Currently, one of the primary forms of investment by foreign investors in Vietnam is purchasing shares and capital contributions in companies established in Vietnam, as stipulated in Article 26 of the Investment Law 2020. This form of investment offers significant convenience for foreign investors as they are not required to apply for an Investment Registration Certificate or undergo related procedures such as opening a Direct Investment Capital Account (DICA) for the company in case of establishing a new enterprise in Vietnam. Additionally, investing in an already operational enterprise saves foreign investors time and resources for market research.
However, foreign investors must comply with certain investment and foreign exchange procedures when investing in this way, not to mention they may face restrictions on market access in specific industries. Therefore, many foreign investors opt to entrust an individual or organization in Vietnam to purchase shares or capital contributions of companies in Vietnam to avoid compliance with these regulations. In practice, this activity contains numerous risks that foreign investors should be aware of.
1. Reasons Why Foreign Investors Choose “Entrusted Investment”
(In this article, the term "entrusted investment" refers to the entrustment of purchasing shares and capital contributions and does not include the entrustment to invest in other forms such as establishing a company in Vietnam or investing in the stock market.)
As mentioned, entrusted investment brings convenience to foreign investors, allowing them to avoid requirements under current Vietnamese law related to foreign investors’ purchase of shares or capital contributions. Some of these regulations include:
First, regarding market access conditions for foreign investors. When deciding to invest by purchasing shares or capital contributions in a Vietnamese company, foreign investors must consider the market access conditions that Vietnam imposes on the target company’s industry. Currently, many industries either prohibit foreign investors from investing (e.g., travel services, sending workers abroad), limit the ownership percentage (e.g., container handling and ship agency services, where foreign investors are capped at 49% ownership), restrict the scope of activities (e.g., foreign-invested pharmaceutical companies are not allowed to distribute drugs in Vietnam except for self-produced drugs), or require additional licenses (e.g., foreign-invested retail enterprises must obtain a retail business license and a retail establishment license). These regulations can pose significant barriers for foreign investors targeting companies operating in such industries.
Second, according to current foreign exchange regulations, specifically Article 3.2.b.(i), Article 5.1.a, and Article 4.3 of Circular 06/2019/TT-NHNN on foreign exchange management for foreign direct investment in Vietnam, if a foreign investor’s purchase of shares or capital contributions increases foreign ownership in the target company above 51%, the target company becomes a foreign-invested company. As such, the company must open a DICA, and foreign investors can only pay for shares or capital contributions through this account. In practice, many investors and target companies often overlook this regulation, leading to invalid transactions and potential difficulties when transferring capital, withdrawing investments, or distributing profits later.
Third, although foreign investors are not required to apply for an Investment Registration Certificate, they still need to obtain approval for the purchase of shares or capital contributions from the relevant authorities (“M&A approval”) in certain cases, such as investing to acquire more than 50% of the target company's shares. Although M&A approval is usually faster and less complicated than applying for an Investment Registration Certificate, it remains a regulation that foreign investors may find cumbersome.
Given these regulations, foreign investors have sufficient reasons to entrust a Vietnamese individual or organization to purchase shares or capital contributions in the target company. By doing so, the investment is made in the name of the Vietnamese investor, thereby circumventing these legal requirements.
2. Vietnamese Law Regarding “Entrusted Investment”
Although the issue of entrusted investment, particularly in purchasing shares or capital contributions on behalf of foreign investors, has been widely discussed and is increasingly common, it is not clearly regulated under Vietnamese law.
Currently, regulations concerning foreign investors’ entrusted investment seem to only apply to indirect investment in the Vietnamese stock market, where foreign investors can entrust capital to a securities investment fund management company or a foreign fund management company branch in Vietnam.
Despite the lack of clear regulations, the 2015 Civil Code contains provisions on void civil transactions due to deceit. According to these provisions:
(i) If parties establish a civil transaction in a deceptive manner to conceal another civil transaction, the deceitful transaction is void, but the hidden transaction remains valid unless it too is void under the Civil Code or other relevant laws; (ii) If the deceitful transaction is intended to evade obligations to third parties, the transaction is void.
Based on these regulations, if a foreign investor and a Vietnamese individual or organization establish an agreement stating that the Vietnamese individual or organization is entrusted by the foreign investor to invest in Vietnam, the transactions related to this investment could be declared void. This is because the entrusted investment agreement is designed to help the foreign investor avoid compliance with Vietnamese laws and obligations.
The lack of clear legal recognition also means that foreign investors lack legal grounds to protect themselves in case of disputes with the entrusted party or other third parties.
3. Risks for Foreign Investors
Although entrusted investment in purchasing shares or capital contributions in target companies in Vietnam offers apparent advantages, it also contains numerous risks for foreign investors, including:
First, foreign investors may lose control over their investment activities. The only binding factor between the entrusted party and the foreign investor is the entrusted investment agreement. Without direct control, foreign investors are vulnerable to dishonest or unfaithful behavior by the entrusted party, who could misuse the entrusted assets or even appropriate them. The entrusted party could also use their authority to conduct transactions that the foreign investor does not desire or that are not beneficial.
Second, disputes over ownership of investment capital and profits could arise. Entrusted investments often conclude when the entrusted party transfers the purchased shares or capital contributions to the foreign investor (for the foreign investor to officially become a shareholder or member of the target company) or transfers them to a third party designated by the foreign investor. However, there is a risk that the entrusted party might not follow the agreement or the foreign investor's instructions, potentially transferring the shares to a third party without the investor’s consent. This poses a risk for the foreign investor in recovering their invested capital. Similarly, the entrusted party might fail to distribute profits to the foreign investor.
Third, there are legal risks. As mentioned above, the entrusted agreement could be declared void, leaving the foreign investor struggling to prove ownership of the shares or capital contributions if documentation is not transparent. Ambiguous clauses in the entrusted agreement could lead to disputes between the parties over rights, responsibilities, or ownership.
Fourth, ownership disputes over the invested funds could arise in the event of the entrusted party’s divorce, death (if the entrusted party is an individual), or dissolution/bankruptcy (if the entrusted party is an organization). In such cases, the foreign investor may face disputes not only with the entrusted party but also with the entrusted party's spouse, heirs, creditors, and others.
In conclusion, with the lack of clear regulations on entrusted investment in Vietnam, foreign investors face numerous risks, including the absence of legal grounds to protect themselves in case of disputes with the entrusted party or third parties. Foreign investors must carefully weigh the benefits and risks of this approach and pay special attention to thoroughly researching their partners and drafting detailed, clear terms in the entrusted agreement to mitigate risks.
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