Introduction

Vietnam continues to show impressive growth, notwithstanding difficulties experienced due to the COVID-19 pandemic. At a snapshot, whilst Vietnam’s GDP growth in 2021 dropped slightly to 2.58% (from 2.90% in 2020) it still maintained growth during a difficult 2021 with severe pandemic restrictions (whilst other countries in similar circumstances had experienced negative growth). Expectations are that the country should see growth in the range of 5.5% to 6.7% during 2022. The key tourism sector is expected to garner growth as travel restrictions ease and it should be noted that despite a very low contribution from this ordinarily significant sector, the Vietnamese economy still grew during 2020 and 2021. As experienced elsewhere, the pandemic has resulted in labour shortages in certain business sectors (primarily in the textile, leather and footwear industries), though this is also expected to recover.

From a socio-economic perspective, Vietnam has a last measured human development index of 0.704 (placing at 117th globally), though the country has seen significant improvements over the last ten years. Remarkably, poverty has been reduced from 32% of the population in 2011 to 2% in 2020. Indeed, Vietnam has one of the fastest growing middle-class populations in the world and although likely slowed due to the pandemic, this acceleration should revert with anticipated GDP growth. Prior to the pandemic, the middle class consisted of approximately 13.6% of the 96 million population, enroute to reach a middle class of 56 million by 2030. It is expected that the standard of living and quality of life of Vietnamese will continue to rise and, with this, domestic consumer demand should grow.

Whilst the above paints an overall picture of prevailing trends, set out below are insights relevant to M&A and, of course, with particular reference to the year 2021 and expectations for 2022. Unfortunately, statistical data is not as easily available in Vietnam as with other markets and much of this article is based on our conversations with clients, other deal advisors as well our general experience as local lawyers.

2021: Lessons for 2022 and Beyond

Last year saw COVID-19 restrictions impact manufacturing output. Despite this, a strong commitment was shown by multinational corporations (MNCs) and, by way of example, Nike has continued to invest in Vietnam by expanding production and Intel is building a research and development centre in Hanoi. Whilst this commitment, combined with easing restrictions, signals strong optimism in the market, the pandemic continues to have adverse effects, albeit largely external. For example, global logistical disruptions may constrain exports.

Geopolitical risks

Although 2021 was affected by the pandemic, there have been noticeable trends which can be expected to continue in 2022. A significant lesson from the pandemic is that events outside of Vietnam can indeed impact Vietnam and should the pandemic or geopolitical risks threaten Vietnam’s trading partners, then this may weaken demand for Vietnam’s exports and also result in traditional sources of capital limiting their investment activities generally. Whilst this could dampen growth, Vietnam has in recent history managed to maintain healthy relationships with geopolitical rivals and there is no reason why it should not continue to do so, mitigating potential risks. In any event, the global economy will need producers of goods and investment destinations – Vietnam satisfies both.

Foreign direct investment (FDI) remained significant during 2021, being recorded at USD31,15 billion with an increase of 9.2% year-on-year. Although new investment projects increased in total value, the number of actual projects decreased by 30%. Importantly, of the FDI received, USD9 billion was allocated to existing projects (with a 10% decrease in number of projects but also an increase in total value). This illustrates confidence by existing and new investors. The sectors with the greatest FDI were manufacturing and processing, electricity production and distribution, real estate and wholesale and retail. The year 2021 resulted in a trade surplus of USD4,08 billion.

Regional investment

A continuing trend is strong regional investment from within South-East Asia and Asia. This may in certain instances be due to more developed Asian countries looking to chase higher returns in faster growing and less mature economies such as Vietnam. A major attraction is Vietnam’s younger population, combined with continued focus by the State and Vietnamese society on education and upskilling. The fact that the country remains at a comparatively low labour unit cost is also influential. The development of management talent has also led to greater investor confidence. Although these considerations apply equally to investments from outside of Asia, FDI remains led (in order) by Singapore, South Korea, Japan and China. We note that Singapore remains a jurisdiction through which investment is facilitated and, therefore, FDI from Singapore could easily be from other sources of capital. Private equity, following global trends, continues to play a major role and sponsor backed deals remain significant. We expect the patterns described here to continue.

