The New Law on Securities
On 26 November 2019, the National Assembly of Vietnam approved a new Law on Securities no. 54/2019/QH14 (the “2019 LoS”), replacing the current version of the law which was last amended in 2010 (the “2010 LoS”).i
More than 92% of the delegates approved this piece of legislation which enter into force on 1st January 2021. In addition to the LoS, the overall legislative framework will also comprise a number of decrees and circulars on specific securities-related issues which are expected to be issued by mid-September 2020.ii
This legal update reviews the main changes implemented in the LoS and their impact on the Vietnamese securities market.
These include key amendments are in relation to: (1) the threshold for joint-stock companies to qualify as ‘public’, (2) public and private offerings, (3) foreign ownership restrictions; (4) depository receipts, (5) the establishment of the Vietnam Stock Exchange, (6) corporate governance, (7) licensing, and (8) inspections and handling of violations.
(1) Threshold for public companies
Under the 2010 LoS, a company was considered as ‘public’ if it had (i) conducted an initial public offering, (ii) shares listed on a stock exchange or (iii) 100 shareholders (excluding professional securities investors) and a charter capital of VND 10 billion or more.
The 2019 LoS increases the charter capital threshold for joint-stock companies to be considered as ‘public’, both in terms of capital size and shareholding structure.iii
A joint-stock company must now have a charter capital of VND 30 billion or more with at least 10% of its shares owned by 100 or more investors which are not ‘major shareholders’.iv
The 2019 LoS further provides that companies which qualified as public under the 2010 LoS will retain their status and shall not be unlisted and unregistered, unless otherwise decided by the general meeting of shareholders.v
The increased requirements introduced in the 2019 LoS are in line with the listing conditions of the Hanoi Stock Exchange. However, they remain below the listing conditions of the HCMC Stock Exchange which necessitates a charter capital of VND 120 billion or more, with at least 20% of the shares owned by 300 investors who are not major shareholders.
(2) Public and private offerings of securities
The 2010 LoS defined a ‘public offer’ as “an offer for the sale of securities via […] (a) the mass media, including internet, (b) an offer for the sale of securities to 100 or more investors, excluding professional securities investors [or] (c) an offer to a number of undefined investors”.
The above definition, and the provisions of the 2010 LoS, did not distinguish initial public offerings (“IPOs”) from subsequent offerings. The 2019 LoS retains a similar definition of a ‘public offer’ but now clarifies that they will be subject to different requirements.
Companies undertaking IPOs will now have to meet the following requirements:vi
- Respect the charter capital threshold above;
- Demonstrate profitable business operations for a period of at least 2 consecutive years preceding the offering registration, instead of only 1 year under the 2010 LoS;
- Offer or sell at least 20% of the company’s charter capital to investors which, individually, must not own more than 1% of the company. If a company has a charter capital of 100 billion or 1000 billion, then the threshold is respectively decreased to 15% and 10%;
- Major shareholders must undertake to hold, together, at least 20% of the company’s charter capital for a period of at least 1 year from the completion of the IPO;
- The company must not be subject to criminal prosecutions or have an expunged criminal record; and
- The shares must be listed or registered for trade on a securities exchange at the end of the IPO, instead of 1 year after the end of the IPO under the 2010 LoS.
Likewise, when undertaking subsequent public offerings, companies will have to comply with the requirements set out in (a), (b), (e) and (f) above, as well as the following condition:vii
- The total value of the shares issued at par value must not exceed the total value of the outstanding shares at par value, unless the company undertakes to purchase all shares for re-sale or to purchase remaining shares that have not been allotted;
- A public offering pursued to raise capital for a project will be considered as successful if at least 70% of the offered shares are sold to investors; and
- A subsequent offering can only be executed at least one year from three previous offerings;
In addition to the above, the 2019 LoS allows listed companies with shares traded on a stock exchange at prices lower than their par value (10.000 VND) to offer securities at prices lower than their par value.
