Legal Aspects in M&A: Essential Elements to Master

Mergers and acquisitions (M&A) are becoming increasingly common in Vietnam, serving as a key strategy for businesses to scale up, enhance competitiveness, or restructure. However, M&A is not merely a business matter; it is also deeply intertwined with legal considerations. Without a solid grasp of the relevant regulations, companies risk facing significant issues, ranging from contractual disputes to competition law violations. What legal factors, then, require attention during M&A transactions? This article analyzes the fundamental aspects to help businesses execute M&A deals effectively and securely.

What is M&A and Why Are Legal Aspects Important?

M&A stands for Mergers and Acquisitions, a term referring to transactions where one company acquires all or part of another company's assets or shares, or where two companies consolidate into a new entity. In Vietnam, M&A activities are often undertaken to expand market reach, optimize resources, or enter new industries. However, these are not merely commercial agreements; they are governed by various legal regulations, such as the 2020 Law on Enterprises, the 2020 Law on Investment, and the 2018 Law on Competition. Legal issues in M&A can impact the transaction's validity, the parties' rights and interests, and overall market stability. Therefore, a clear understanding of the legal framework is crucial for ensuring a successful transaction and avoiding risks such as disputes or penalties from regulatory authorities.

Key Legal Factors in M&A

To execute M&A transactions legally and effectively, businesses must pay attention to several critical legal factors.

Legal due diligence is an indispensable step, enabling a comprehensive assessment of the target company's legal status. Under the 2020 Law on Enterprises, this process involves verifying the company's legal standing, reviewing major contracts, debts, and outstanding financial obligations, as well as ensuring that assets and intellectual property rights are free from disputes or encumbrances. Thorough due diligence helps identify potential risks, thereby facilitating accurate decision-making and the negotiation of a fair transaction value. Regulations regarding the transfer of shares or capital contributions are also critical. Under Article 126 of the 2020 Law on Enterprises, shareholders in a joint-stock company are free to transfer their shares, except where restrictions exist in the company's charter or regarding shares with preferential voting rights. Conversely, for limited liability companies, the transfer of capital contributions generally requires the consent of other members, subject to certain exceptions. Furthermore, if the transaction involves foreign investors, the enterprise must comply with the 2020 Law on Investment, particularly regarding foreign ownership limits in conditional business sectors.

Another factor to consider is competition control in M&A transactions, as stipulated by the 2018 Law on Competition. Pursuant to Article 30, M&A transactions must be notified to the National Competition Commission if they constitute an "economic concentration"—for instance, when the combined assets or revenue of the involved parties reach or exceed VND 3,000 billion, or if the transaction is likely to restrict competition, such as by creating a dominant market position. Failure to notify the authorities or proceeding with a prohibited transaction may result in fines ranging from 1% to 5% of the enterprise's total revenue from the preceding year, in accordance with Article 76 of the Law.

Regarding tax and finance, M&A transactions often give rise to tax obligations that require careful attention. Profits derived from the transfer of shares or assets are subject to corporate income tax under the Law on Corporate Income Tax 2008 (amended in 2013), while certain asset transfer transactions may be subject to value-added tax (VAT) under the Law on Value-Added Tax 2008. Enterprises must conduct careful calculations to avoid the risk of post-transaction tax arrears and must also assess the target company's debts and financial obligations to ensure the transaction value is not adversely affected.

Finally, safeguarding employee rights is a critical aspect of M&A transactions, as mandated by Article 44 of the 2019 Labor Code. In the event of a merger, the two companies must formulate a labor utilization plan that guarantees rights regarding wages, insurance, and working conditions. In an asset transfer scenario, employees have the right to terminate their employment contracts if they do not consent to the new terms. Failure to comply with these regulations can lead to labor disputes, thereby jeopardizing the progress and reputation of the M&A deal.

Legal considerations in M&A—ranging from legal due diligence, share transfers, and competition control to taxation and employee rights—cannot be overlooked. Adherence to the 2020 Law on Enterprises, the 2018 Law on Competition, and other relevant regulations helps enterprises minimize risk and ensures the transaction is both lawful and effective. Do you require legal support for an M&A transaction? Contact HTC Vietnam for in-depth advice from our team of experienced lawyers. ______________________________________________________________

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(Author: Le Thi Ngoc Tram; Translator: Nguyen Phuong Anh; Date: April 4, 2025)

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