M&A in Vietnam: Notes on cross-ownership on the relation of parent-subsidiary companies

Date: 25 December 2021

Writer: Linh Nguyen

Cross-ownership on a parent-subsidiary company model in Vietnam has not been rare. The basic feature of this type of ownership is that one company has control over another based on a portion of the charter capital. However, there have been several regulations of Vietnamese law limiting cross-ownership on the relation of parent-subsidiary companies. Through this article, BLawyers Vietnam would like to present the cases where cross-ownership is not allowed and sanctions imposing violations. 

M&A: Cross-ownership between parent subsidiary companies

1. What is cross-ownership?

Cross-ownership is the situation of two enterprises owing each other’s contribution capital or shares. The most basic understanding of cross-ownership is that company A owns company B and company B also owns company A.

Cross-ownership between parent subsidiary companies-1

There are several forms of cross-ownership such as:

(i) Enterprises have ownership with another one, and each enterprise also has cross-ownership with another enterprise.

Cross-ownership between parent subsidiary companies-2

(ii) Enterprises with cross-ownership under a circular pattern, also known as circular ownership.

Cross-ownership between parent subsidiary companies-3

(iii) Enterprises that own each other as well as other enterprises.

Cross-ownership between parent subsidiary companies-4

(iv) An enterprise at the center of cross-ownership relationships with other enterprises.

Cross-ownership between parent subsidiary companies-5

Thus, there is no cross-ownership if only one enterprise owns a portion of contribution capital/ shares of another enterprise without a vice versa ownership.

2. Determination of the relation of the parent-subsidiary companies

According to Law on Enterprise 2020, a company is considered as the parent company of another company if it falls into one of the following cases:

  1. Owning more than 50% of the charter capital or the total number of ordinary shares of such a company;
  2. Having the right to decide directly or indirectly to appoint most of all members of the Board of Management, Directors or General Directors of such a company; or
  3. Having the right to decide on the amendment and supplementation of the Charter of such a company.

3. Unallowed cross-ownership cases

Law on Enterprises 2020 does not allow cross-ownership in the following two cases:

  1. A subsidiary company cannot invest to purchase shares /contribution capital into its parent company
  2. Subsidiaries of a parent company (sibling companies) cannot concurrently contribute capital or purchase shares to make cross-ownership together.

Therefore, Vietnamese laws do not govern cross-ownership relation between companies not standing in a parent-subsidiary relation.

4. Sanctions imposing cross-ownership violations

Administrative fine

Enterprises may be subject to administrative fines in the field of planning and investment if there is a situation of cross-ownership in the parent and subsidiary companies. Specifically, violating enterprises will bear a fine of from 15 million VND to 20 million VND for one of the following actions:

  1. Subsidiaries purchase contributed capital or shares of the parent company;
  2. Subsidiaries of the same parent company purchase contributed capital or shares to make cross-ownership together; or
  3. Subsidiaries of the same parent company as an enterprise holding at least 65% of state capital contribute capital to establish another enterprise.
Remedial measures

In addition to administrative fines, enterprises must also take the following remedial measures:

  1. Being forced divestment or withdrawal of shares from the parent company or other subsidiaries; or
  2. Being forced divestment from established the enterprise.

Shortly, Vietnamese law does not allow cross-ownership on a relation of parent-subsidiary companies. As a result, studying the cases which are unallowed by law could help mitigate potential risks, especially during the process of M&A or restructuring.

Should you have any questions about the above contents, please revert to BLawyers Vietnam at consult@blawyersvn.com. We are more than happy to hear from you!

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