Defusing the “ticking time bomb” of contingent liabilities in M&A transactions: A practical legal guide for 2026

Against the backdrop of Vietnam’s mergers and acquisitions (M&A) market in 2026, which is shifting toward substantive development and rigorous screening, the due diligence of a target company has evolved far beyond superficial financial analysis. A target company may boast impressive revenue metrics, a loyal customer base, or market leadership, yet all of this value can be instantly wiped out by invisible financial “black holes”. These are contingent liabilities—financial or legal obligations that have not officially crystallized at the time of transfer but remain latent, poised to be triggered by future uncertain events.

For the Buyer, failing to identify and establish effective legal safeguards in the Share Purchase Agreement (SPA) or Capital Transfer Agreement means inadvertently inheriting these “ticking time bombs”. Consequently, identifying, assessing, and structuring mechanisms to address contingent liabilities is recognized as one of the most critical aspects of legal due diligence, contract negotiation, and overall M&A transaction structuring.

I. The landscape of contingent liabilities in the new 2026 legal context

By nature, contingent liabilities are obligations that are either inadequately recorded or actively concealed on audited financial statements. To protect their investment capital, investors must precisely map out the following five core risk categories:

1. Tax risks and public financial obligations

This is a classic risk category, yet it represents the highest value of disputes. After the transaction is closed, tax authorities may conduct routine or ad-hoc tax audits and uncover cumulative non-compliance from previous years, resulting in massive back-tax assessments, retroactive collections, and late payment penalties.

Related-party transactions and transfer pricing: Tax authorities are increasingly scrutinizing the arm’s-length nature of transactions between related parties. Intra-group management fees or brand royalty fees that fail to demonstrate actual commercial substance are highly vulnerable to being disallowed as deductible expenses.

Illegitimate invoices: The risk associated with utilizing invoices from “runaway businesses” (entities that have ceased operations at their registered addresses) to artificially optimize corporate income tax expenses and input value-added tax (VAT) deductions.

Capital transfer tax obligations: Stringent oversight by tax authorities regarding the actual transfer price in transactions involving the transfer of shares in non-public companies or capital contributions. Underreporting or delayed declarations will trigger late payment interest accumulated over multiple fiscal years.

2. “Pitfalls” within existing commercial contracts

Numerous financial obligations only materialize when the ownership structure of the enterprise changes or when disruptions occur within the supply chain:

Change of control clauses: Many major commercial contracts or credit facility agreements stipulate that if there is a change in the ownership structure or control of the target company, the counterparty has the right to unilaterally terminate the contract prematurely, impose penalties, or demand immediate repayment of the entire outstanding loan.

Excessive penalties and unlimited indemnity commitments: Commitments to pay penalties for contract breaches that exceed statutory caps (e.g., exceeding 8% of the value of the breached obligation under the Commercial Law for pure commercial contracts), or unlimited indemnity obligations of which the Buyer was entirely unaware when reviewing preliminary financial statements.

Long-term product warranty liabilities: Particularly in manufacturing, construction, or technology sectors, the cumulative obligations to provide warranties or rectify product defects can persist for several years after the transaction closes.

3. Labor and insurance implications under the lens of the 2024 Law on Social insurance

Risks stemming from human resources are often underestimated, yet they can trigger catastrophic financial and public relations crises post-M&A:

Strict enforcement on social insurance arrears: With the 2024 Law on Social Insurance now fully operational, delinquent payments or evasion of social insurance contributions are subject to exceptionally severe enforcement measures, mirroring tax penalties. These measures include potential criminal prosecution, temporary travel bans (exit suspensions) imposed on the legal representative of the enterprise, bank account freezes, and high-interest late payment penalties. If the target company has a practice of “circumventing” social insurance contributions by artificially splitting employee income into non-assessable allowances, the Buyer will inherit the entirety of these legal and financial liabilities post-acquisition.

Job loss allowance and unlawful termination compensation: During post-M&A restructuring, large-scale layoffs will trigger job loss allowance obligations under the Labor Code. If a redundant employee utilization plan is not approved in accordance with statutory procedures, the enterprise faces protracted labor disputes and compensation liabilities for unlawful termination of employment contracts.

