M&A TRANSACTION, CRITICAL ISSUES ENTERPRISES SHOULD CONSIDER

The trend of M&A is emerging as a prominent phenomenon in the global business landscape, reflecting the dynamic evolution and growth of modern economies. Companies engage in M&A transaction for various strategic purposes, including market expansion, access to new technologies, achieving target economies of scale, and enhancing competitive positioning. However, alongside these significant benefits, M&A also presents numerous challenges and risks that require thorough assessment by businesses.

What is M&A? 

M&A is an abbreviation for the English term “Mergers and Acquisitions”. Specifically:

Mergers: This refers to the consolidation of different companies to create a new entity. Legally, the merged company transfers all its assets, rights, obligations, and lawful interests to the merging company and ceases to exist as a separate entity.

Acquisitions: This involves one company acquiring full or partial ownership of shares, assets, or control rights of another company (the target company) to gain operational control or expand its business activities. Acquisitions can be executed through the purchase of shares or assets, depending on the transaction’s objectives. After the process is complete, the target company may either continue as an independent entity or integrate into the acquiring company.

Thus, M&A generally refers to the activity of acquiring control over a business through mergers or acquisitions between companies, aiming to consolidate resources, expand scale, or achieve strategic business goals. It is an essential and effective tool widely used by enterprises for restructuring and enhancing competitive positions in the market.

M&A brings significant and practical strategic benefits

Firstly, many companies focus on scaling up to penetrate new markets, increase production lines, and expand distribution networks, branches, transaction offices, and projects. M&A is considered a strategic tool that not only enables businesses to rapidly increase their scale but also enhances the efficiency of goods distribution, broadens market share, and strengthens their competitive position in the marketplace.

Secondly, one of the standout advantages of M&A is the reduction of labor costs through streamlining operations and personnel restructuring. During the merger process, there is often a need to optimize the organizational structure, particularly in indirect roles. This presents an opportunity for businesses to replace or eliminate underperforming positions while acquiring skilled and experienced talent from the involved parties. It is crucial to note that, when conducted in compliance with regulations, personnel optimization through M&A is entirely lawful and is often regarded as a sound human resource management strategy. However, in cases of non-compliance, companies may face penalties under the law, along with the challenges of resolving labor disputes, which could adversely affect their reputation and business operations.

Third, M&A provides exceptional opportunities to enhance financial resources by expanding available capital, improving access to new funding sources, and facilitating financial risk sharing. Additionally, it contributes to greater transparency in financial management, laying a solid foundation for sustainable long-term growth.

Another significant advantage of M&A is its potential to drive and elevate the technological and technical capabilities of businesses. Through mergers and acquisitions, companies can leverage each other’s technological strengths to gain a competitive edge. Furthermore, the abundant capital generated through M&A serves as a favorable condition for businesses to invest in modern technologies, effectively supporting their operations and unlocking new business opportunities.

M&A activities, key legal considerations

From a legal perspective, M&A is a complex investment activity involving a variety of related issues. Among these, the “four key laws” that have a significant impact on investment and business activities, particularly M&A transactions, include the Enterprise Law 2020, the Investment Law 2020, the Securities Law 2019, and the Competition Law 2018.

In addition to domestic laws, M&A activities are subject to commitments under the World Trade Organization (WTO) and trade agreements to which Vietnam is a party. To ensure a smooth M&A process while minimizing legal risks, investors must pay attention to the following key issues:

– Legal procedures to be completed;

– Accounting and tax mechanisms;

– Labor-related matters;

– Competition and economic concentration regulations.

For enterprises operating in non-conditional business sectors, the law currently permits increasing foreign ownership limits to 100%. However, caution must be exercised regarding restrictions on capital transfer in the case of joint-stock companies. Specifically, within the first three years following the issuance of the enterprise registration certificate, founding shareholders of a joint-stock company may only transfer their ordinary shares to a third party who is not a founding shareholder if such a transfer is approved by the General Meeting of Shareholders.

Moreover, under the Competition Law, M&A transactions resulting in a market share of 30% to 50% in a “relevant market” must be notified to the Ministry of Industry and Trade. Transactions leading to a combined market share exceeding 50% are prohibited, except in certain cases stipulated by law.

>> IMPORTANT NOTES ON CAPITAL CONTRIBUTION, CONTRIBUTED CAPITAL OR SHARE PURCHASE https://linconlaw.vn/important-notes-on-capital-contribution-contributed-capital-or-share-purchase/

>> REPORT ON OPERATION OF FOREIGN REPRESENTATIVE OFFICE, HOW TO PERFORM https://linconlaw.vn/report-on-operation-of-foreign-representative-office-how-to-perform/