Secondary market Vietnam: latest comments on wind farm transactions from a legal perspective

published on 20th August 2021

For several years now, Vietnam has been on course to diversify its energy production in order to move away from total dependence on fossil fuels. As in many other countries in Southeast Asia, the market for renewable energy project development in Vietnam is relatively new. The public sector, which strongly pursues strategic national targets such as energy security, emission control and accelerated economic growth, encourages the development of projects through creating various incentives and positive framework conditions, e.g. tax reliefs or support in the purchase of land, which in turn also drives sales on the secondary market. According to the government's current targets, about 10 per cent of Vietnam's energy should be generated from renewable sources in 2030. This means that the development is only in its early stages. This article addresses some selected aspects of the wind farm transaction process on the Vietnamese secondary market.

Framework conditions

Vietnam has had a feed-in tariff (FiT) since 2017 – amended in 2019 by a circular letter issued by the relevant Ministry of Industry and Trade (MOIT). Eligible for the tariff are projects launched between 1 November 2018 and 1 November 2021 and the rate of the tariff is 8.5 US cents for onshore wind projects and 9.8 US cents for offshore wind projects. The FiT is valid for a period of 20 years in each case and is documented in the respective Power Purchase Agreement (PPA) concluded with Electricity of Vietnam (EVN). With just a few exceptions, EVN is currently the only grid operator that purchases energy from renewable sources.

It is expected that a comparable system will be in place until 2023. However, the MOIT has proposed reducing the FiT for projects to be launched on 1 November 2021 or later. For investors, this makes the acquisition of an existing project on the secondary market potentially more attractive than developing a new project that would only be launched after 1 November 2021.

Preparation of the transaction

As with other transactions, the parties to this kind of transactions typically sign a non-disclosure and exclusivity agreement before the buyer starts the due diligence process. In addition to issues that arise in all due diligence processes, care should be taken to ensure that (i) a PPA providing for the desired tariff is in place, (ii) documentation is in place to confirm eligibility for any tax relief, (iii) EVN has confirmed the date of commissioning of the wind farm; and (iv) the Electricity Operation Licence has been obtained.
Then the transaction must be structured as either an asset deal or a share deal. The structuring of the project to be acquired taking into account company law aspects must also be considered: Is there one or more companies? Is it reasonable to acquire an offshore holding company? Or is it better to purchase a Vietnamese special-purpose vehicle directly?

In the case of acquisition of the special-purpose vehicle or the holding company, a Share Purchase Agreement (SPA) is negotiated, whereas its standard elements must be taken into account, e.g. structuring of the purchase price, payment terms, warranty, conditions precedent, etc. Depending on what exactly is being sold and purchased in which country, the clause on the applicable law and jurisdiction (or arbitration clause) must also be considered more closely to ensure that the provisions of the SPA can also be effectively enforced in the case of emergency.

In particular, the numerous approval requirements and necessary changes to business and FDI permits must also be considered. For example, a foreign investor must generally apply for a so-called M&A approval, which is a prerequisite for an effective transfer of shares in a Vietnamese company to a foreign investor or buyer. Depending on how the transaction impacts the Vietnamese market, an approval from the National Competition Commission of Vietnam (NCC Approval) may also be required.

Only after the necessary approvals have been granted can the parties sign the transaction documents concerning the sale of a Vietnamese company. These documents include the previously negotiated SPA and a Capital Transfer Agreement (CTA) required for the registration of the share transfer.

Closing

The closing – including the transfer of the purchase price – usually takes place after the CTA is signed and before the new shareholder is entered into the register. As regards instructing the payment, the Vietnamese foreign exchange regulations must be observed and the necessary documents (including handwritten signatures) must be prepared, as Vietnamese banks may refuse to process the payments in the absence of these documents. The successfully completed closing is recorded in a protocol, which is required for the approval applications in the post-completion phase.

Post Completion

As with any M&A transaction, the first thing to consider is the fulfilment of the relevant contractual provisions of the SPA. Also the registration of the new shareholder, which normally takes place after the payment of the purchase price, must be considered. The following applications are relevant in this context:

application for the amendment of entries in the commercial register (Enterprise Registration Certificate or ERC),
application for the amendment of approvals granted by local authorities (Principle Approval of the People's Committee); and
application for the amendment of an FDI permit (Investment Registration Certificate or IRC).
Finally, tax declaration obligations should also be considered, e.g. the seller's capital gains tax (CGT).

Conclusion

As mentioned above, the Vietnamese secondary market offers attractive opportunities for acquiring existing projects right now. A successful investor should be well prepared, though: In particular, it is necessary to structure the transaction in advance and to analyse it in detail in order to avoid any surprises regarding taxes or the legal framework, which, in the worst case scenario, could mean the failure of a transaction that has already been initiated. Our experience tells us that patience and realistic time planning are also sometimes required, as the processing of the necessary steps involved in a Vietnamese transaction can take months. Rödl & Partner's team in Vietnam has many years of experience in law, taxes and finance, especially in connection with transactions in the realm of renewable energies.