4. Related-party transactions and undisclosed guarantees

In Vietnam, family-owned businesses or mid-sized conglomerates often maintain highly intertwined cash flows:

Cross-guarantees: The target company may have executed guarantee instruments to secure loans of another member entity within the Seller’s former ecosystem, which are not clearly recorded on the accounting books.

Interest-free or off-market related-party loans: Such loans are highly susceptible to tax reassessment by tax authorities due to non-compliance with the arm’s-length principle.

5. Pending and potential legal disputes and litigation risks

The target company may currently be a defendant or a party with related rights and obligations in civil, commercial, land, or intellectual property disputes that have not yet reached a final, non-appealable judgment or award from a Court or Commercial Arbitration. The variance in potential rulings can completely alter the net asset value of the enterprise.

II. Legal Due Diligence (LDD) – The risk-quantification filter

Legal Due Diligence (LDD) is not merely a compliance-checking exercise or a mechanical gathering of documents based on a pre-defined checklist. From a practical perspective, LDD is the process of connecting the blind spots between legal records, financial figures, and operational realities to quantify risks into concrete financial numbers.

A high-quality due diligence process dissects core operational aspects, including reviewing the continuity and validity of core licenses to ensure the enterprise does not face the risk of suspension or revocation due to past non-compliance with business conditions. Simultaneously, legal counsel will investigate administrative compliance history by reviewing all previous inspections conducted by state agencies (tax, customs, environment, fire safety, and occupational safety). Furthermore, an in-depth analysis of material contracts will timely detect unfavorable clauses, unconditional indemnity obligations, and asset encumbrances.

Based on these findings, legal and financial experts categorize the identified risks into four strategic groups to establish corresponding mitigation measures as follows:

Fatal flaws: Representing risks of such magnitude that they exceed the investor’s risk tolerance, leading to an immediate decision to abort the transaction to preserve capital.

Conditions precedent: Representing rectifiable legal hurdles that the Seller must resolve completely before the closing date.

Price-deductible risks: Representing risks that can be directly quantified in monetary terms, allowing the Buyer to negotiate a direct reduction in the purchase price.

Latent/uncrystallized risks: Representing risks of which the timing or actual likelihood of occurrence remains uncertain, which will be managed via specific indemnity mechanisms in the contract.

III. Practical legal mechanisms to “tame” contingent liabilities in the Share Purchase Agreement (SPA)

Once contingent liabilities have been identified through LDD, the allocation of these risks between the Seller and the Buyer is codified through professional M&A drafting tools within the SPA:

1. Conditions precedent

The Buyer is entitled to demand that the Seller fully resolve the contingent liabilities identified in the LDD report prior to the closing date. If the Seller fails to do so, the Buyer has the right to refuse to close the transaction without incurring any breach penalties or legal liability.

Practical examples: Requiring the target company to complete tax finalization up to a specific cut-off date; fully repaying related-party debts; releasing mortgaged assets at banks; or obtaining written consent from major commercial partners to waive the trigger of “change of control” clauses.

2. Price adjustment mechanism

In cases where a contingent liability can be capped or estimated at a maximum value (such as an anticipated tax penalty or the estimated cost of resolving a pending lawsuit), the parties can negotiate to deduct this amount directly from the initial purchase price. This option provides the Buyer with immediate financial liquidity to manage the risk independently post-closing.

3. Holdback and escrow mechanisms

These are the most effective tools for handling contingent liabilities whose exact amount or timing of occurrence cannot be determined at the closing date.

Holdback of purchase price: The Buyer retains a certain percentage of the transaction value (typically 10% to 20%) for a specified period, usually ranging from 12 to 24 months, to align with statutory tax audit periods or general limitation periods for claims. If historical liabilities arise during this period, the Buyer is entitled to unilaterally offset these liabilities against the withheld amount before releasing the balance to the Seller.

