation of the leading Vietnamese insurer, Bao Viet in 2007, and in the case of Vietnam Airlines in 2014. Therefore, it is necessary for a strategic investor to seek control mechanisms in a shareholders’ agreement and potentially the new charter of the company. This requires careful consideration as mechanisms deployed internationally, such as voting agreements, are yet to be tested for enforceability in Vietnam

TIMING AND PRICE BASIS Under the previous equitisation regime, the law practically prevented strategic investors securing a stake in the SOE before the public IPO, as the price for the purchase of shares by strategic investors had to be not less than the average IPO price, so could not be set before that IPO price was known. The current law has removed this requirement and now allows strategic investors to acquire shares prior to an IPO at a price not lower than the officially announced ‘starting price’. If the strategic investors acquire shares after the IPO, they will be required to match the IPO results by paying a price not less than the lowest successful bid in the public auction.

VALUATION Valuation is an integral part of the equitisation process and provides the base line for any price negotiation between the State and strategic investors. There are prescriptive rules that must be followed in undertaking a valuation for equitisation purposes and civil and criminal consequences may arise if these rules are not complied with. In practice, there may be differences in price expectations due to the range of results that different valuation methodologies can yield.

> PRACTICAL TIPS FOR FOREIGN INVESTORS

In our experience, in order to be successful in the equitisation process, it is important for foreign investors to find the right target with a management team that is genuinely looking for changes in the way they do business and sees the foreign investor as someone that is going to help bring about these changes. Foreign investors should try to get involved early on in the equitisation process to make representations to the valuers and impact the valuation process, which will be the key for the subsequent determination on price. It is also advisable to agree on technology transfer and management control with the target company upfront in a term sheet to avoid unnecessary gaps in expectations that may arise at a later stage.

The organisational structure of the target company and its control by the State should also be studied carefully to identify the decision makers both within and outside the company and to focus the negotiation process on them.