With its promise of lucrative returns, the buying and selling of businesses has emerged as an attractive investment instrument nowadays, drawing considerable attention from investors. Nevertheless, business buying and selling transactions are complicated matter and usually accompanied with potential risks. Consequently, prior to entering into business deals, it is imperative for the involved parties to assess many relevant factors, preventing from potential risks or mitigating risks to the utmost extent possible. This article will discuss on business buying and selling transactions and simultaneously provide legal advice for the business buying and selling process.
What does business buying and selling mean?
To ensure a successful business transaction aligning with the desires of all involved parties, the parties must first comprehend the concept of buying and selling businesses and clarify their own transactional objectives.
In Vietnam, “buying and selling business” is also commonly known as “business merger and acquisition”, derived from the English term “merge and acquisition”, which is abbreviated as “M&A”. Vietnamese law does not provide a specific definition for the term “buying and selling business”. In general, it can be understood as the activity of acquiring a portion or the entire shares or contributed capital of another business, or carrying out transactions involving businesses merger or consolidation.
The purposes behind a business buying and selling deal can be varied. In some instances, the buyer aims solely at acquiring the assets of the target business (typically non-transferable assets). In other cases, the buyer often seeks to gain control of the target business by holding the right to participate and decide on significant issues related to its operations and management. Additionally, there are cases where the buyer has different objectives, such as eliminating a rival in the market or saving production costs through resource-sharing among the merged or consolidated companies.
There are two prevalent types of business buying and selling transactions nowadays, as follows:
- Horizontal transaction: where target business are companies providing similar products or services in the same market as the buyer. Through this type of business buying and selling transactions, the buyer enhances their competitive strength and market’s ratio.
- Vertical transaction: The buyer and the target company operate in different stages of the same supply chain. This type of business buying and selling transactions are often carried out to achieve economic efficiency by avoiding production disruptions and reducing production costs.
Due to the complexity of these transactions, seeking legal advice for the business buying and selling processprior to and throughout the entire process of business buying and selling is essential for relevant parties to mitigate potential risks they may have had.
Legal advice for the business buying and selling process
First and foremost, parties involved in the business transaction should acknowledge that the legal regulations governing this process are not condensed in a single legal instrument but are spread across various ones, such as:
- The Law on Enterprises stipulates procedures for business registration related to business buying and selling activities;
- The Law on Investment outlines the conditions that foreign investors and foreign invested enterprises need to meet when acquiring other businesses, along with the required investment registration procedures;
- The Law on Competition specifies that business buying and selling (such as mergers, consolidations, acquisitions, joint ventures between businesses) is identified as a type of economic concentration. Additionally, in certain cases, businesses participating in economic concentration must conduct notification procedures to the National Competition Commission as stipulated.
In addition, there are numerous legal instruments such as decrees and circulars providing guidance on the implementation of the laws. The content of these instruments may overlap and lack of uniformity, posing challenges for businesses in complying with legal provisions. Therefore, involved parties need to carefully review relevant legal regulations to answer some of the following concerns: Can the business buying and selling transaction be carried out as planned in compliance with the law? If not, what modifications are required to comply with relevant regulations? (e.g., narrowing the scope of business lines in the target enterprise, adjusting the shareholding percentage of the buyer, etc.). Furthermore, the steps taken in the transaction should align with the administrative procedures at the competent state agencies. To mitigate potential legal risks, parties can seek legal advice for the business buying and selling process from reputable law firms to address the issues mentioned above.
Besides the challenges posed by the legal system, when engaging in business buying and selling transaction, the buyer also finds it difficult to check the legal status of the target business to identify potential risks prior to and after the transaction completion. In this case, the buyer should seek for legal due diligence services from reputable law firms to investigate the legal status, the fulfillment of obligations, and legal responsibilities of the target business. Legal due diligence involves a comprehensive review and examination of all legal factors related to the target business, allowing the buyer to consider and evaluate whether to acquire the target company or not. While legal due diligence can be time-consuming, demanding in terms of effort and finances, it is still more effective than resolving legal issues after completing the transaction.
The legal due diligence process for a business can vary in complexity depending on the specifics of each transaction. If the target business is newly established and has not engaged in many business transactions, with no branches or representative offices, the number of information and documents to be reviewed may be minimal. Conversely, for well-established businesses with a long operational history, the information and documents to be collected and reviewed can be extensive and complex, leading to an extended legal due diligence timeline. Typically, the criteria for the target business’s legal due diligence shall be comprised of: establishment and operations certificates, labour-related issues, business assets, key contracts, compliance with tax and financial obligations, a history of disputes, penalties, as well as potential future dispute and penalty risks, etc. The legal due diligence report usually outlines legal issues that the target business has complied with and those it has not, along with risks arising from non-compliance. Moreover, the report should provide potential solutions to address the identified risks.
Furthermore, negotiation and drafting of relevant legal documents are crucial aspects of the business selling and buying process. Negotiation topics include the valuation of the target business, transaction structure, conditions precedent, completion timeline, transaction execution methods, and other contract terms tailored to each case. The documents to be drafted will depend on the complexity of the transaction. These documents often include memorandum of understanding, confidentiality agreement, capital contribution/share purchase agreement, asset transfer agreement, meeting minutes, resolutions of the business for transaction’s approval, personnel appointment decisions, etc.
Seeking for expert’s opinions
Business buying and selling deals are rapidly increased in Vietnam, presenting a promising investment market for investors. However, as highlighted in the analyses above, the business buying and selling activities come with inherent risks for involved parties, particularly legal risks. In some cases, if caution is not exercised during the transaction process, the benefits derived may not be sufficient to offset the actual damage. Therefore, all transaction parties are encouraged to seek the opinions of legal experts throughout the entire process. Legal services can provide valuable legal advice for the business buying and selling process, assisting parties in evaluating the feasibility of the transaction, devising an appropriate transaction structure, identifying risks, and minimising the risks in the business buying and selling deal.
The above is an overview of legal advice for the business buying and selling process. If you have difficulties in finding a Law Firm to advise and support in the relevant legal field, please contact us. Phuoc & Partners is a professional consulting firm established in Vietnam and currently has nearly 100 members working in three offices in Ho Chi Minh City, Hanoi and Danang. Phuoc & Partners is also rated as one of the leading consulting firms specialising in business law in Vietnam that has leading practice areas in the legal market such as Labour and Employment, Taxation, Merger and acquisition, Litigation. We are confident in providing Clients with optimal and effective service.