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With the increasing demand for M&A transactions in Vietnam to meet companies’ goals of expanding into new areas or restructuring, there is a corresponding rise in the need for professional legal due diligence in Vietnam (LDD) for target projects and companies.
The nature of M&A transactions has become more flexible and complex, especially as Vietnam integrates into the international market, leading to cross-border M&A deals involving multinational corporations across various sectors. However, as these transactions evolve, companies engaging in M&A require a strong foundation of legal knowledge and experience, alongside high expertise in other areas such as management and finance.
In the constantly changing market landscape, it is challenging for companies to manage and execute all the necessary stages of an M&A transaction independently, as it lacks objectivity when the company itself is a party to the transaction.
Therefore, companies often use the legal due diligence services of partners who can access information, review the actual business situation of the company, prepare legal documents, and negotiate as a neutral party to ensure both the buyer and seller are satisfied with the benefits obtained in the M&A transaction.
Basics of Legal Due Diligence in M&A Transactions in Vietnam
A typical M&A transaction is generally divided into three phases: Pre-M&A, M&A Signing, and Post-M&A. The pre-M&A phase is often considered the most critical to ensure the transaction’s success and to effectively implement the post-M&A phase, which revolves around corporate restructuring and efficient post-M&A operations.
The reason the pre-M&A phase is so crucial is due to the legal due diligence and business valuation steps. Specifically, in M&A transactions involving multiple entities such as investors, credit institutions, companies, and both domestic and international banks, the internal information of these parties and their relationships and connections are often not disclosed publicly and transparently.
Legal due diligence (LDD) in Vietnam is conducted to gather and assess the accuracy and validity of the information related to the successful execution of the M&A transaction. Typically, the assessed party is the target company, but both the buyer and seller will receive the necessary information to evaluate the risks they face, such as hidden information about assets owned by a party, undisclosed conflicts or disputes, intellectual property rights like trademarks, patents, industrial designs that are not protected but are in use, etc.
With these reports, the buyer and seller will have sufficient information to make informed decisions on whether to proceed with the M&A, or if they need to renegotiate to align with the actual operations of the other party.
Due to the complex nature of M&A transactions, there is no specific procedure that parties must follow. However, this article assumes that the party initiating the legal due diligence is the buyer in an M&A transaction, while the seller is the target company subject to review and investigation.
In a comprehensive legal due diligence review across all areas of the seller by the buyer, the buyer usually gains more leverage during negotiations and establishes an advantage throughout the M&A process.
Conversely, the seller also benefits from receiving an objective report on its business operations, allowing it to make necessary changes to ensure compliance with legal regulations from the company’s establishment to the present.
However, regardless of the side, the support of legal advisory units with high expertise in corporate and M&A matters is essential to ensure that the company does not suffer disadvantages during the due diligence process, thereby avoiding losses in the overall M&A transaction process.
Considerations in the Legal Due Diligence Process for M&A Transactions in Vietnam
Depending on the scale of the target company and the complexity of its operations, the time required for legal due diligence (LDD) can vary. Factors such as which areas require focus, whether the target company is fully cooperative in providing documents, and other related issues will impact the due diligence process.
Here are some specific considerations:
1. Legal Due Diligence (LDD) on the Financial Status of the Target Company
When assessing the financial activities of the target company, the legal due diligence (LDD) team needs to pay special attention to the company’s financial performance, which is reflected in its capital raising, management, and use of funds in its business operations. Notably, the history of capital raising is a key area of focus.
For example, if the target company has issued bonds to raise funds for projects, it is crucial to review information regarding the scale, quantity, issuance value, any confirmed violations or accusations by other parties, whether the company has repaid the principal and interest on maturing bonds, and if there are any bonds where the company has negotiated delayed payments with investors.
If the company has raised capital through other means, such as bank loans or credit institutions, it is important to examine the assets and rights owned by the company used as collateral. Determine if these assets are also used to secure or guarantee other payment obligations and whether there are any restrictions on the use of these assets by the target company.
In most cases, the seller will not voluntarily provide detailed transaction information due to factors such as taxes, reduced profits on records, social insurance contributions, and actual wages of employees. Thus, the advisory and due diligence team should work closely with independent auditors to retrieve accurate information.
The financial nature of the company reflects the economic benefits it receives and the costs incurred to obtain those benefits. The financial status of the company is the critical backbone that determines its ability to operate daily and meet the responsibilities and obligations agreed upon in the M&A transaction.
In addition to outstanding obligations to third parties, the legal due diligence (LDD) report should also check the company’s financial obligations related to land, taxes, and other government authorities, as well as review any official documentation or sanctions imposed by competent authorities.
These aspects are mandatory to review and assess in detail to ensure that the buyer has a certain level of assurance about the company’s financial status. For instance, in a merger, after the merger, the merged company will cease to exist, while the acquiring company will continue to exist and inherit all assets, rights, and obligations of the merged company, including undisclosed debts and payment obligations.
Failure to conduct thorough financial due diligence due to negligence or lack of capability places the buyer at significant risk of future liabilities. When issues arise, the buyer will have to expend substantial resources and costs to resolve them instead of the seller, due to the lack of proactive due diligence from the start.