M&A

Focusing on M&A (away from broader FDI), 2021 was an excellent year globally and Vietnam certainly did not buck against the trend. Feature deals of 2021 include the acquisition by SMBC Consumer Finance (Japan) of a 49% stake in VPBank Finance Company (also known as FECredit) from Vietnam Prosperity Joint-Stock Commercial Bank (VPBank) with a reported value of USD1.4 billion and Saigon-Hanoi Commercial Bank selling all of its interest in its financial consumer arm, SHBank Finance Company Limited (SHB Finance), to Bank of Ayudhya Public Company (Krungsri) (Thailand) for a reported USD156 million. YKVN acted as counsel for the sellers in either instance. Another major deal, in which YKVN acted as counsel to the Masan Group, is the investment by Alibaba, the Abu Dhabu Investment Authority, Temasek (the Singaporean sovereign investor) and Baring Private Equity Asia in a 5.5% stake of CrownX Corporation for a reported cash consideration of USD400 million. CrownX is a retail platform that consolidates Masan Group’s interests in Masan Consumer Holdings and VCM Services and Trading (Masan Group’s retail arm and food supply chain).

The creation of CrownX is itself an example of how domestic players have been driving transactional activity in the local market and playing an ever-increasing role in M&A. A few of the domestic deals of 2021 include GTNFood’s merger with its subsidiary Vietnam Livestock Group at a reported value of USD203 million and Vinh Hoan Corporation’s acquisition of a 51.29% interest in Sa Giang Import Export Corporation from State Capital Investment Corporation for a reported USD15,2 million, and thereafter furthering its position to hold approximately 76.72%. It is a sign of the increasing sophistication of the local market that corporates are making strategic plays through M&A.

M&A activity was prominent in consumer finance and financial services (noticeably in connection with FECredit and SH Finance), technology, real estate, retail (notably in connection with CrownX) and manufacturing. Education also remained a significant sector (including edutech). We expect this to continue into 2022 whilst also highlighting the energy (specifically renewable energy) and agricultural sectors.

Technology

Technology and tech start-ups are flourishing domestically and Vietnam is expected to produce significant unicorns. VNLIFE (a platform offering banking enablement, digital payment, online travel and retail) raised US$250 million in Series B Funding, whilst Momo (a payment platform) raised US$200 million in Series E funding. The CrownX transaction is also an example of a technology deal with the platform aiming to accelerate the offline to online market in Vietnam.

The local market did not see a strong pattern of significant distressed sales, though local asset value has decreased in certain sectors and, as an example, real estate distressed transactions did occur. The lack of such transactions may be attributed to Vietnam maintaining economic growth. It is not anticipated that distressed sales will feature during 2022 and “exits” would more likely involve regional decisions made by MNCs (such as the exit by Citigroup from South-East Asia). Naturally, regional or global consolidations and carve outs may impact Vietnam.

Transactional Terms

Generally, the COVID-19 pandemic did not impact transactional terms during 2021 and deal terms did not deviate much from previous years. Foreign investors continue to make use of ordinary shares, convertible loans and convertible bonds whilst use of preference shares is less common (and when used owing to deal specific structuring considerations). Due to foreign exchange regulations, instruments are considered when making investments in VND rather than foreign currency. Convertible loans are more commonly denominated in foreign currency than is the case with convertible bonds. An investor’s choice in use of convertible loans, convertible bonds and preference shares is driven by equity/debt classification of an instrument. As investors usually benchmark against USD, foreign exchange indemnities are becoming more common.

As can be expected, material adverse change (MAC) and force majeure clauses continued to be (from 2020) negotiated and commercial terms certainly did deal with risks associated with the pandemic. Whilst sellers typically sought exclusion of COVID-19 from MAC clauses, buyers resisted.

In so far as choice of law and forum are concerned, it remains the case that foreign parties opt for Vietnamese law and Vietnam International Arbitration Center. For high value and complex deals, a foreign choice of forum is usually utilised (often arbitration rather than courts). The typical combination is Vietnamese law and either the Vietnam International Arbitration Center or the Singapore International Arbitration Centre. It is highlighted that Vietnam is a member of the New York Convention and Vietnamese courts continue the trend of openness to enforcement of foreign arbitral awards and judgments.

