Mergers of Viet Nam's credit institutions regulated

Lawyers of Vilaf Hong Duc
Viet Nam News

Mergers are becoming more common among financial institutions, not only due to the impact of globalisation but also as a means to help smaller banks and stock brokerages weather the world economic crisis.

The State Bank of Viet Nam has proposed new regulations to govern mergers of credit institutions in a draft circular expected to replace State Bank Decision of July 1998.

Under the Law on Enterprises 2005, one or more companies can merge with another by means of one company acquiring all legal assets, rights, liabilities and interests of the other, with the latter then winding up business.

The law also provides for consolidation, under which two or more companies can form a new company and transfer all legal assets, rights, liabilities, and interests into that new company while simultaneously winding up the consolidated companies.

The draft circular would retain these definitions and make mergers and consolidations of credit institutions comply with relevant provisions of the Law on Credit Institutions, Law on Enterprises and Law on Competition.

To comply with the Law on Competition, the draft circular requests credit institutions participating in a merger or a consolidation ("transacting credit institutions") to obtain the opinion of competition administration agency regarding their merger or consolidation if required by this law. In particular, in accordance with Article 20 of the Law on Competition, if transacting credit institutions have a combined market share of between 30 per cent and 50 per cent of the relevant market, they must notify the competition authority before implementing the merger or consolidation.

If the combined market share is less than 30 per cent of the relevant market or if these transacting credit institutions after merging or consolidating remain small-or medium-sized, no notification is required. In such cases, the draft circular would only require the transacting credit institutions to provide a written explanation of the absence of the competition authority’s opinion regarding the merger or consolidation.

The draft circular also has a broader scope and covers more types of credit institutions than Decision No 241, applying to all State-owned, joint stock, co-operative, joint venture and foreign-owned financial institutions. It aims to create a level playing field for all credit institutions and prevent differential treatment.

The draft circular would also make a distinction between voluntary and compulsory mergers or consolidations. A voluntary merger or consolidation would occur when the financial institutions merge or consolidate on their own initiative for their own purposes of development.
A compulsory merger or consolidation, on the other hand, would apply when a financial institution (i) cannot satisfy regulated minimum capital requirements; (ii) has "inefficient operations"; or (iii) is under special control; and cannot apply the voluntary method and poses a risk to the integrity of the credit system. In the latter instance, the State Bank shall prepare a detailed plan for approval by the Prime Minister before the merger or consolidation.

The draft does not provide criteria to determine which credit institutions are considered to have "inefficient operations". Although this could be interpreted to mean insolvency or a threat of insolvency, the vagueness of this term could lead to some discretionary applications of compulsory merger or consolidation.

Like Decision No 241, the draft circular sets forth two required procedural steps for merger or consolidation of credit institutions: (i) in-principle approval by the Governor of the State Bank; and (ii) the State Bank Governor’s official approval.

The draft circular adds the requirement that the application dossiers for approval in principle contain not only the written opinion of the competition authority but also the transacting credit institutions’ next three-year business plan, financial statements for the past two years, and a summary of financial status and operations for the past three years. It is questionable how credit institutions with less than three years in operation would be able to satisfy this requirement.

In order to prevent insider trading by members of the boards of management, members of the control board, directors or deputy directors of transacting credit institutions, the draft circular would also prohibit these figures from purchasing and/or selling their contributed capital in such credit institutions within a "suspension period" on capital transfers. This period of time would start from the date that the transacting credit institutions submitted their application dossiers for in-principle approval from the State Bank and would end 30 days after the date that the merger or consolidation is publicly announced. Any capital transfers within that period could only take place with the approval by the State Bank Governor.