Few months ago, a corporate client (the Buyer) requested me to assist in its purchase of 100% equity from the owners of a private university in Vietnam (the Sellers). The Buyer and the Sellers had worked together before and reached an agreement on the payment. Accordingly, the Buyer shall deposit 10% of the value of the sale and purchase agreement (the SPA) to the Sellers after signing the Memorandum of Understanding and the remaining 90% shall be paid after the Buyer and the Sellers sign the notarized SPA at a licensed notary office, and after the Sellers hand over all original legal documents in connection with the private university to the Buyer.
This way of doing transaction was quite familiar in Vietnam 15-20 years ago. However, it is so risky for the Buyer if it follows this transaction structure when key steps in an M&A transaction, including without limitation, legal and financial due diligence are not done, which can help define the requirements that the Sellers must meet/ satisfy prior to the Buyer’s payment (the Conditions Precedent). Simply speaking, the Conditions Precedent are the requirements that must be satisfied before a party is obliged to performed under a contract or before a closing occurs. In the above case, it can be understood that the Conditions Precedent for the Buyer to pay 90% value of the SPA to the Seller include (i) the SPA is signed and notarized at the licensed notary office, and (ii) the Sellers hand over all original legal papers of the private university to the Buyer.
The Conditions Precedent are not so popular in M&A transactions between local (Vietnam-owned) companies in Vietnam, but are an integral part of any M&A transactions, involving foreign buyers. In such M&A transactions, the payment shall be made (into various installment) by the buyer, upon satisfaction of the Conditions Precedent by the Sellers.
The Conditions Precedent may vary among M&A transactions. However, in my own experience from many M&A transactions, some of the key/ common Conditions Precedent in M&A transactions include:
1) The Conditions Precedent for the seller’s representations and warranties. Accordingly, the seller’s representations and warranties must be true and accurate and the sellers must fully comply with such representations and warranties;
2) The Conditions Precedent for internal approval for M&A transaction. Accordingly, the seller must provide evidence/ proof to obtain internal approvals (from the General Meeting of Shareholders or the Board of Members, as the case may be), authorizing the execution, delivery and performance of the sale and purchase agreement;
3) The Conditions Precedent for approval in-writing by competent authorities of Vietnam for such M&A transaction. For any M&A transactions where the buyer is a foreign investor, one of the most important Conditions Precedent is that the seller must obtain the written approval from the competent authorities of Vietnam for the share/ equity acquisition by the foreign investor;
4) The Conditions Precedent for the tax obligations with the tax authorities, and/ or financial obligations to any third parties. As such, the seller commits that the seller hides no tax obligation and/ or financial obligation besides what are included in the sale and purchase agreement, and as the case may be the seller shall pay any pending tax obligation and/ or financial obligation before the buyer makes payment;
5) The Conditions Precedent for completing some other legal procedures to recognize the buyer as a new member/ shareholder of the target company such as amending the Enterprise Registration Certificate to recognize the buyer as a new member (for limited liability company), or update the Register of Shareholders recording the buyer as a shareholder and issue the Share Ownership Certificate to the buyer (for joint stock company);
Returning to the above case, it is clear that (i) signing and notarizing (optional) the SPA, and (ii) handing over all original legal documents of the private university to the Buyer are not sufficient enough for the Buyer to control the transaction and minimize legal risks which may occur to the Buyer in this transaction. Some of the potential legal risks can happen as consequences of the fact that the order to transfer the equity of the private university does not comply with the education regulations of Vietnam, if it is not made public and offered to the private university’s officials, and teachers prior to transfer to the Buyer; tax and financial obligations arise after the Buyer takes over the private university…?
The above M&A transaction should not be done in a way of “cash on delivery” like the way you buy an item in the supermarket. Instead, it must be done carefully, step by step so as to avoid “putting the cat among the pigeons”.
Please note that I have reviewed my case as per the laws of Vietnam. I would expect my conclusions to apply in other jurisdictions, and would be pleased to receive comments from lawyers from other jurisdictions.
By: Richard Luu