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Consolidation and mergers between heterogeneous enterprises – Why not?

The article written by Lawyer Nguyen Danh Cong – Associate and Ms. Ngo Thi Diem – Paralegal of Phuoc & Partners is published on Saigon Economic Times dated 25/07/2013.

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Consolidation and mergers may be the shortest paths to create booming-prone enterprises. However, consolidation and merger operations face several constraints under the Law on Enterprises, of which mere eligibility for consolidation and merger requires the precence of homogeneous enterprises.

Corporate consolidation and merger – Why must it be among the homogeneous enterprises?

Under the Law on Enterprises 2005;

So why must a consolidation or merger be only among homogeneous enterprises? To answer this question we refer to the relevant provisions in previous corporate legislation documents, so as to study the disparative legislative viewpoints over time; where the Companies Act 1990 did not codify the two forms of consolidation and merger, the Law on Enterprises 1999 only allows consolidation and mergers of homogeneous enterprises. Agreeing with the opinions of many legal experts, we believe that perhaps from a straightforward legal perspective only the homogeneous enterprises can be consolidated or merged together i.e. between one private enterprise and another,  one limited responsibility company and another or one joint stock company and another, in order to maintain the initial organization model of these companies so as to avoid post-restructuring disturbances. Lawmakers formulated the above provisions for this purpose. With respect to administrative management however, this provision could ensure the administrative procedures are simplification as expected by enterprise management authorities.

In essence, consolidation or merger operations are the coalescing of the capital, assets, labour force and market share of two or more enterprises. Accordingly, as the consolidated or merged enterprises will cease to exist, and in spite of the maintenance of the previous enterprise form, these enterprises will almost certainly be forced to re-organize their own management and regulating apparatus to fit their new corporate size and structure. As such, any concern about disruptions of the organizational structure of the post-consolidation/merger enterprises are unnecessary and impractical.

Moreover, in terms of legal procedure and with respect to a consolidation exercise, the consolidated enterprises shall conduct business registration procedures for establishing the new enterprise. Accordingly, the provision requiring companies to be homogeneous for consolidation becomes meaningless; when registering a new establishment, the new consolidating enterprises shall be eligible to choose the new enterprises form rather than forcibly accept that of the previous enterprises.

In addition, with respect to the form of the merger, all capital, assets, labour force etc. and the executive apparatus of the merged enterprises will united under the cumulative principle into one merging enterprise. And so, the executive apparatus of those businesses which were merged will certainly be reduced or rearranged to the needs of the current enterprise. In other words, the merging enterprise will have its own model and organizational structure while the structure of the previous businesses will no longer exist.

The negative impact

As the law does not allow consolidation or mergers between heterogeneous enterprises, any such enterprising attempting either operation will forced into a “bypass” – the consolidating or merging enterprises shall convert their enterprise form to suit that of the other enterprises to meet the statutory requirements before the transaction.

Thus, despite the law banning consolidation and mergers between heterogeneous enterprises, the mechanism allowing this conversion of enterprise form has inadvertently left law-makers wrong-footed, with “those who say one thing now and do another later”. These “loop-holes” not only increase costs for relevant parties in the consolidation or merger deal, but also waste social resources; a complicated obstruction when considering the need to simplify administrative procedures as arranged by the state authorities.

In a final analysis, to ensure the consolidating or merging enterprises inherit the rights and obligations of the consolidated or merged enterprises, the restriction on consolidation and mergers between the heterogeneous enterprises as stated by the Vietnamese laws should be applied to the enterprise forms with different legal liabilities for assets i.e. between a private enterprise that is fully responsible for corporate debts and a limited liability company or a joint stock company that only takes limited liability to the extent of capital contribution.

For enterprise forms with the same set of legal liabilities for assets such as limited liability companies and joint stock companies, Vietnamese corporate law should allow consolidation or merger directly between the two enterprise forms to ensure alignment with the regulations which allow conversions between these two enterprise forms. However, the corporate law and relevant legislation need to further specify in detail the issues on labour restructuring, the procedures and conditions for converting assets, capital contributions, shares and bonds among these groups of subjects. From our experience, identifying the charter capital of two or more homogeneous enterprises after their consolidation or merger is not merely a mechanical cumulation of their capital, but also a relevant capitalization of their tangible assets and other intangibles upon joining in a consolidation or merger. Therefore, once a consolidation or merger is allowed between heterogeneous enterprises, this issue needs to be thoroughly addressed to eliminate any discrepancies when determining the charter capital structure between limited liability companies and joint stock companies.

With the foregoing in mind, in order to enable enterprises and state authorities to promote more streamlined consolidation and merger operations, and to avoid time and money wasting evasions of the law such as “bypassing”, in future, the legislature should study, amend and supplement the the Law on Enterprises 2005 and other relevant legislations towards allowing direct consolidation and mergers between heterogeneous enterprises, whilst maintaining the regime of legal liabilities for assets, as discussed.