The 2010 LoS defined a private offer as an “arrangement for offering securities to less than 100 investors, excluding institutional investors, without using mass media or the internet”. It further provided that number and nature of the investors eligible for such a private offering would be determined by the board of the company.
In an effort to keep up with technological developments, the 2019 LoS now removes the restriction with regards to the use of mass media or internet for private offerings. It further specifies that public companies may only make private offerings to (i) ‘strategic investors’ and (ii) ‘professional securities investors’ (“PSIs”).viii
Previously, the concept of ‘strategic investor’ was not defined in the law. The 2019 LoS remedies this lacuna, defining it as including investors with financial capabilities, technological expertise and a long-term relationship which are selected in accordance with the criteria determined by the board of a company.
The 2019 LoS further defines a ‘long-term relationship’ as a “commit[ment] to cooperate with the company for at least 3 years”.
As for PSIs, the 2010 LoS only encompassed commercial banks, financial companies, financial leasing companies, insurance business organizations and securities trading organizations. The 2019 LoS now expands this definition to include:
- Companies with charter capital of over VND 100 billion, listing organizations and transaction registration organizations;
- Individuals with securities practicing certificate; and
- Individuals with a securities portfolio value of at least VND 2 billion or with a taxable income of at least VND 1 billion during the preceding year.
Strategic investors and PSIs who take part in a private offering will be respectively subject to lock-up periods of 3 and 1 year, during which they will be restricted from transferring acquired shares.
The above definitions of strategic investors and PSIs thus broaden the types of investors who are allowed to participate in the private offering of public companies.
These investors are qualified and knowledgeable individuals or entities that have the ability to assess the risks and potential losses associated with an investment.
(3) Foreign ownership restrictions
The 2010 LoS set a general cap for the foreign ownership of voting shares in public companies at 49%, with conditional sectors such as banking or aviation subject to a stricter 30% limit.
In 2015, the Government passed a decree allowing public companies to abolish the foreign ownership limit, except for companies operating in business lines subject to restrictions under international treaties to which Vietnam is a party or under Vietnamese law.ix
The 2019 LoS now formally incorporates this approach and provides that the foreign ownership ratio must be determined on the basis of the voting shares.x
Otherwise, there is no restrictions under 2019 LoS on foreign investment in investment fund certificates, shares of securities investment funds, non-voting shares, derivative securities, custody certificates and warranty certificates, unless provided otherwise in the charter of a public company.
Thus far, many public companies have been reluctant to lift their foreign ownership restrictions because qualifying as a ‘foreign enterprise’ generally makes operations in Vietnam more complicated, notable in terms of M&A and land-related transactions.
In this context, other financial instruments such as Non-Voting Depository Receipts (NVDRs) may be more effective for Vietnamese public companies to attract foreign investment.
(4) Depository receipts
Non-Voting Depository Receipts (NVDRs) are financial instruments that can be issued by a company to raise capital from foreign investors, without exceeding foreign ownership restrictions. Previously, this type of securities was not allowed under the Law on Enterprise (LoE) and the 2010 LoS.
In July 2019, the Ministry of Planning and Investment published draft amendments to the Law on Enterprise (LoE) under which NDVRs are authorized. The holder of an NDVR would benefit from the same rights available to the holder of the underlying share save for voting rights.
The proposed amendments to the LoE also provide that the company charter must regulate the voting rights of ordinary shares for which NDVRs are issued.
To complement the above, the 2019 LoS now defines depository receipt as “a type of securities issued on the basis of the securities of an organization legally established and operating in Vietnam”.xi
However, the parameters for public companies to issues NDVRs remain to be defined, including as to whether there will be a maximum percentage of shares for which NDVRs can be issued or if such matter will be determined in the company’s charter.
The Ministry of Finance, therefore, is expected to publish detailed regulations on the deposit, transfer, and listing of NDVRs.
