Dr Net Le, Partner at LNT & Partners in Vietnam and Head of the firm’s Arbitration and Financial Services Practices was among the panelists addressing the issue of state-owned enterprises amid the transformation of command economies on Saturday, May 9th at The Inter-Pacific Bar Association’s (IPBA) 25th Annual Meeting and Conference in Hong Kong. After Dr Le’s presentation, I had an opportunity to interview him in-depth about what specific opportunities exist in Vietnam for foreign investors in state-owned enterprises (SOE’s), and how those investors might safely navigate Vietnam’s legal, regulatory, political and financial landscape to make those investments successfully.
Here’s that interview:
John Grimley: “This is John Grimley and I’m editor and publisher of Asia Law Portal. It’s May 9th, Saturday. I’m here in Hong Kong with Net Le, a partner in LNT partners in Vietnam, a law firm that’s focused on representing foreign investors in their activities in Vietnam. We’re here at the Inter-Pacific Bar Association annual conference and Net participated on a panel discussion about opportunities for foreign investors in acquisitions or investment positions in state-owned enterprises in Vietnam, which is a very interesting opportunity for foreign investors from all around the world, and I wanted to ask Net”:
“What is the current state of play in Vietnam with state-owned enterprises. What does the government want? What is it looking for? What is available to foreign investors? Net, what do you know?”
Net Le: “Thanks John, it’s a pleasure to be interviewed by Asia Law Portal. As you know, Vietnam used to be a communist country and is now moving toward a free market economy. In the past, the government thought that state-owned enterprise should play a major role in helping the economy to achieve its social-political purposes. But, nowadays the government is convinced that this is not the most efficient way of doing the work and it’s not very good at helping the government to achieve its’ social-political purpose. Therefore, they think of equitizing those companies.
They classify the state-owned enterprises into three categories. The first is company 91, which is the national corporation, like Petrol Vietnam, like Energy of Vietnam, like Vietnam Airlines, like Vietnam Railways, Vietnam Post and Telecom, etcetra. Those like the monopoly companies of Vietnam handling infrastructure works. The second type of company is company 90, which is a state-owned enterprise that is established by the province. The third type of company is independent state-owned enterprise.
A vibrant example [of a company 90] is Vinamilk. That company is producing milk. They’re not the monopoly milk producer in Vietnam, but they are the best milk producer in Vietnam and they are blue-chip in the stock market. It’s the best player in the stock market and Vinamilk is held 40% by a government company called State Capitol Investment Company, or SCIC. Of the rest, 49% is held by foreign investors and in between them are some domestic investors. The government sees that Vinamilk has performed extremely well after equitization, or as you call it, privatization, in that its total assets have increased 60 times and it generates 30% of total profits of SCIC, even though SCIC is handling not only one company, it’s handling thousands of companies. Vinamilk alone is 30% of their total profit. They receive a lot of money which they would never receive if they ran Vinamilk by themselves. So, that is the example of why the government should have equitization. And that’s the difference between Vietnam and China. China does not talk about equitization or privatization and their state-owned enterprise getting bigger and bigger. Sometimes president Xi Jinping says that they are run out of control, and now president Xi would like to tackle the corruption and then enhance the management. And, I think that is also one viable way to run state-owned enterprise, is to restructure the management.
But, in Vietnam restructuring the management is not that viable and not that easy. Therefore, the government would like to restructure by restructuring the ownership, so they will sell those companies to foreigners. And now they’re talking about selling blue-chip companies to foreigners. They’re saying that this year they’re going to sell 280 companies. Not selling 100%, but at least they will sell some percentage in it. Well, actually last year there was an equitization of Vietnam airlines and unfortunately only 1.2% of the total shares were released. Therefore the buyers were only Vietnamese. There were some foreign individuals but there were no foreign organizations or foreign funds. They’re not interested in it because perhaps they think that the piece of the pie is too small to buy in. So this year the government had to push it further and sell more of the stake of those companies, like Vietnam airlines.”
John Grimley: “To date, what other countries have had companies that have participated in purchasing stakes in Vietnamese state-owned enterprises?”
Net Le: “The companies that buy the most Vietnamese state-owned enterprises are the Japanese. There are two big deals in purchasing state-owned enterprises. Number one is Mizuho Bank purchasing 15% of Vietcom Bank at the price of 500 million US dollars at the stock price of 34,000 Dong per share and the other one is Bank of Tokyo Mitsubishi UFJ – [which] purchased 20% of the shares of Vietnam Commercial and Industry Bank, which is Vientinbank, 20% at the price of over 750 million US dollars and at the price of 32,000 Dong per share. Apart from that, companies like Fraser & Neave, they hold approximately 15% of shares in Vinamilk. And interestingly enough, Fraser & Neave, a Singaporean company, they did have a milk company in Vietnam, but it didn’t make a profit, and then guess who bought it? Vienamilk bought it. They sold the company to Vienamilk, but then, they own Vienamilk shares, so they make more money.”
