This article is written by Madhu Mallah, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.

Solar power in Vietnam

Vietnam has experienced high rapid economic growth in recent years, with an annual average gross domestic product (GDP) of about 7%. The energy sector played and continues to play an important role in this expansion. Both primary and final energy demand increased by more than 5% per year, with coal and oil providing the majority of this development, while renewables played a minor role. As a result of its rising energy consumption, Vietnam will be forced to depend more on energy imported from other countries, such as coal and oil. This condition puts the country’s energy stability in jeopardy. However, In 2016, the long-awaited announcement of Vietnam’s first solar feed-in tariff (FiT) policy for solar project growth (also known as FiT phase 1) sparked a solar success story that was unparalleled in the ASEAN region, resulting in a massive increase in solar power. Vietnam’s solar star is amazingly growing. 

Due to its strong annual economic growth (currently about 6 to 7%) and underlying factors that lead to such success – namely a stable political structure, a young and diverse population, a low wage economy, and a rising middle class – Vietnam has emerged as a promising destination for many regional and foreign investors in recent years. Despite the major effects of the unprecedented and continuing Covid-19 pandemic, Vietnam is one of the few countries that, compared to most economies, is expected to experience positive GDP growth in 2020. This year, Vietnam is expected to be ASEAN’s fourth-largest economy, behind Indonesia, Thailand, and the Philippines.

Although concerns about the investment climate remain, the Vietnamese mergers and acquisitions (M&A) market has seen an increase in the number of financial and strategic investments, resulting in a sharp increase in overall deal value. Inbound M&A is becoming more common than domestic M&A; according to public data, inbound M&A accounted for more than 75 percent of total deal volume in 2018. Retail and consumer goods, pharmaceuticals and life sciences, as well as real estate, are all strong sectors for M&A. In this article we will cover the scenario of solar M&A, Public and Private Mergers and Acquisition, mergers and acquisitions in the solar power landscape, why is solar M&A in Vietnam set to boost.

Solar M&A Scenario

The solar mergers and acquisitions scene is most active in Thailand and Vietnam, the ASEAN countries with the most installed capacity. Local players are taking the lead in Thailand (the oldest market), while foreign players are growing their involvement. These markets also have favourable FDI requirements, allowing for full foreign ownership of properties. The level of competition is also smaller than in developed markets, allowing for good acquisition deals. Project risk varies by country and ranges from medium to low, depending on the off-taker and the context within which the project was built. We profile the most developed solar power markets in the ASEAN region and summarise recent M&A activity in the following sections.

How to regulate mergers in Vietnam?

A merger of two foreign-owned corporations, a merger of two local businesses, and a merger of a locally-owned company with a foreign-owned company are the three primary types of mergers. A merger contract, which defines ownership after the merger, is also generally required. The processes for the merger take around 30 days after the merger contract is signed. While completing a merger might seem like a complicated and frightening job, the actual stages aren’t that long. To promote foreign investment, the government has worked to make the procedure appealing and simple. The following are the procedures that firms seeking funding should take:

1. Determine the merger’s viability and legality, as well as the structure of the newly combined firm.
2. Sign a non-disclosure agreement to learn more about the company’s operations, finances, and other details. With these information, the investor may conduct due diligence and determine if the business is viable.
3. The two parties must now discuss the merger’s terms and circumstances, as well as a contract and a draught charter. The contract must specify the parties involved, as well as the merger’s terms and timetable. It is advisable to seek preliminary approval from the appropriate authorities, depending on the nature of the proposal. Within 15 days, the firm must notify all workers of the merger and give creditors with a copy of the deal.
4. To get an investment certificate or a certificate of enterprise registration, submit an application to the licencing authorities. A merger contract, as well as a resolution and minutes from the consolidated company meeting and the merging businesses’ meetings where the contract was authorised, will be required for the application.
5. Certain post-merger measures, such as creating an escrow account, may be necessary depending on the type of merger. The company’s status in the national enterprise registration database will be updated by the government.

For Contribution of funds and stock purchase:

6. Submit an application for registration to the Ministry of Planning and Investment (MPI), which must include information on the investment as well as an individual’s passport or ID card or an organization’s certificate of establishment.
7. The investor will get permission or refusal of the contribution/purchase within 15 days after receipt.

How to regulate acquisition in Vietnam?

The procedure for acquisitions is determined by the kind of ownership.

For example, there are no specific processes involved in the acquisition of a single-member limited liability corporation (LLC) by another single-member LLC involving foreign-owned firms. Though, there are a few more steps to take:

1. Submit capital contribution transfer paperwork to the MPI. 
2. It may take up to 15 days for the MPI to be processed. After they’ve examined it, they’ll either send an acceptance letter, ask for further information, or ask for changes. 
3. The investors will begin the process of changing the owner after getting the permission letter. 

