ECONOMIC CONCENTRATION NOTIFICATION - COMMON MISTAKES IN M&A PRACTICES THAT CAN LEAD TO COMPANIES BEING FINED UP TO BILLIONS OF VND

In recent years, M&A (mergers and acquisitions) activities have become increasingly common, with many large-scale deals exerting significant influence on the market. Accordingly, it is certain that major enterprises and consultants involved in large M&A transactions are generally familiar with the concept of economic concentration and the obligation to notify economic concentration in M&A activities. However, in reality, many transactions still see parties "forgeting" or "overlooking” this obligation to notify economic concentration, leading to being fined or at risk of being fined up to billions of VND.

As a law firm that regularly operates in the field of M&A consulting and has advised and supported many businesses in implementing economic concentration notification activities, ATA Global Law Firm LLC has published many articles on this issue [1]. However, the National Competition Commission ("NCC") - the State management agency for competition - implementing activities to strengthen the supervision of economic concentration transactions, ATA writes this article to once again warn, remind and support businesses to have a comprehensive understanding of the obligation to notify economic concentration, avoiding risks and related legal consequences.

1. What is economic concentration? When does the obligation to notify economic concentration arise?

According to Competition Law 2018 , Economic concentration (“EC”) is a term used to refer to mergers, consolidations, acquisitions or joint ventures between enterprises in the market. Due to the nature and objectives of these activities, they often help enterprises strengthen their potential, enhance their competitiveness, increase market share and potentially limit competition with other enterprises in the market, so these activities are classified as subjects that must be managed and monitored.

The obligation to notify EC will arise when mergers, consolidations, acquisitions, and joint ventures take place between enterprises that have one of the following criteria:

2. Sanctions for violations of TTKT notification obligations

Under current legal regulations, enterprises that violate the obligation to notify EC may be fined, subject to additional penalties and/or forced to apply remedial measures, including:

In case enterprises violate the obligation to notify the economic information and the executed economic information transactions are prohibited, in addition to fines, the enterprises may also be subject to additional penalties or remedial measures such as: Revocation of business registration certificate; Forced restoration to the original state; Forced to submit to the control of competent state agencies regarding the purchase price of goods, services or other transaction conditions in the enterprise's contract.

Thus, it can be seen that violating the obligation to notify EC or implementing EC without clearly understanding and complying with the conditions set by the competent authority will cause the enterprise to face the risk of being greatly affected, not only in terms of material damage but also possibly causing the enterprise to stagnate or fundamentally change its orientation and strategy of operations and business.

3. Common misunderstandings of businesses leading to violations of the obligation to notify TTKT:

In fact, in the process of implementing EC transactions, there are not only cases where enterprises do not grasp the regulations, but also cases where enterprises know about the regulations but still misunderstand, leading to violations of the obligation to notify EC and still fall into cases where they must be punished according to the law.

Through practical experience in supporting many large corporations and enterprises in implementing EC notification procedures, ATA will list some common cases as follows:

3.1. Misunderstanding case number 01: Internal restructuring between companies in the same system does not require EC notification

Enterprises believe that they only carry out internal restructuring between companies in the group system, without increasing the total assets , revenue or market share of the companies in the market, so there is no need to carry out the EC notification procedure.

This notion is completely wrong. Because the competition law does not exclude economic concentration transactions within the same system from being subject to economic concentration notification, and the criteria for increasing total assets, revenue or market share are not mandatory conditions for a economic concentration transaction to be determined as a case of having to make economic concentration notification or not. Therefore, this activity considered as internal restructuring is essentially still a purchase, merger, or consolidation activity between two or more enterprises, and if it meets one of the thresholds /criteria prescribed by the competition law (mentioned in section 1 above) , it is still necessary to carry out the economic concentration notification procedure.