(5) Public Tender Offers
The 2019 LoS sets out the new circumstances in which a tender offer will be triggered, requiring inter alia the approval of the SCC. The triggering events are as follows:
- If an organization or individual, including its/his related persons,xii intend to purchase, directly or indirectly, 25% or more of the voting shares of a public company or fund certificates of closed-ended funds;
- If an organization or individual, including its/his related persons, holding more 25% or more of the voting shares of a public company or fund certificates of a closed-ended fund intend to acquire, directly or indirectly, additional shares such that its shareholding meets or exceed each threshold of 35%, 45%, 55%, 65% and 75% of the total voting shares or total fund certificates;xiii and
- If an organization or individual holds 75% or more of the voting shares of a public company or fund certificates of a closed-ended fund, it must purchase the remaining shares at the disclosed purchased price within 30 days, if requested by the remaining shareholders.xiv
With regards to the above, it should be noted that the 2019 LoS defines ‘related persons’ as including xv
- First-degree family members;
- Employees or directors of an organization owning 15% or more of the voting shares;
- Board members, directors, and other management personnel of an organization;
- Individuals or entities who are in a relationship with, or controlled by, a related person;
- A parent company and its subsidiaries;
- Authorized representatives; and
- Business partners and key clients of a company.
(6) Establishment of the Vietnam Stock Exchange (“VSE”)
The 2019 LoS provides for the establishment of a new and centralized VSE,xvi which shall be incorporated as a private company with the State as a majority owner. The VSE will be directly managed by the Vietnam State Securities Commission. It will act as a high-level market regulator and issue common indices and standards for both the HNX and HOSE.
These 2 entities will become subsidiaries of the VSE but continue their operations separately. All bonds and derivatives transactions will be conducted at the HNX while all stock transactions will be conducted at the HOSE.
No merger of the HNX and HOSE into a unified system is foreseen in the nearby future. Further directives regarding the operations and organization of the VSE and its members are to be issued by the Prime Minister.
(7) Corporate Governance
In 2015, the OECD/G20 published corporate governance principles to provide guidance on:
- The basis for an effective corporate governance framework;
- The rights and equitable treatment of shareholders and key ownership functions;
- Institutional investors, stock markets, and other intermediaries;
- The role of stakeholders in corporate governance;
- Disclosure and transparency; and
- Board responsibilities.
The 2019 LoS now incorporated the above principles,xvii requiring public companies to put in place a system comply with the following standards and ensure:
- A reasonable and effective governance framework;
- The efficiency of the Board of Directors and the Control Board;
- The safeguard of shareholder rights and the equal treatment among shareholders;
- The role of investors, stock markets, and intermediaries in supporting corporate governance activities;
- The legitimate rights and interests of related parties in corporate governance;
- Timely, completely, and accurately disclose the company’s operations, allowing shareholders to have equal access to information.
The government published further detailed drafts to implement the above. For example, the disclosure of the company’s operations is better via Article 5, Chapter II (from article 8 to article 11) of the circular guiding information disclosure on the stock market.