Escrow account: To ensure objectivity and prevent the Buyer from abusing the holdback mechanism, the parties can appoint an independent bank to act as an escrow agent. The withheld funds are deposited into a locked escrow account and are only released to the Seller upon the expiration of the survival period without any pending claims, or released to the Buyer upon proof that a contingent liability has actually materialized.

4. Representations and warranties combined with Indemnities

The combination of these two mechanisms provides a robust, double-layered shield for the investor. The Seller must provide absolute affirmations regarding the state of the target company – known as representations and warranties – confirming that the company has fully paid its taxes, is in compliance with labor laws, and has no undisclosed pending disputes. Any breach of these representations serves as the legal basis for the Buyer to claim damages under the Civil Code.

However, for specific risks already identified during the LDD process (such as a pending lawsuit), the Buyer must demand a specific indemnity clause. Under this mechanism, the Seller covenants to indemnify the Buyer on a “dollar-for-dollar” basis for all costs and losses arising from that specific matter, bypassing the standard limitations on liability stipulated in the contract.

5. Transaction restructuring

If the target company harbors too many uncontrollable contingent liabilities, legal counsel will advise the Buyer to restructure the transaction from a share deal (buying shares or capital contributions) to an asset deal. In an asset deal, the Buyer cherry-picks and acquires only “clean” assets (machinery, factories, intellectual property, customer databases) without inheriting the corporate entity of the target company. Consequently, historical debts, tax liabilities, and legacy labor risks remain with the Seller’s corporate entity, establishing an absolute legal shield for the Buyer.

However, under the impact of the Land Law 2024 and the current Law on Real Estate Business, transferring assets that constitute real estate projects requires fulfilling strict conditions regarding completed land-related financial obligations. Therefore, selecting an asset deal structure in the real estate sector must be evaluated with extreme caution regarding project timelines and tax implications.

IV. The art of negotiating and drafting limitation of liability clauses

A successful M&A contract cannot be one-sided; it must be the result of a calculated compromise between both parties. When negotiating clauses to address contingent liabilities, the parties must pay close attention to international standard drafting techniques:

First, the contract must define “contingent liabilities” and “losses” with absolute clarity and precision. This definition should encompass all associated legal costs, including attorneys’ fees, court fees, and the cost of hiring independent experts or appraisers to resolve disputes arising from such liabilities.

Second is the survival period of representations and warranties. Indemnity commitments cannot last indefinitely. Typically, tax and environmental representations survive for 05 to 07 years in alignment with statutory administrative limitation periods, whereas general commercial representations usually survive for only 12 to 24 months.

Third is the agreement on limitations on liability (liability thresholds). The Seller will typically negotiate the inclusion of three critical clauses:

De Minimis provision: Establishes a minimum financial threshold for individual claims, preventing the Buyer from bringing claims for trivial losses.

Basket (or Threshold) provision: Requires that the aggregate of all individual claims exceeding the De Minimis threshold must exceed a specified amount (e.g., 1% of the transaction value) before the Buyer is entitled to seek indemnification.

Cap (ceiling on liability): Limits the maximum aggregate amount the Seller is liable to pay for indemnity claims throughout the transaction, typically ranging from 10% to 50% of the purchase price, with standard carve-outs (exceptions) for fraud, willful misconduct, or breaches of fundamental representations (such as title to shares).

Finally, the contract must clearly outline the claims notification and resolution procedure. This establishes the timeframe within which the Buyer must notify the Seller of a third-party claim, the Seller’s right to participate in the defense of such claims to mitigate losses, and the allocation of defense costs between the parties.

In an M&A transaction, investors do not merely acquire the existing value of the target company; they may also inherit historical legal and financial liabilities. Therefore, the management and mitigation of contingent liabilities play a pivotal role in safeguarding investment efficiency and minimizing post-transaction risks.

A successful M&A transaction is measured not only by its purchase price or the speed of its closing, but by the parties’ ability to identify, control, and equitably allocate risks. This represents the cornerstone of ensuring the safety, sustainability, and long-term value of the transaction.

Submission date: Jun 20 2026

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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 M&A Consulting and contact our team of lawyers in Vietnam via email info@apolatlegal.com.

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