3.2. Misunderstanding case number 02: Buying and selling from 50% or less of the total shares and capital contributions of the target company do not need to notify E

Competition Law stipulates that “Enterprise acquisition is the act of an enterprise directly or indirectly purchasing all or part of the capital contribution and assets of another enterprise sufficient to control and dominate the enterprise or a sector or profession of the acquired enterprise”. Enterprises believe that a company must purchase to own more than 50% of the shares and capital contributions of the target company to be considered as controlling and dominating the target company. Therefore, if the purchase does not exceed 50% of the total shares and capital contributions, it is certainly not necessary to notify EC.

concept is not really correct. Because the competition law does not define the case of business acquisition that must notify the economic concentration based on the percentage of shares/capital contributions owned, but determines it based on the ability to "control and dominate the enterprise" or "control and dominate a business line of the enterprise". Therefore , in cases where the transaction only causes the acquiring enterprise to own up to 50% of shares/capital contributions but has the right to "control and dominate" the target company (expressed in forms such as voting rights, election rights, management rights... at the target company), it may still be a case of having to notify the economic concentration.

3.3. Misunderstanding case number 03: Total assets of each enterprise participating in EC activities under 3,000 billion VND will not have to carry out EC notification procedures.

According to the provisions of Clause 1a, Article 13 of Decree 35/2020/ND-CP ("Decree 35"), there are provisions on cases where EC notification must be made as follows:

“Article 13. Threshold for notification of EC

1. Enterprises intending to participate in economic concentration, except for enterprises specified in Clause 2 of this Article, as prescribed in Clause 1, Article 33 of the Competition Law, must notify the National Competition Commission before implementing economic concentration if they fall into one of the following cases:
2. a) Total assets in the Vietnamese market of an enterprise or group of affiliated enterprises of which the enterprise is a member reach VND 3,000 billion or more in the fiscal year immediately preceding the year of expected economic concentration implementation;”

Based on the criteria of total assets of the enterprise according to this regulation, there will be two cases where EC notification must be made:

• Case 1 - For enterprises participating in economic restructuring, each enterprise itself does not have affiliated companies or is not in the group of affiliated enterprises (parent/subsidiary/affiliated companies group) : The total assets of each enterprise participating in economic restructuring must reach VND 3,000 billion or more to be required to notify economic restructuring.
• Case 2 - For enterprises participating in economic integration, the enterprises themselves have an affiliated relationship with another enterprise or a member of a group of affiliated enterprises: Although the assets of each enterprise participating in the economic integration have not reached VND 3,000 billion, but the total assets of the group of affiliated enterprises of each member reach VND 3,000 billion or more, the economic integration must still be notified.

In case 2, the total assets of the enterprises participating in the economic integration will be determined based on the consolidated financial statements of the group of affiliated enterprises.

3.4. Misunderstanding case number 04: Enterprises do not have to notify EC if they only sign and execute contracts but have not completed registration procedures or changed business registration.

Article 33, Clause 1 of the Competition Law provides as follows:

“Article 33. Notification of economic concentration

1. Enterprises participating in economic concentration must submit economic concentration notification dossiers to the National Competition Commission as prescribed in Article 34 of this Law before conducting economic concentration if they fall within the economic concentration notification threshold.”

According to this regulation, when a business must carry out the EC notification procedure before conducting an official transaction - it also means that the transaction must be "not completed" .

In addition, the Law on Enterprises, in Clause 2, Article 52 and Clause 6, Article 127, determines the time of completion of transactions to transfer shares and capital contributions in enterprises as follows:

" Article 52. Transfer of capital contribution:

2. The transferring member still has the rights and obligations towards the company corresponding to the relevant capital contribution until the information about the buyer specified in points b, c and d, Clause 2, Article 48 of this Law is fully recorded in the member registration book. ”

“ Article 127. Transfer of shares:

6. Individuals and organizations receiving shares in the cases specified in this Article shall only become shareholders of the company from the time their information specified in Clause 2, Article 122 of this Law is fully recorded in the shareholder register.”