Environmental, Social and Corporate Governance (ESG)

In 2019, Vietnam adopted the Vietnam Corporate Governance Code of Best Practices (the “Code”). The Code is itself indicative of a desire to follow best practices with key reference materials in developing the Code being the 2015 G20/OECD Principles of Corporate Governance and the 2017 ASEAN Corporate Governance Scorecard. There is an increasing level of maturity in corporate governance. ESG goals form part of a broader movement in Vietnam towards greater governance.

Although environmental and social issues have not historically featured prominently, there is a prevailing attitude (of both the State and market participants) that Vietnam achieve sustainable growth and the country continues to make strides in this area. Illustrative of this trend, the Code makes recommendations (for public companies) that the board of directors report key non-financial information including environmental and social matters. Additionally, on 1 October 2021, the Prime Minister issued Decision No 1658/QD-TTg on approving the National Strategy on Green Growth for the 2021–30 period, with a vision to 2050. This sets out general objectives of the State to accomplish green growth and transition Vietnam towards a carbon-neutral economy. The Ministry of Industry and Trade has been assigned the task of developing specific incentive mechanisms for enterprises that provide green products and services. Foreign and institutional finance investors are also expected to drive change in this area. The continuous improvement in corporate governance has been a reason that foreign investors are displaying a greater willingness to participate as minorities in Vietnamese led companies.

Shareholder activism

Although shareholder activism is not as widespread in Vietnam as more developed markets, there is a trend towards this. Recent changes to the Law on Enterprises (in effect from beginning of 2021) have resulted in an expanded shareholder toolbox that more easily facilitates management accountability. The market has, for example, seen incidences of shareholders banding together to remove board members. We have also seen shareholders make use of the direct derivative suite against management. We expect activism to increase, especially with the growing base of retail investors in the local stock exchanges.

Gender equality

In so far as gender equality is concerned, Vietnam continues to have a high participation of women in business (owing in no small part to the equal treatment of women advocated by the socialist system). Almost half of all small businesses in Vietnam are owned by women and there appears to be a surge in the number of women participating in tech start-ups. Notwithstanding this, further progress is required, and signs are that the market is heading in the right direction.

Outlook in 2022

Commentators are largely of the view that Vietnam will experience significant growth in 2022. The State’s targeted growth for GDP of 6.0% to 6.5% aligns with many commentators.

The Communist Party of Vietnam held its 13th National Congress in 2021 and essentially maintained pre-existing policies. The country remains politically stable with leadership change not contemplated until at least until 2026. The manner in which the COVID-19 pandemic has been handled has shown a capable State. Vietnam therefore continues to offer a safe investment environment.

Vietnam has concluded significant trade deals in 2020, namely the EU-Vietnam Free Trade Agreement and the Regional Comprehensive Economic Partnership (the latter with effect from 1 January 2022). Notwithstanding geopolitical risk, Vietnam should continue to benefit from the so called “China plus one” policy. Commentary that Vietnam may struggle to balance its relationship with China and Western nations would seem overstated and, practically, China and Vietnam have an incredibly historic relationship that includes trade. Indeed, Vietnam actually has a trade deficit with China and the two countries would unlikely disrupt a relationship that remains mutually beneficial. In respect of the West, it is anticipated that investment from the USA and the EU will continue to grow and remain hugely important (the USA ranks 11th out of 138 territories with investments in Vietnam). However, as already mentioned, a risk to Vietnam in 2022 is that trading partners may experience headwinds that inhibit demand for Vietnam’s exports or which could also result in weakened investment into Vietnam. Global tensions could also result in trade tariffs. However, this seems remote in application against Vietnam itself and it is more likely that Vietnam will become more attractive as a low-cost base destination with a safe environment.

A significant trend is the gradual transition from low to high technology products with greater value. It is expected that in 2022 there will be significant foreign investment in Vietnam higher up the value chain. A reason for this includes the State’s determination for this to occur as well as the necessity for global supply chains that this does occur in destinations such as Vietnam. This approach should result in greater investment in research and development in Vietnam.

In conclusion, it is expected that the Year of the Tiger (2022) will deliver a robust M&A market in Vietnam.