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Setting process in m&a transaction

The article titled: “Setting process in m&a transaction” from Lawyer Tran Thanh Tung & Lawyer Nguyen Danh Cong, is published on Sai Gon economic times, dated 31 May 2012.

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Mergers and Acquisitions (M&A) transactions have never been simple ones. In contrary, a detailed plan is needed to be made for executing those transactions.

Nowadays, there is no standard process in M&A transactions in accordance with the law of Vietnam. The M&A’s regulations are scattered in a number of legal documents such as the Civil Code, Law on Enterprises, Law on Securities, Law on Competition, Law on Credit Institutions and so on. Each law recognizes M&A transaction from different viewpoint and as a result, the process may vary accordingly.  So, what should each party do to set up an appropriate process for a successful transaction?

Traditional general process

From the buyer’s viewpoint, M&A process traditionally includes seven stages as follows:

  • Stage 1: Selecting the targeted company

In this stage, the main activity is to make initial analysis of the targeted company, the status of the seller as well as the seller need of selling, the compatibility of targeted company’s operation and the plan of the buyer. The buyer can proceed this step without participation of the seller. After finishing this step, the buyer will have a short list of potential targeted companies.

  • Stage 2: Letter of intend

The buyer shall issue a letter of intend to the targeted company to demonstrate their good wills and willingness to make an M&A deal. This letter is not a binding agreement or contract between two parties but an acknowledgement of the items which are proposed to be implemented in the transaction or the initial structure of the transaction.  Of course, in some cases, parties can state several binding provisions, normally about the confidentiality obligation of the buyer or the commitment of the seller not to offer selling to any other party during the negotiation time between the two parties.

  • Stage 3: Making detailed evaluation

 To get detailed information about the seller, the buyer will invite consultants, lawyers, accountants, etc. to review entire documents relating to the targeted company to make the comprehensive and intensive evaluation about it such as the legal and financial status, labour, assets, real estates, environment issues, etc. The detailed evaluation report prepared by lawyers, accountants and consultants will be one of the basis for the buyer and the seller to negotiate and make an mutual agreement on price, structure of the transaction and the content of the sale and purchase agreement

  • Stage 4: Negotiating and signing sale and purchase agreement (the “Agreement”)

Based on the information collected from the detailed evaluation, the parties will discuss about the Agreement content. This stage is usually time-consuming and easy to make the deal collapsed. The success in negotiation can lead to the result that the Agreement would be signed. However, the agreement will not fully take legal effect before being approved by competent state the authorities.

  • Stage 5: Requesting for principle approval

In general, a M&A transaction must have both internal and external approvals. The internal approval is the acceptance of the shareholders/members of company for making the M&A transaction. The external approval is the permission needed to be taken from the competition State agency, State Securities Commission, business/investment registry.

  • Stage 6: Submitting application for transaction registration 

Once approved by the shareholders/members of the company and relevant authorities, the completed application files will be submitted to the State authorities for an official decision (by issuing an amended enterprise registration certificate or an amended investment certificate which records the M&A transaction).

  • Stage 7: Completing the transaction

After getting the amended enterprise registration certificate or an amended investment certificate recording the M&A transaction, the relevant parties will meet to confirm the completion of transaction (such as the sufficiency of making payment by the buyer, the fulfillment of performing obligations by the seller) or to reach the agreement on the works needed to be done after completing the transaction.

These seven stages make a common process of an M&A transaction. However, a specific M&A transaction is not required to follow through these seven stages and they can be shortened or separated into smaller stages according to the parties’ agreement.

Practices in Vietnam

 Currently, M&A transactions take place more and more, and enterprises are getting acquainted with such kind of transactions. However, Vietnamese enterprises often only pay attention to the stage 4 (Negotiating and signing the Agreement) and quickly move to the stage 6 (Submitting application for transaction registration). Just a few enterprises are concerned with stage 3 (Making detailed evaluation), stage 5 (Requesting for principle approval) and stage 7 (Completing the transaction).

Each stage takes its own role in the progress and skipping any stage may pose certain risks for parties in the M&A transaction.

  • Stage 3 takes an important role in helping the buyer collect information about the targeted company. Skipping stage 3, the buyer will not have necessary information to state the most appropriate price for buying, and have to face with the risk of buying unworthy stuffs or paying at a high price. More seriously, without careful consideration before buying, the buyer may be liable to large debts of the targeted company when such company intend to hide them.
  • Through stage 5, the parties will know opinion of related State authorities to adjust the transaction structure to be more suitable, or cancel the transaction if it cannot obtain permission from the State authorities when the parties have not been bound by contract yet. Without stage 5, the parties may face the risk of disapproval of the transaction or requirement for changing the application for transaction registration from the relevant State authorities. Parties may have to turn back to the negotiation process to find a new structure. This will be time-consuming and costly and easy to create disputes between the parties once the preceding agreement cannot be performed while negotiation for the new one is unsuccessful.
  • In the seller’s opinion, their responsibilities shall be completely completed when the buyer is named on the amended enterprise registration certificate or the amended investment certificate so few sellers consider the stage 7. However, the buyer will not easily agree with the seller on this point. Acquiring a company is not like purchasing a trivial stuff, so, the seller needs to go on the same way with the buyer at least for a while before they officially complete and make the liquidation of the transaction.

As mentioned above, Vietnam laws have not set up a standard process for M&A transaction. Therefore, the parties involved in the transaction need to check the requirements in each specialized law to determine the process for their transaction.

The above process can be used as a suggestion for the parties in making the transaction.