All business paperwork must be updated when a single-member LLC acquires a multiple-member LLC. Consider the following scenario:

1. Update the total number of members, including ownership information.
2. Submit papers for the formation of the member’s council – the highest decision-making body – and the inspection committee – the management structure’s main supervisory board.
3. Any other tax, business registration, or charter capital paperwork.

It’s also important that a multiple-member LLC can only have 50 members, either persons or organisations, or a mix of both. It may take up to 40 days to complete this process.

A separate set of regulations applies when a locally held firm buys a foreign-owned corporation:

1. If a foreign investor wishes to buy a local firm, the acquisition procedure is the same as long as the World Trade Organization (WTO) has approved the transaction in that industry.
2. If there is no WTO or local commitment for the particular business sector, a ministry-level clearance is necessary. This procedure might take up to three months to complete.

Enterprise and Investment Legislation: January 2021

The amended Law on Enterprises and Law on Investment was enacted by the National Assembly of Vietnam, with the goal of making conducting business in Vietnam easier. Both of these regulations take effect on January 1, 2021, and are relevant in light of the passage of new free trade agreements like as the EVFTA and the CPTPP, as well as Vietnam’s status as the world’s second most attractive market for mergers and acquisitions, according to Euromonitor International. 

The revised Investment Law contains changes on conditional business lines, investment incentives, and support systems, as well as the removal of administrative clearance for some types of investment projects.The law eliminates the need for M&A clearance if the transaction does not result in a rise in the target company’s foreign investor ownership percentage. M&A transactions that result in a higher foreign investor ownership ratio in the target firm and exceed 50% of the shares or charter capital will require M&A clearance.

Minority shareholders in a firm are likewise protected under the amended Law on Enterprises.The new regulations will almost certainly ensure that M&A activity in Vietnam stays strong. These reforms reflect the government’s continuous efforts to streamline administrative procedures, making it simpler for firms interested in entering the Vietnamese market.

This, together with the government’s drive to divest a number of SOEs, bodes favourably for foreign investment. Only 35 out of 127 SOEs were divested as of 2019, and based on current patterns, we may predict continued robust M&A activity.

Solar market in Vietnam

• POLICIES AND OBJECTIVES FOR SOLAR POWER

According to National Power Development Plan VIII (PDP 8) for the years 2021–2030, with a long-term goal of 2045, is pending approval and represents a step toward renewable energy growth. By 2025, solar capacity is expected to reach 17 GW (roughly 17% of total installed capacity), increasing to 20 GW in 2030 (roughly 14% of total installed capacity), and solar and wind power will account for about 42% of total installed capacity by 2045. Around 16.45 GW of solar generation capacity has been installed at this time. When dispatching solar power to the state-owned utility Electricity of Vietnam (EVN), the mostly government-controlled market in Vietnam is regulated by capacity quota targets announced in the PDP. Under current legislation, bilateral agreements with EVN are not feasible, but sales of electricity models under private PPAs in the private sector are.

• SOLAR PROGRAMMES ANNOUNCED IN PAST, PRESENT, FUTURE

1. 2016: FiT programme for on-grid, rooftop, insular, off-grid, and net-metering models for 20 years at 2,086 VND/kWh (equivalent to 0.09 USD/kWh), with 4,460 MW commissioned by 31.06.2019. By December 31, 2021, ventures in Ninh Thuan Province will be able to hit COD (30 solar power projects over 1,932.92 MW).
2. 2020: For 20 years, the FiT will be extended at 1,758 VND/kWh (0.08 US cents/kWh) for floating solar projects and 1,620 VND/kWh (0.07 USD/kWh) for ground-mounted solar projects (36 solar farms with a total accumulated capacity of around 2,988.9 MW were eligible). For 20 years, the rooftop tariff was set at 1,943 VND/kWh (equivalent to 0.084 USD/kWh).
3. 2020: Announce a two-phase pilot auction scheme for hydropower plant dams with a capacity of around 400 MW at Da Mi Hydropower Joint Stock Co, a subsidiary of EVN.
4. 2020: A pilot synthetic DPPA scheme of 400–1,000 MW with some registered private sector buyers was announced for 2020 (eligibility for registered projects >30 MW in areas with no grid congestion and developers with established technical and financial capabilities).
5. 2020: Competitive selection mechanisms are envisioned for future utility-scale solar power. A framework for both substation- and solar-plant-based auctions is under development with the support of the World Bank. The timeline for implementation is to be announced.

