December, 2023

OPTION 3: SHARE BUYBACK

In this article, we will explore the option of share buyback, which is the process of the project company repurchasing its own shares from the foreign investor, along with its specific legal basis, benefits, tax implications, legal considerations, implementation time, risks, costs, and issues to consider.

WHAT IS SHARE BUYBACK?

Share buyback is the process of the project company repurchasing its own shares from the foreign investor, reducing its outstanding share capital. 

WHY SHARE BUYBACK?

Share buyback is a direct and efficient way for foreign investors to divest from a project company in Vietnam, especially when the project company has sufficient financial resources are favorable. Share buyback provides the following benefits:

• Provides a direct and efficient way for investors to exit the project company: Share buyback allows foreign investors to sell their shares to the project company, without having to find a third-party buyer or negotiate the terms and conditions of the sale. Share buyback also allows foreign investors to receive the sale proceeds in a short period of time, and avoid the hassle and uncertainty of other divestment options.
• Improves the company’s financial ratios and returns on equity for remaining shareholders: Share buyback reduces the number of outstanding shares of the project company, which increases the earnings per share, the return on equity, and the market value of the remaining shares. Share buyback also signals the confidence and optimism of the project company about its future prospects, which may boost the investor sentiment and the stock price.
• Can be used to consolidate ownership and control of the company: Share buyback can be used to consolidate the ownership and control of the project company, by increasing the stake and the voting power of the remaining shareholders, especially the major shareholders or the management. Share buyback can also be used to prevent hostile takeovers or unwanted shareholders, by reducing the availability and the attractiveness of the shares. 

HOW TO SHARE BUYBACK?

To implement share buyback, generally, the following steps shall be required:

Decide to buy back shares. The project company needs to make a decision to buy back its own shares from the foreign investor, by passing a resolution at a board of directors meeting or a general meeting of shareholders, depending on the quantum of share buyback and applicable laws. The resolution needs to specify the reasons, the method, the price, the quantity, and the time limit of the buyback, and the source of funds for the buyback.

Notify the shareholders. The project company needs to notify the shareholders of its decision of share buyback, within the time limit prescribed by the applicable laws.

Conduct the buyback. Upon its shareholders accepted the notified buyback proposal, the project company shall complete the buy-back proves and pay share buyback price within the time limit notified and thereafter record the changes in the shareholder register, cancel relevant share certificate.

Completion. The project company needs to prepare and submit a filling to register the change  of its outstanding charter capital with local authorities. 

LEGAL BASIS

The legal basis for share buyback are the following laws and regulations:

• Law on Enterprises 2020, which is the main law governing the establishment, operation, and dissolution of enterprises in Vietnam, including the rights and obligations of shareholders, the procedures and conditions for share buyback, and the responsibilities of the board of directors and the general meeting of shareholders.
• Law on Investment 2020, which is the special law governing the investment activities of foreign investors in Vietnam, including the forms and sectors of investment, the procedures and conditions for investment registration and approval, and the rights and obligations of foreign investors.

TAX CONSIDERATIONS

The main tax consideration for share buyback is the capital gains tax, which is the tax levied on the difference between the buyback price and the acquisition cost of the shares. The tax rate varies depending on the nature of project company and the nature of the foreign investors.

The foreign investor may also be eligible for tax exemptions or reductions under the applicable treaties that Vietnam has signed with other countries, such as the Double Taxation Avoidance Agreement or the Investment Protection Agreement.

LEGAL CONSIDERATION

The main legal consideration of share buyback are:

• Share buyback is relatively easy and quick to implement, compared to other divestment options, as long as the project company has sufficient financial resources. The project company can decide the method, the price, the quantity, and the time limit of the buyback, and adjust them according to the situation. The project company can also choose to buy back shares from all or some of the shareholders, depending on its objectives, strategies, consent of shareholders and applicable laws;

• Share buyback requires significant financial resources from the project company, to repurchase shares, especially for large investors who hold a substantial stake in the project company. The project company may have to use its own funds or borrow funds from banks or other sources, which may affect its cash flow and liquidity. The project company may also have to pay a premium price for the shares, which may reduce its profitability and return on equity.
• Share buyback may require shareholder approval and regulatory compliance, depending on the quantum of share buyback and applicable laws. The project company may have to obtain prior approval of the board of directors or the general meeting of shareholders, to authorize the buyback and appoint the person in charge of the buyback.

IMPLEMENTATION TIME

The implementation time for share buyback depends on the method, the price, the quantum, and the time limit of the buyback, as well as the company’s financial resources. A rough estimate of the implementation time for share buyback is 2-4 months

CONCLUSION

In conclusion, share buyback is an option for foreign investors to divest from a project company in Vietnam, by selling their shares to the project company, reducing its outstanding share capital. Share buyback has its specific legal basis, benefits, tax implications, legal considerations, implementation time, risks, costs, and issues to consider. Share buyback is a direct and efficient way for foreign investors to exit the project company, but requires significant financial resources and careful planning and communication. Consulting with qualified advisors is recommended to navigate the legal and financial complexities of a share buyback.

Read Part II

Note: This article and information herein are intended for general reference only and does not constitute any type of advice and REISTRAshall not be, in any case, be responsible for your use of this article or information herein for any purpose.

For your specific case, please do not hesitate to contact REISTRA at info@reistra.com for advice.