Vietnam’s strategic location and economic growth make it an attractive destination for foreign investors. However, M&A transactions in Vietnam involving foreign ownership, particularly in sensitive locations near borders or coastlines, must comply with the country’s national security regulations. This article outlines the critical factors foreign investors need to consider to avoid regulatory hurdles and mitigate potential risks associated with national defense concerns in Vietnam.

Key National Security Regulations Impacting M&A in Vietnam

Under the 2020 Law on Investment (LOI), Vietnam has implemented regulations that protect national security interests, which foreign investors must navigate carefully, especially when investing in sensitive areas such as islands, international border communes, and coastal areas. Specific articles within the LOI set requirements for foreign investments to ensure they do not pose a threat to national defense and security.

Article 26.2.c: National Security Zones and Ownership Restrictions

According to Article 26.2.c, foreign investors seeking to acquire shares or stakes in a company with land ownership in sensitive areas must go through an investment registration process. This requirement applies to any economic organization holding land in regions designated as national security zones, which include:

  • Islands within Vietnam’s territory
  • Communes near international borders
  • Coastal regions with strategic importance for national defense​​.

Investments in these areas are subject to strict oversight by government bodies, and transactions may be delayed or rejected if authorities assess potential national security threats.

Article 24.2.b: Evaluating Security Threats in Foreign Investments

Article 24.2.b stipulates that any foreign investment involving capital contributions, share purchases, or stakes in economic organizations must not endanger national security. However, this provision lacks specific criteria or a defined review process, which can lead to prolonged approval timelines due to reliance on subjective assessments by various ministries, including:

  • Ministry of National Defense
  • Ministry of Public Security
  • Ministry of Foreign Affairs

This uncertainty can introduce delays and complexities in the M&A process, as investors must wait for multiple approvals, each potentially carrying unique conditions or concerns based on the project’s geographic or strategic significance​.

Article 47.3: Suspension Powers of the Prime Minister

For foreign investments perceived as high-risk, Article 47.3 grants the Prime Minister authority to suspend investment projects that may threaten national security. This intervention is usually based on recommendations from the Ministry of Planning and Investment, potentially impacting M&A transactions if authorities raise significant national security concerns after preliminary reviews​.

How Foreign Investors Can Navigate National Security Reviews

Foreign investors aiming to successfully acquire or merge with Vietnamese businesses located in sensitive areas must take proactive steps to address potential national security concerns. Here are essential strategies to consider:

Conduct Thorough Due Diligence on Geographical Sensitivity

Foreign investors should evaluate the geographic location and strategic implications of the target company’s assets. Acquisitions involving land near borders or coastlines should be carefully analyzed for their proximity to national defense zones. Engaging local experts with insights into regulatory requirements can help anticipate whether a deal may face additional scrutiny.

Engage with Regulatory Authorities Early

Given the role of multiple government bodies in the national security assessment process, investors should consider engaging with relevant ministries early in the transaction process. By proactively consulting with the Ministry of Planning and Investment and other key ministries, foreign investors can gain insights into potential regulatory concerns, thereby mitigating delays and aligning their approach with national interests.

Seek Legal Guidance for Compliance and Documentation

Vietnam’s national security regulations are multifaceted and require detailed compliance documentation. Partnering with a reputable legal firm familiar with Vietnamese M&A and national security law can help investors navigate legal complexities, fulfill documentation requirements, and anticipate potential risks associated with the transaction​.

Potential Challenges in the National Security Approval Process

Subjectivity and Ambiguity in Regulatory Criteria

While the 2020 LOI specifies some conditions for foreign investments in national security zones, the lack of clear evaluation criteria means regulatory assessments can vary, sometimes relying heavily on ministerial discretion. This ambiguity can hinder transparency and create inconsistencies in how similar transactions are treated.

Delays and Increased Costs Due to Multi-Agency Review

The involvement of multiple ministries often leads to longer processing times for approvals, as each agency may have different concerns or priorities. This requirement for cross-ministerial collaboration can result in significant delays, impacting project timelines and increasing administrative costs for foreign investors​.

Potential for Deal Suspension

In high-risk cases, the Prime Minister’s power to suspend projects presents an added level of uncertainty. Suspensions can disrupt carefully planned M&A transactions, particularly if national security threats are perceived after initial approvals. Foreign investors must be prepared for such contingencies and factor them into their investment risk assessments.

Ensuring Compliance with Vietnam’s National Security Regulations

Navigating Vietnam’s national security regulations is crucial for foreign investors seeking to acquire businesses in sensitive locations near borders or coastlines. Understanding and adhering to the 2020 Law on Investment, particularly the provisions under Articles 24 and 26, is essential to avoid regulatory setbacks. By anticipating the specific requirements for investments in national defense zones, engaging proactively with Vietnamese regulatory authorities, and preparing comprehensive documentation, investors can minimize delays and enhance the likelihood of a successful transaction.

While Vietnam offers vast investment opportunities, the complexity of national security reviews calls for specialized legal expertise. Collaborating with experienced local legal counsel can provide foreign investors with the necessary insights to not only comply with existing laws but also navigate potential regulatory uncertainties, ultimately helping them achieve their investment objectives within Vietnam’s strategic landscape.

For foreign investors committed to compliance, these preparatory steps can lead to smoother transactions and a stronger foundation for long-term success in Vietnam’s market.

LeTran Law’s Corporate Counsel team is ready to support your investment endeavors in Vietnam, providing tailored advice on national security compliance and risk mitigation strategies. For personalized legal assistance, please contact us at letran@corporatecounsels.vn.