Under the 2010 LoS, the license issued by the State Securities Commission (SSC) serves both as an operating license and enterprise registration certificate. This will no longer be the case under the 2019 LoS. Rather, securities and management companies will first have to obtain an operating license from the SSC and thereafter an enterprise registration certificate in accordance with the LoE.xviii
Securities and fund management companies presently operating under an SCC license will have 2 years from the entry into force of the 2019 LoS to obtain an enterprise registration certificate from the competent Department of Planning and Investment.xix
(9) Inspection and handling of violations
The 2010 LoS did not provide the SSC with sufficient powers to adequately manage and supervise its enforcement and regulate the stock market. This was inconsistent with the securities market management principles of the International Organization of Securities Commissions (IOSCO), to which Vietnam is a member.xx
To remedy this lacuna, the 2019 LoS now provides for the establishment of a Securities Inspectorate under the authority of the SCC. The Securities Inspectorate has the mission of conducting inspections to ensure the enforcement and compliance with the LoS. It will have the power to request information and documents from inspected companies, facilitating the detection and verification of violations.xxi
It also makes cooperation mandatory for agencies, organizations, and individuals (e.g. banks, telecommunication companies, business registration authorities, tax authorities, etc.) involved in the context of such inspections.xxii
In an effort to keep up with market developments, the 2019 LoS also significantly broadens the scope of prohibited acts in relation to securities.xxiii
These include manipulation, insider trading, use of trading accounts to create artificial supply and demand; collusion with others to spread false rumors and manipulate stock prices; using customer accounts and assets without being entrusted to do so, abusing trust to appropriate properties of customers, etc. Individuals who commit such prohibited acts may be temporarily or permanently banned from holding a certain position in the securities industry.xxiv
In addition, the maximum level of fines that can be levied under the 2010 LoS is limited to VND 2 and 1 billion respectively for enterprises and individuals.xxv The 2019 LoS now raises this ceiling by providing that:xxvi
- For market manipulation or internal transactions violations, the maximum fine is increased to 5 or 10 times (for individuals and organizations respectively) the illegal revenue gained from such actions; and
- For other violations, the maximum fines imposable are respectively increased to VND 3 and 1.5 billion for organizations and individuals.
In the context of its investigations, the SCC may cooperate with different agencies such as the VSE, securities companies, tax authorities, business registration authorities, etc.xxvii
The 2019 LoS sets out a mechanism for coordination between the agencies involved. With the above amendments, the Ministry of Finance and the SSC will have better tools to manage and supervise the stock market in accordance with international practices and IOSCO principles.
i Law No. 70/2006/QH11 on securities dated 29 June 2006 as amended by Law 62 dated 24 November 2010.
ii This includes: firstly, a draft decree elaborating on several provisions of the LoS; secondly, a draft circular guiding information disclosure on the stock market; next, a decree regarding derivatives and derivative securities markets; a decree stipulating sanctions against administrative violations in the field of securities and securities market. Then, a decree on the issuance of corporate bonds; a decree on the standards and conditions for practicing auditors and auditing organizations; a decree on enterprise registration; a circular guiding the public offering of stocks, offering of stocks for exchange, issuance of additional stocks, repurchase of stocks, sale of stocks, sale of stocks, public tender of stocks. Next, a circular guiding transaction on securities markets; circular guiding operations of registration, depository, offsetting and payment of securities transactions on the securities market; and a circular guiding establishment and operation of securities companies.
iii Articles 15 and 32, 2019 LoS
iv Major shareholder is defined as owning, directly or indirectly, more than 5% of the voting shares
v Article 135.4, 2019 LoS
vi Article 12.1, 2019 LoS
vii Article 1.2, 2019 LoS
viii Article 31, 2019 LoS
ix Decree No 60/2015/ND-CP
x Article 32, 2019 LoS
xi Article 4(8), 2019 LoS
xii The 2010 LoS did take into account related persons for this triggering event.
xiii The 2010 LoS also provided that offers to purchase 5 to 10% of the voting shares in a public company within 1 year from the completion of the previous offer also qualified as a triggering event. This has been removed in the 2019 LoS.
xiv The 2010 LoS contained a similar requirement but with a shareholding threshold of 80%.
xv Article 4.39, 2019 LoS
xvi Article 43,2019 LoS
xvii Article 40, 2019 LoS
xviii Article 71 and 81, 2019 LoS
xix Article 135.2, 2019 LoS
xx Namely principles 10, 11, and 12 which require that the agency regulating securities should have a comprehensive investigation, inspection, surveillance, and enforcement powers.
xxi Article 130, 2019 LoS
xxii Article 131, 2019 LoS
xxiii Article 12, 2019 LoS
xxiv Article 7, 2019 LoS
xxv Decree No.145/2016 /ND-CP
xxvi Article 132, 2019 LoS
xxvii Articles 43, 44, 46, 130 and 131, 2019 LoS