Corporate consolidation and mergers are two common forms of corporate reorganizations. These corporate reorganizations help the merging enterprise and the consolidating enterprise increase their competitive potentials in the normal market. After the consolidation or merger, the enterprise will receive benefits such as increased market share, capital use and accessibility to capital resources, risk sharing, saving of operation and management costs.

This article will provide basic information about the inheritance of the rights and obligations of the consolidating enterprise and merging enterprise from the consolidated enterprises and merged enterprise.

Transfer of Rights and Obligations to the Consolidating Enterprises and Merging Enterprise

According to the 2020 Law on Enterprises, corporate consolidation is where two or more enterprises (hereafter referred to as consolidated enterprises) may be consolidated into a new enterprise (hereafter referred to as a consolidating enterprise) and terminates the existence of consolidated enterprises. After the consolidating enterprise registers its business, the consolidated enterprises cease to exist; the consolidating enterprise inherits all the legitimate rights and interests, is responsible for the obligations, unpaid debts, labor contracts, and other property obligations of the consolidated enterprises. The consolidating enterprise prima facie inherits the full rights, obligations, and legitimate interests of the consolidated enterprises under the consolidation contract.

Meanwhile, a merger is where one or more enterprises (hereafter referred to as the merged enterprises) is merged into another enterprise (hereafter referred to as the merging enterprise) by transferring all legitimate assets, rights, obligations, and interests to the merging enterprise, at the same time, ceases to exist the merged enterprise. Similar to the case of corporate consolidation, after the merging enterprise registers its business, the merged enterprise ceases to exist; the merging enterprise inherits the legitimate rights and interests, responsible for the obligations, unpaid debts, labor contracts, and other property obligations of the merged enterprise. Merging enterprise prima facie inherits the full rights, obligations, and legitimate interests of merged enterprises under merger contracts.

After a merger or consolidation, in case the merging enterprise or consolidating enterprise may change its name to match the new market position and business strategy, according to Article 48.3 of Decree No. 01/2021/ND-CP, the change of the enterprise name does not change its rights and obligations. Therefore, the rights and obligations of the merged or consolidated enterprise will remain unchanged even if the enterprise’s name is changed.

Notes in the Process of Consolidation and Merger

Legal due diligence

Since the consolidating enterprise and merging enterprise will inherit the full rights, obligations, and legitimate interests of the consolidated and merged enterprises, it is important to fully understand these enterprises’ rights, obligations, and interests. The legal due diligence should be detailed and completed, including business contracts, labor contracts, assets, debts, intellectual property rights, existing or potential disputes, etc.

For the legal due diligence process to be effective, all records, documents, and information about the consolidated and merged enterprises must be provided fully and honestly. Access to these documents will also help the parties determine the value of the merger and consolidation transaction.

Consolidation and merger contracts

In order to protect the legitimate rights and interests of the consolidating enterprise and the merging enterprise as well as form a basis for resolving issues, avoiding disputes arising later, consolidation and merger contracts should be carefully drafted, for example, provisions on confidentiality, anti-competitive, representations and warranties, etc.

Notification on economic concentration

Based on the 2018 Law on Competition, forms of economic concentration include corporate consolidation and merger, in which enterprises implementing economic concentration causes or may cause anti-competitive effects on the Vietnamese market.

According to Decree No. 35/2020/ND-CP providing in detail some articles of the Law on Competition, enterprises having the intention to participate in economic concentration must notify the National Competition Commission before implementing economic concentration if they fall under one of the following cases:

  • Total assets in the Vietnamese market of an enterprise or a group of affiliated enterprises of which the enterprise is an affiliate must be worth VND3,000 billion or more in the fiscal year preceding the planned year of economic concentration;
  • Total sales or purchase volume arising in the Vietnamese market of an enterprise or a group of affiliated enterprises of which the enterprise is an affiliate must be worth VND3,000 billion or more in the fiscal year preceding the planned year of economic concentration;
  • Value of all economic concentration transactions must be worth at least VND1,000 billion;
  • The joint market share of enterprises having intention to participate in the economic concentration must account for at least 20% of the total share of the relevant market in the fiscal year preceding the planned year of economic concentration.

Therefore, the parties in the merger and consolidation transactions should carefully note whether the economic concentration transaction falls under the case of required notification or prohibition under competition laws. The consequence of not notifying economic concentration is a fine of between 01% and 05% of the total revenue in the relevant market in the preceding fiscal year before the year of each enterprise participating in economic concentration not fulfilling its notification obligations. Where mergers or acquisitions are prohibited, the parties will be forced to split or separate the consolidating enterprise and the merging enterprise.

If you have any questions or discuss about consolidation and merger transactions in Vietnam, our experienced Corporate Counsels lawyers are always available at letran@corporatecounsels.vn