Public mergers and acquisition

A public tender offer (PTO) must be made and registered with the SSC for an acquisition of 25% or more of a public company’s issued voting shares. Furthermore, a PTO is caused when an existing shareholder directly or indirectly owns at least 35 percent, 45 percent, 55 percent, 65 percent, or 75 percent of the voting shares of a public company after the purchase of voting shares. The target board is expected to give shareholders and the SSC its opinion on the PTO. As a result, even though Vietnamese law does not differentiate between friendly and hostile takeovers, engaging with the target board is still necessary.

The PTO must, among other things, ensure that all shareholders are treated equally under the PTO terms, including in terms of price and access to information about the PTO. The acquirer is specifically forbidden from participating in any side deals involving securities that are the focus of the PTO (from the date of submission of the PTO to the SSC until the date of completion of the process). If the number of acceptances received exceeds the number of shares to be purchased, the acquirer will purchase shares on a pro-rata basis. In limited circumstances and when permitted by law, an acquirer may abandon or terminate a registered PTO. Acceptance of the offer that are less than the registered amount of shares offered to be acquired are examples of this, as is a change in the number of voting shares of the target company.

Private mergers and acquisition

Although simple purchase price structures are commonly used, more complex structures do exist. Locked-box mechanisms (on the last account date) are common when a majority, or all, of the target is being acquired. When a minority position is acquired, completion account mechanisms are commonly used. Earn-outs and other types of deferred compensation are uncommon in the business world. Sellers can request that a deposit be charged, and escrow accounts are used. Warranty and indemnity insurance (W&I) is also relatively uncommon. 

COVID-19 has resulted in an increase in the use of MAC clauses, which exempt the pandemic’s effects and allow the risk to be shifted from closing to signing to prevent walkaways. Signing and closing occur almost concurrently in a variety of cases, or the time between signing and closing is comparatively short with less precedent.

Mergers and acquisitions in the solar power landscape

1. Super energy acquired 70% of shares for USD 70M of Loc Ninh Solar power plants 1-4 in March 2020. Super Energy Corporation invests in waste-to-energy and industrial water utilities, as well as clean energy ventures in Asia, such as Japan and Indonesia. 
2. B Grimm acquired 80% of shares of Hoa Hoi Solar power plant  for USD 35.2M in 2018.
3. BC Container Glass acquired 12.86% of shares of Xuan Tho 1&2 Solar Power Plants in september 2020.
4. Gulf Energy acquired an additional 41% (increase to total 90%) of TTCIZ-02 Solar Power Plant in January 2019.
5. Begistics acquired 40% of shares of GA Power Solar Park Cam Xuyen and GA Power Solar Park Huong Son in July 2019.

Why is solar M&A in Vietnam set to boost?

Despite the slow pace of development thus far, there are a number of reasons to believe that Vietnam’s still largely dormant solar M&A environment will pick up steam in the coming months, with investors beginning to see risks from a variety of angles rather than just the model PPA bankability concerns:

1. Huge quantity of operational solar projects: By the end of 2020, 2,988.9 MW of ground-mounted solar developments will exceed COD, adding to the current operational solar properties, many of which would be for sale. Unlike greenfield project acquisitions, which require disclosure of Vietnamese authorities and are difficult to complete, brownfield acquisitions of operating plants are much simpler from a legal standpoint and minimise the risk of forecasting generation because real data is already available.
2. Fitch gave EVN its first and optimistic credit rating of “BB” in June 2018, which was verified in April 2020 with a stable outlook at the same stage as the Vietnamese sovereign rating. As a result, apart from the model PPA, EVN is most likely to honour payments made under the PPA.
3. Vietnam’s dependence on foreign direct investment (FDI): Vietnam is one of the most open economies in the world, relying heavily on FDI to expand its economy. Any negative headlines in the power sector will likely tarnish this image and work against Vietnam’s strategic interests in attracting more FDI to a sector that desperately needs it.
4. As seen, the first major projects have secured loans from international financing institutions, a trend that is likely to continue as there appears to be an increasing demand to fund such projects and lenders are becoming more comfortable with evaluating and mitigating underlying risks.
5. Attractive electricity tariffs: The tariffs awarded under both FiT phases are high in comparison to other solar projects in the region and possible future tariffs in Vietnam under announced competitive selection processes, allowing for reasonably high returns.

Conclusion

Most legal experts and analysts believe that M&A operations in Vietnam will likely increase in 2021, reflecting the country’s economic fortunes. This is due to Vietnam’s elevated profile as a result of its handling of the COVID-19 pandemic, global supply chain shifts, and the country’s general trend of rapid development. The aim of promoting green energy in Vietnam is linked to energy efficiency, reducing dependence on fossil fuels and reducing the environmental effects of energy production. Because of its geographical location, Vietnam has a lot of potential for solar energy. According to the reports, Vietnam’s solar capacity is comparable to that of certain countries with a mature solar industry.

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