John Grimley: “What sectors are available for potential stakes to be purchased?”
Net Le: “There will be infrastructure sectors, like telecommunications for sure, electricity, transportation and many others. Even for oil and gas, Petrovietnam, they may sell quite a few downstream projects to foreigners. I am aware that they might think of selling shares in the oil refinery to one of the Russian investors. And, also the other infrastructure like the Hanoi airport, another local company like VietJetAir, a private airline, they want to buy Terminal One. And just after they announced the intention, Vietnam Airlines sent another letter saying they also want to buy Terminal One, so now it’s getting more competitive and exciting.”
John Grimley: “What would you say to any foreign investor that might be interested in purchasing a stake in a Vietnamese state-owned enterprise? What is the advantage of purchasing such a small stake?”
Net Le: “Of course purchasing small stakes doesn’t allow you to do a lot of things in a state-owned enterprise and maybe you might get frustrated because even if you hold a 20% or 15% of the shares of the company, you don’t hold the position of chairman. You may have two seats on the board and the way the bank is running may still be the same as before equitization. However, if you have a 1% stake, you can launch a derivative action if you find out the management of the company is not as it should be under OECD standard of good corporate governance. You can ask for opening the books and to investigate what’s going on and what’s wrong with the management of the company. And, if you hold 10% share in the company, you can call for an AGM, an annual general meeting, the shareholder’s meeting. Or, you can request [other] such things.
If you mobilize a few people who hold 1% then you can make a challenge before the governance of the board and if anything is illegal or reduces your rights, you can invalidate the shareholders meeting minutes and the resolution. So, yes, some protection is there, like in other countries. And, also, if you don’t look at the rights in a strictly legal way, I think by getting to know the company and being the first mover into those companies, you can send a signal to your competitors that you’re already there and if there is a new share issue then you’ll probably have priority of first right of refusal, depending on how you negotiate with the state-owned enterprise.
And actually, the state-owned enterprise, when they sell their shares, they want to find a strategic partner. By saying strategic partner, I’m talking about shareholders that have specific technology and brand that can bring value to the Vietnamese company. They may hold 20% or more of the shares of those companies. By participating in those companies, you establish a channel of communication with the government and your probability to become a strategic partner is also increased. So, if you don’t look at it as a purely economic reason, there might be a political or long-term reason why you should buy the small stake in the company.”
John Grimley: “Some investors who may be interested in this opportunity, many of them are perhaps likely to be first time potential investors into the Vietnamese economy. How would you advise them to protect themselves against risk when entering the market?”
Net Le: “When entering the market, of course if you want to buy some shares in a company, like a decent amount, like 5% or 10%, you should do a due diligence and not merely a legal due diligence where you look at the corporate books of the company and check the legality and also the potential liability and risks in those contracts or assets of the company.
More importantly, you have to do the personal due diligence that by which I mean you have to know very well who is in charge of the company, who is the chairman, whether he can be a good leader who can lead the company to future of success. Whether he is motivated by his own interest or he or she is only in it for the interest of the shareholders. I’ll give you the example of Vinamilk – Vinamilk has a very good leader, Madam Lien. She was actually appointed by SCIC and she is a government person, but everybody trusts her. Even recently there were potential conflicts in the shareholder’s meeting in Vinamilk because SCIC wants to replace her and other shareholders don’t want that, especially foreign shareholders. SCIC invited each of the foreign shareholders to come in and have a meeting and convince to amend the charter to put in a clause saying that a member of the board will be automatically removed if the shareholder who appointed that member removes him or her. But they know exactly what it means. They want to, if that is implemented, then Madam Lien will be removed, because she is over 60 years old, and she, under Vietnamese law, has a compulsory retirement, so they don’t agree and it’s amazing all of them put together, 19%, 10%, 5%, all together they covered up 49%, so they can defeat it.
And with the audits, they defeated the 40% of the government shares. And of course the SCIC 40%, they cannot get approval and pass a resolution, but still they can ditto, so that is also a dangerous situation. So when you look at the company, when you purchase shares in the company, you have to look at the person in change, and whether he or she has a good motivation to build up for the company. That’s very important. Then, you have to look at the brand of that company, and see if they are transparent enough, do they use “big fours auditor”, the books look good, and they regularly report their information. That is a good sign that you could invest in those companies.”
John Grimley: “As we look forward, of course any investor, is going to be interested in what are the prospects for the overall performance in the Vietnamese economy going forward. What is the current status of the Vietnamese economy, and what are the prospects for the future?”
