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Special transformations of company models

Based on use, enterprise managers around the world have created “special transformations” of company models to suit each investment project. Understanding those transformations, managers have the freedom to choose the correct company model for their own purpose. The company is often seen as a business organization – a legal entity that has separate status, name, organizational structure, and the legal representation.For investments, the company becomes an instrument to implement the investment project.

SPV – Companies for special purposes

Special Purpose Vehicles (SPVs) or Special Purpose Entities (SPEs) are companies established to serve a special purpose for its parent company. SPV has been around for more than three decades and has been singled out as one of the culprits of the financial crisis in United State in 2007-2008. Basically, banks provide loans to people who are not qualified to purchase properties and thus, create a sub-prime loan. To avoid holding all the risk if borrowers are incapable of repaying their debts, the bank sets up the SPV, transferred those debts to the SPV and then SPV sold the debts to external investors in the form of bond issuance. Investors would receive the majority of the periodic interest paid by the previous borrowers while the banks would receive a small amount as management fees.

From time to time, the SPV model is not only encapsulated in the financial sector but also widely used in many fields. As a specific example, a foreign corporation through a SPVjoint venture agreement with a Vietnamese enterprise. During the operation, this joint venture purchased raw materials from the foreign corporation with high-priced or raised the cost of management fees, at the same time, sold the finished products at a low price. Thus, the joint venture incurred losses or low profits, but could then duly transfer the real profits to the parent foreign company. After quite some time, the Vietnamese enterprise could not tolerate the financial “heat” from the frequent losses leading it to withdraw from the joint venture, and so the foreign company usurped the joint venture and transferred it to the form of the company having 100% foreign investment capital.

SPV can satisfy multiple purposes of the parent company, especially the following purposes:

Firstly, transfer of sub-prime assets as mentioned above.

Secondly, diversify risk:  A company which has established an SPV has transferred the risk to SPV to protect the parent company.

Thirdly, raise the capital without affecting the rate of ownership: for large projects, the company established SPV may invest a part of the capital to the project and the rest shall be called from the external investors without contributing the whole investment capitals for the project. Therefore, the SPV can be used to raise the capital for a large project without increasing the debt burden or diluting the shares of the company established SPV.

Fourthly, separate the bad debts from the company lawfully in order to transfer those debts to the SPV and embellish the company’s financial statement.

Fifthly, improve the liquidity of the company: when SPV sells the debts to other investors, its profit including of sales, service fees, charges and so forth which will be transferred to the parent company and enable the company to improve its liquidity.

Sixthly, acquire enterprises: by many different methods, SPV can be a tool to acquire other enterprises.

However, using SPV may also lead to legal problems, for example, the complex structure – the complexity of management and cash flow may cause the parent company losing the control of an SPV. In addition, there are reputation risks – the reputation of the parent company could be affected if the SPVperforms poorly.

Internationally, the legal regulations for this model are still quite ambiguous, and so SPVshave been recently in the crosshairs of legislators in order to tighten the operation of SPVs by creating more transparent mechanisms of information and defining its role in the operation of the parent company.

Variable interest entity – VIE

Pursuant to the laws on investment of some nations, foreign investors are forbidden to invest in a number of sensitive business areas. Many foreign companies overcome such hindrance by establishing two legal entities, one legal entity has its head office located overseas and one legal entity has its head office located in the target nation of investment, e.g. China. The legal entity located in China enters into a contract with the foreign entity – accordingly, the foreign entity shall earn the right to control the operation of the one located in China without holding ownership, and such Chinese legal entity shall distribute profits in return. This structure is called the Variable Interest Entity or VIE which was used by the 90s and allows foreign investors to have limited control without holding ownership of the subsidiary.

Moving one step forward, foreign companies may be listed on the foreign securities market and investors purchasing stocks of such companies shall enjoy the profit from the Chinese company without directly owning stocks of the Chinese company. The Chinese company is able to mobilize capital without worrying that it must share ownership with foreign investors.

In Vietnam, some companies have applied VIE for their IPO plans in the international market. Hence VIE and SPV are the same in terms of a legal entity which are used as an instrument for investors who must or choose to operate behind the veil.

Holding company model – investment company

A Holding company is the basic model of a company operating in multiple sectors and those sectors must support each other. In this model, the parent company acts as a major shareholder for subsidiaries but not to directly monitor their business operations. In a holding company model, the parent company and subsidiaries are independent and transparent entities. Theoretically, if the parent company or subsidiary meets financial difficulties, the others are unaffected.

In Vietnam, in term of legality, the format of a holding company is similar to a stock investment company by the same form of capital investment. A holding company is generally considered to have several advantages, including tax benefits, human resource capacity, access, and control equity capital and merger and consolidation processes are also simpler and easier to implement. The most prominent point is it remains in control of its own operations and business activities of the subsidiaries with the parent company.

The holding company model is considered to be quite in line with the Vietnamese economic where the majority of enterprises are medium, small, and extra small companies. Holding companies are expected to connect separate, small enterprises to become supply chains for the national economy.


As noted above, the models of SPV, VIE or the holding company are transformations of the company which are used commonly in the world for many years are still new in Vietnam. However, this does not mean that these models cannot be developed in Vietnam. Selection of a suitable variant to suit the long-term business and investment purposes based on the basis of complying with Vietnamese laws requires the business managers to have the vision and be prepared to develop these models further to fit the economy in general and the business investment sector in particular.

Le An Hai

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