Therefore, in case an enterprise has not performed the procedure of recording new/change shareholders/capital contributing members on the Business Registration Certificate but has completed the transfer activity, recorded shareholders on the Shareholder Registration Book/recorded capital contributing members on its Member Registration Book, it is still considered to have performed/completed the EC transaction. Note that the fact that the enterprise does not perform the work of recording shareholders/capital contributing members in accordance with regulations or the shareholder does not notify the enterprise to perform the work of recording shareholders/capital contributing members in accordance with regulations is not the basis for determining that the transfer transaction has not been performed/completed.

3.5. Misunderstanding case number 05 : Only when establishing a joint venture with a foreign investor , it is necessary to make a notification of EC.

The reason for this misunderstanding is that many businesses still consider joint ventures with joint venture enterprises - which used to be a form of foreign-invested enterprise according to the provisions of the Law on Foreign Investment in 1996 [6]. However, this notion is completely wrong because currently, the form of joint venture enterprise is no longer recognized in the new Investment Law and the concept of "joint venture" in competition law is completely different . Specifically, Clause 5, Article 29 of the Competition Law stipulates:

“ 5. A joint venture between enterprises is when two or more enterprises jointly contribute part of their assets, rights, obligations and legitimate interests to form a new enterprise.”

Thus, it is only necessary for legal entities considered as enterprises to jointly contribute a part of their assets, rights, obligations and legitimate interests to establish a new enterprise, the establishment of that new enterprise is considered a form of "joint venture between enterprises" according to the provisions of the competition law. With current regulations, the Competition Law does not exclude the case of a new enterprise with the participation of capital contribution/share purchase by individuals, nor does it require enterprises to fully hold or control the new enterprise.

Conclude:

It can be seen that, unlike the penalties for violations in other fields, the fine for violations of the obligation to notify EC can be very high, depending on the revenue value that the enterprises achieved in the previous year. For enterprises with revenue in the related market up to hundreds of billions of VND per year, the fine can be up to billions of VND. In addition, enterprises may have to take remedial measures leading to complete changes in strategy and operation plans, thereby leading to a series of other risks and impacts. Therefore, to limit the above risks, enterprises, especially enterprises and groups of enterprises with large total assets (from 3,000 billion VND or more) and/or participating in large-value transactions (with a value of thousands of billion VND or more) need to be extremely careful and should consult professional consultants before officially implementing.

With what has been done in the past time, ATA is proud to not only be a professional consultant providing customers with the most suitable and effective legal solutions , but also to be considered a dedicated consultant when always striving to bring in-depth and comprehensive topics and articles, helping not only customers but also partners and other readers to understand correctly , thereby fully performing their legal obligations. This is completely consistent with ATA's operating goal of protecting its customers from risks , minimizing damage and at the same time contributing to the construction and improvement of a healthy and sustainable business environment in Vietnam. 

[1] https://ata-legal.com/nghia-vu-thong-bao-tap-trung- Kinh-te-phat-sinh-khi-nao ?

https://ata-legal.com/hau-qua-do-vi-pham-nghia-vu-thong-bao-tap-trung- Kinh- te ?

[2] Total assets of the enterprise or group of affiliated enterprises of which the enterprise is a member in the fiscal year immediately preceding the year expected to implement the economic restructuring ;

[3] Total sales revenue or purchase turnover in the Vietnamese market of the enterprise or group of affiliated enterprises of which the enterprise is a member in the fiscal year immediately preceding the year expected to implement the economic restructuring ;

[4] Transaction value of TTKT ;

[5] Combined market share of enterprises planning to participate in economic concentration in the relevant market in the fiscal year immediately preceding the year in which the economic concentration is expected to be implemented ;

[6] A joint venture enterprise is an enterprise established in Vietnam by two or more parties on the basis of a joint venture contract or an agreement signed between the Government of the Socialist Republic of Vietnam and a foreign government, or an enterprise established by a foreign-invested enterprise in cooperation with a Vietnamese enterprise, or by a joint venture enterprise in cooperation with a foreign investor on the basis of a joint venture contract.