Net Le: “In the first quarter of this year, Vietnam’s economy grew by 6.8% or over 7%. It’s quite impressive, the same level of China. I read a report yesterday, that Vietnam has become the number 3 trading partner of South Korea, after the US and China. And of course, the reason is because of Samsung, because Samsung invested 10 billion dollars in Vietnam. That means they have to produce mobile phones to the world; they have to import a lot of chips, and display and panel from Korea to Vietnam. And right now they export every month over 10 billion US dollars, value of export. That means they invest, they counted for 17 – 20% of total export value of the whole country. So that’s the reason why Vietnam became the number 3 trading partner of Korea.”
John Grimley: “What is the Vietnamese government position on investment? Are they very desirous of having foreign investment in the country?”
Net Le: “Yes. I think if you compare it with other countries. Whereas for example in Thailand you may have compulsory ownership of local people up to 49% or 51%. In Vietnam, many sectors are open 100% to foreigners. There are some restrictions for bank and finance, where you can hold up to 30%, but in the future that rule may be relaxed. For a public company, I mean the company that has at least 100 shareholders, the room is 49%, but that room is soon to be relaxed as well.
So, the Vietnam government now realized that FDI (foreign direct investment), accounts for 75% of GDP, and for sure they are more efficient than state-owned enterprise. They pay tax, if they still have tax holiday, then they still employ a lot of people and if they localize their products, that means their products can be exported for the whole world. So when you are talking about localization, Samsung mobile phones are not just about localization of mobile phones for Vietnamese people: That is the Vietnamization of mobile phones for the whole world. So that is a total different story, and the government knows about that, and the government would like to learn from China, and step in the way of China to become a manufacturer of the world.
So for manufacturing I think Vietnam would likely follow the steps of China to become a manufacturing base of the world. For manufacturing, of course you need electricity, you need water, you need steel, you need anything related to manufacturing, so that created the opportunities for foreigners to come and to buy shares in state-owned enterprises, and of course when Vietnamese workers have money, the first thing they think is a house and the second they think is a car. So that is also another possibility — to build roads, infrastructure, and anything for those people.”
John Grimley: “Tell me about LNT Partners and how the firm got its start and how the firm might be able to help foreign investors seeking stake in SOE in Vietnam.”
Net Le: “LNT partners last year won the deal firm of the year by Asia Legal Business Thomson Reuters. We are also highly recommended by International Financial Law Review 1000, by Chambers and Partners and Legal 500. We are a well-established law firm with the head office in Ho Chi Minh City and the branch office in Hanoi. We have 8 partners and soon to have 9 partners. We have 40 fee earners, so that is a good size of a local law firms. We have 5 practice groups and we represent the government in the East-West Highway project, and in the Thu Tiem Tunnel, also international arbitration.
We represent the investors in the Suai Raw Stretching project; we work with the construction company, and the design company in the metro line number 2. We represent Petro Vietnam in the refinery extension project of Dung Quất Refinery, also another thermal power plant of Petro Vietnam. We also work with a division of Petro Vietnam in project finance of an FPSO floating production and storage oil tanker in Singapore [for placement] offshore in Vietnam. [We also] advise Petro Vietnam on drilling overseas for developing oil rigs.
We are experienced in representing both government, SOE’s and foreign investors who would like to participate in purchasing those companies. We could establish an effective communication channel to those SOEs and build a trust relationship in order to facilitate the purchasing of the shares of the state-owned enterprises. We are constantly writing articles and participating in law advisor, law amendment, in legal drafting committee, towards the end that Vietnam will be recognized as a market economy — toward the end that we highly equitize the presence of foreign investors [in Vietnamese] enterprise.
We also don’t hesitate to represent the foreign investors against the government, at the administrative court. And we win over the tax authority in a lot of cases, for the clients, because we believe that the economy should be run by the private sector and not the public sector. They are more efficient in doing that and of course they should pay tax to a fair amount, what is in the law, and the government should also collect tax and they should impose effective rules to prevent monopoly and also against transfer pricing. But that also means that the government has to go hand in hand with the investors, and not play a dominant role to the investors. That is what we truly believe.”
John Grimley: “For any prospective investors who are listening, how can they reach you for more information?”
Net Le: “We have a blog: VietnamLawinsight.com and we welcome investors to visit that website. We also have a website: LNTPartners.com. Come visit us. Our office is in Bitexco Financial Tower, Level 21 in District 1, Ho Chi Minh City, and the branch office in Hanoi. So we look forward to meeting foreign investors and try to assist them to achieve their objectives in Vietnam. We hope to contribute a small part to the success in Vietnam.”
John Grimley: “I want to say thank you very much for joining us, Net, from the IPBA annual conference in Hong Kong. I’m John Grimley for Asia Law Portal. Thank you very much.”
Net Le: “Thank you very much, my pleasure.”