2. Legal Due Diligence (LDD) on Construction Projects, Real Estate, and Land
In recent years, the construction and real estate sector in Vietnam has faced significant legal procedural issues. This is because, to accelerate development and expand profit margins, real estate companies often borrow or raise funds beyond safe limits to undertake multiple projects in different locations.
In many cases, these projects may not meet legal requirements for implementation, but companies continue to invest heavily. For example, a high-rise residential project might be limited to 15 floors to fit local infrastructure conditions and city planning but ends up being built to 20 or 25 floors to maximize profit.
Alternatively, a project approved for construction may be required to include a portion of affordable housing for low-income workers but might reduce this portion and expand the area for commercial housing at higher prices, increasing profit margins. Additionally, projects may be expedited by ignoring safety, environmental, or fire safety regulations.
These considerations are critical in the legal due diligence process to identify potential legal and regulatory issues, ensuring compliance and mitigating future risks associated with the project’s legal status.
In rare cases, a company may initially comply with legal requirements, but due to the extended nature of construction and real estate activities, project plans may be adjusted to align with higher-level planning or investor decisions, leading to delays in project modifications beyond the original schedule.
For buyers, if the seller’s project is subject to zoning adjustments, it is essential to reassess the project’s value and any additional financial obligations related to land that may arise.
As a unique asset type in Vietnam, legal due diligence should also focus on reviewing whether the target company is subject to any complaints or disputes related to land use rights or property attached to the land. If the disputing party is another business, information can be more accessible, but if it involves individuals, verifying this information can be challenging.
These factors can impact the buyer’s business plans after the M&A is completed. Thorough legal due diligence on construction projects and real estate is crucial, especially for companies with significant capitalization and a high portfolio of real estate assets.
Assessing legal conditions, issues, and potential risks associated with assets the buyer will acquire and manage post-M&A will provide a negotiating advantage and mitigate complex risks related to high-value real estate assets in Vietnam.
Legal Due Diligence on Intellectual Property (LDD In IP)
When M&A concepts first entered Vietnam, most companies focused on tangible and high-value assets such as real estate, financial conditions, and business operations. However, with the rapid development and legalization of intellectual property rights in Vietnam over the past two decades, modern M&A transactions increasingly include specific provisions on the transfer of intellectual property assets.
During the legal due diligence phase, it is essential to identify the seller’s existing intellectual property assets and assess any risks associated with these rights. Risks in intellectual property can be categorized into two types: infringement of other parties’ intellectual property by the company and infringement of the company’s intellectual property by others.
Unlike financial or real estate assets, intellectual property is intangible and harder to protect, with infringements potentially occurring anywhere, not necessarily from direct competitors of the buyer or seller.
However, risks of the company infringing on others’ intellectual property are easier to control. The due diligence team should check if the company’s intellectual property is exclusive, shared, licensed by others, or if the company licenses it to others for short-term benefits.
Given that intellectual property is intangible and central to a company’s brand, valuing it—a crucial step in all M&A transactions—can be challenging. The valuation should be based on national data, market value, impact on the company’s products and services, and consumer perception. Disputes often arise in this area, with sellers pushing to maximize the value of intellectual property while buyers aim to minimize it.
A prominent example of the importance of intellectual property due diligence in Vietnam is the case involving Agribank. In 2009, Agribank divested its shares in Agribank Gold and Gemstone Corporation (AJC) but failed to recover the trademark rights for “Agribank.” As a result, AJC continued using the name, leading to significant reputational damage for Agribank.
Agribank’s oversight, which occurred despite recognizing the issue shortly after the divestment, highlights the need for thorough due diligence on intellectual property. Agribank failed to secure a proper agreement or transfer of the “Agribank” trademark, resulting in ongoing market confusion and harm to its brand.
Lawyer Pham Duy Khuong of ASL LAW commented in 2019 that to avoid similar issues, companies should ensure that intellectual property transfer or licensing agreements are well-documented and registered if required by law, to protect their interests effectively.
Consequences of Inadequate or Incomplete Legal Due Diligence (LDD)
Legal due diligence (LDD) is not only crucial for assessing whether an M&A transaction meets the required conditions but also plays a pivotal role in determining the buyer’s future development and operations post-M&A.
M&A parties, particularly buyers, should be aware that publicly available information on the internet and social media is often inaccurate, incomplete, or manipulated to benefit the company.
Therefore, legal due diligence (LDD) is especially important in M&A transactions. It provides the most comprehensive and accurate picture of the company, particularly when conducted by experienced and highly skilled advisory firms.
To safeguard interests and mitigate risks in the short, medium, and long term, companies involved in M&A should recognize the importance of thorough legal due diligence and the need for a dedicated advisory firm throughout the entire M&A process.
ASL Law is a leading full-service and independent Vietnamese law firm made up of experienced and talented lawyers. ASL Law is ranked as the top tier Law Firm in Vietnam by Legal500, Asia Law, WTR, and Asia Business Law Journal. Based in both Hanoi and Ho Chi Minh City in Vietnam, the firm’s main purpose is to provide the most practical, efficient and lawful advice to its domestic and international clients. If we can be of assistance, please email to [email protected].
ASL LAW is the top tier M&A law firm in Vietnam. If you need any advice, please contact us for further information or collaboration.
