Introduction

In the context of share or equity valuation within Vietnamese companies, several valuation methodologies can be utilized. Among the most prevalent methods are the discounted cash flow (DCF) analysis and the application of earnings multiples. However, the determination of a definitive enterprise value is often impractical at the juncture of executing the acquisition agreement and completing the transaction. Consequently, the definitive agreements entered into by the parties typically encapsulate their consensus on the valuation method to be employed and the corresponding payment mechanism. In private share transactions, the completion accounts mechanism and locked box mechanism are frequently adopted for settlement of the purchase price.

This article examines the legal implications and potential risks inherent in the completion accounts mechanisms, as construed under Vietnamese law.

Legal Considerations

Overview of Completion Accounts

The completion accounts mechanism involves the stipulation of a preliminary (or initial) purchase price within the share purchase or subscription agreement, reflecting an estimation of the equity value as of the completion date. Subsequently, within a predefined period post-completion, the buyer, potentially through an independent valuation expert, prepares completion accounts to reflect the company’s financial position at that completion date. The seller is afforded the opportunity to review these completion accounts and either contest or concur with their content. Should the parties reach a consensus concerning the completion accounts within a specified timeframe, an adjustment to the preliminary purchase price will ensue accordingly.

Licensing Requirements

In instances where a buyer, either a foreign investor or one deemed to be a foreign investor, is obligated to procure certification from a provincial or municipal State investment management agency, such as the Department of Planning and Investment, for the satisfaction of conditions pertaining to share subscription or acquisition (Acquisition Approval), this certification serves as a condition precedent to the transaction. As part of this process, the buyer must disclose the purchase price within the application for Acquisition Approval and provide a copy of an in-principle agreement on the equity acquisition or subscription arrangement between the parties.

Notwithstanding, the current Vietnamese regulatory framework lacks clarity concerning the permissibility of adjusting the purchase price delineated in the Acquisition Approval application and the in-principle agreement after the issuance of such Acquisition Approval. Furthermore, there are no established procedures for the amendment of the Acquisition Approval’s contents post-issuance.

The question of whether subsequent adjustments to the purchase price, following the issuance of Acquisition Approval to the buyer, or amendments to the terms of the in-principle agreement within the formal share purchase or subscription agreement may constitute a legal breach under Vietnamese law remains indeterminate. Such matters are potentially subject to the discretionary interpretation of the relevant authorities. 

Capital Gain Tax

In the context of income tax arising from a share sale transaction, it is incumbent upon the seller (or, under specific circumstances, the target company) to declare and settle the applicable income tax within a prescribed timeframe.

In a completion accounts scenario, wherein the preliminary purchase price is subject to adjustment post-completion, the following issues may arise:

  • In the event that the final purchase price is lower than the preliminary purchase price, the seller may encounter challenges in reclaiming any excess income tax previously remitted to the State Treasury.
  • Conversely, should the final purchase price exceed the preliminary purchase price, the seller must fulfil their obligation to declare and remit the income tax resulting from this adjustment. However, it remains ambiguous under Vietnamese law whether any declaration and payment of tax made beyond the prescribed timeframe would constitute a violation of tax regulations.
  • Notably, in instances where the preliminary purchase price exceeds the final purchase price, the adjustment amount payable to the buyer may be deemed as income to the buyer, thus subjecting it to withholding tax obligations.

Overseas Remittance

While domestic cash transfers between or to Vietnamese residents are generally permissive, stringent regulations govern outbound remittances to foreign entities or individuals. Consequently, if the seller is required to remit any adjustment amount to a foreign buyer following the completion of the transaction, the remitting bank may necessitate various supporting documentation. This could include, among other things, evidence of the payment of withholding tax applicable to the buyer, in order to facilitate such outbound transfers.

Payment Security

Upon the completion of the transaction, the title and associated risks pertaining to the sale shares or equity will transfer to the buyer. In situations where an adjustment amount is payable to either the buyer or the seller as a result of the completion accounts, the payee may express concerns regarding the payor’s ability to fulfil its payment obligations, particularly in the absence of established payment security measures.

Should either party fail to comply with its respective payment obligations, the question of whether the parties may unwind the transaction from a licensing compliance standpoint remains ambiguous. This uncertainty necessitates careful consideration and potential inclusion of provisions within the transaction documents to address the handling of payment adjustments and the implications of non-payment, in order to proactively mitigate risks associated with licensing and compliance issues following the transfer of title.

Foreign Exchange Risks

As a general principle, Vietnamese law mandates that transactions conducted within its territory be denominated and settled in the local currency, Vietnam Dong (VND). Therefore, if the parties have agreed upon a purchase price referenced in a foreign currency, it must be converted into VND for the purpose of setting out the purchase price in acquisition agreements and subsequently settled in VND. This requirement does not apply when the involved parties are both foreign entities or individuals, allowing for the transaction to be settled outside Vietnam under specific conditions.

Owing to this regulatory framework governing foreign exchange, there is potential for foreign exchange gains or losses to occur during the interval between the payment of the preliminary purchase price and the final adjustment after closing. Consequently, parties are advised to take into account these fluctuations and consider appropriate measures to manage potential foreign exchange risks effectively within their transaction planning.

Alternative Valuation and Payment Mechanisms in M&A Transactions

While the completion accounts mechanism is prevalent in M&A transactions, it may pose several regulatory concerns for the parties involved, particularly within the context of Vietnamese law. Presently, there is no definitive solution to entirely eliminate these risks; however, alternative valuation and payment mechanisms can be employed to alleviate potential issues associated with completion accounts. Such alternatives include the locked box mechanism and the use of escrow accounts.

Locked Box Mechanism

Under the locked box mechanism, the final purchase price is established based on the most recent audited financial statements of the target company or locked box accounts as of a specified date, known as the “locked box date.” This approach eliminates the need for post-completion adjustments. The period from the locked box date to the completion date is referred to as the “locked box period,” during which specific cash outflows authorized for the target company—referred to as “permitted leakage”—are agreed upon by the parties. This arrangement ensures that the company continues its operations in the ordinary course of business and satisfies predetermined financial commitments included in the locked box accounts’ valuation. If any unpermitted leakage occurs within this timeframe that negatively impacts the equity value, the seller is legally obligated to indemnify the buyer for the resultant loss in value.

Escrow Mechanism

Under an escrow mechanism, the parties, or the buyer, will establish an escrow account with an escrow agent to retain the initial purchase price until the final price is determined. Any necessary adjustments—whether additions or deductions—will be made to the initial purchase price based on the final valuation before disbursement to the seller.

Combination of Mechanisms

In practice, these mechanisms may be combined and/or restructured to optimise the commercial interests of the parties and to mitigate the risks inherent in relying on a single mechanism. Therefore, it is advisable for the parties to seek guidance from legal and tax advisors to thoroughly evaluate the risks and practicality of proposed valuation and payment mechanisms in M&A transactions before incorporating them into definitive agreements. This comprehensive evaluation will help ensure that the transaction structure effectively aligns with the parties’ objectives while adhering to Vietnamese regulatory frameworks.