Foreigner lender and receive shares mortgage of a Vietnamese company

Viet Nam is an attractive location for many foreigners who come to work and settle permanently. Parallel to investment, business, and living activities, financial lending between foreigners, or between a foreigner and a Viet Nam national, is relatively common. In some cases, to secure payment obligations, the Borrower may mortgage the shares that it owns in a Viet Nam company as collateral for the loan. When participating in this type of transaction, the Lender, being a foreigner, needs to pay special attention to several important legal issues in order to protect its lawful rights and interests: 

1. Loan contract:

The parties are required to enter into a Loan Contract with clear and comprehensive contents, including: the loan amount, interest rate, loan term, payment method, the rights and obligations of each party, as well as the sanctions applied if the Borrower breaches the repayment obligation. To enhance legal certainty and the ability to provide evidence in the event of a dispute, the Lender should prepare a detailed written document, bearing the signatures of the parties, and retain all relevant documentation (remittance slips, acknowledgement of debt, and amending, supplementary annexes, if any). Under the current legal provisions, the Loan Contract is not required to be notarized or authenticated. 

2. Mortgage of shares

The Lender has the right to accept a share mortgage to secure the obligation to repay the loan. In the event the Borrower does not make timely payment or an event of default occurs under the Loan Contract (for example: continuous late payment of interest for 03 months, insolvency, lawsuit initiated by a bank, etc.), the Lender has the right to require the Borrower to transfer such shares to another person. The entire amount received from the transfer shall be used on a priority basis to pay the principal and interest due to the Lender. However, since the transfer of shares in some companies may be difficult to execute, the Lender should further stipulate the right to require the Borrower to use a part or the whole of the shares to directly settle the debt obligation. 

3. Verification of shares ownership:

Prior to accepting the mortgage, the Lender must conduct a legal due diligence on the proposed shares to be used as collateral, ensuring that the Borrower is the legitimate owner and that the shares are not subject to dispute or restriction on transfer. Concurrently, the Lender should review the business operation status, financial statements, and enterprise valuation to accurately determine the value of the shares. Furthermore, the Borrower must provide the Minutes of Meeting and the Resolution/Decision of the General Meeting of Shareholders or the Board of Members (depending on the company type) to record the approval for the shareholder/member to use the shares as collateral or to settle the loan debt. 

4. Foreign investor ownership limit:

Foreigners may be subject to restrictions on the shareholding ratio in companies operating in conditional business lines or sectors. For instance, in the field of road freight transport, the total ownership ratio of foreign investors shall not exceed 51% of the charter capital. Therefore, before accepting a share mortgage, the Lender must review the business lines and sectors of the share-issuing company to determine whether the foreign ownership limit is applicable. Concurrently, the foreign ownership ratio must be calculated thoroughly in the event the loan debt is settled by shares, to ensure the ratio complies with the ceiling stipulated by law. 

5. Procedures for acknowledging foreigner share ownership:

Should the Lender require settlement of the loan debt by shares, the Borrower and the relevant company must complete mandatory administrative procedures, including: 

  1. Registration for the foreign investor to be entitled to contribute capital, purchase shares, or purchase capital contributions in the company (M&A Approval);  
  2.  Adjustment of the Enterprise Registration Certificate to record the Lender as a shareholder/member of the company. 

Should the company or the Borrower do not cooperate in carrying out these procedures, the Lender will face significant difficulties in becoming the lawful owner of the mortgaged shares. 

Disclaimers:

This article is for general information purposes only and is not intended to provide any legal advice for any particular case. The legal provisions referenced in the content are in effect at the time of publication but may have expired at the time you read the content. We therefore advise that you always consult a professional consultant before applying any content.

For issues related to the content or intellectual property rights of the article, please email cs@apolatlegal.vn.

Apolat Legal is a law firm in Vietnam with experience and capacity to provide consulting services related to Business and Investment and contact our team of lawyers in Vietnam via email info@apolatlegal.com.



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