Overview of the New Indonesia-Singapore Bilateral Investment Treaty

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On 9 March 2021, the latest Singapore-Indonesia Bilateral Investment Treaty (the “BIT“) entered into force and updates the countries’ investment protection framework vis-a-vis each other. This BIT was previously signed on 11 October 2018 with the goal of promoting stronger economic ties and cooperation between the countries, and replaces the previous Singapore-Indonesia Bilateral Investment Treaty which had entered into force on 21 June 2006 and expired on 20 June 2016 (the “Previous BIT“).

Singapore and Indonesia have historically maintained strong trade ties with each other. Despite trade disruptions brought about by the COVID-19 pandemic, Singapore was Indonesia’s largest foreign investor in 2020, with investments totalling USD 9.8 billion; the countries also enjoyed strong bilateral trade in 2020 of approximately USD 36.8 billion.

Updates to Singapore-Indonesia investment provisions

We summarise some of the more salient updates to the Singapore-Indonesia investment provisions below (where applicable, Singapore and Indonesia will hereafter each be referred to as a “State“):

  • Broadened express definition of “investment”: Whilst the categories of assets which qualify as an “investment” are not closed, the express definition of assets which fall within the meaning of “investment” for purposes of the BIT has been broadened. In particular, the express definition now explicitly includes inter alia construction, production or revenue-sharing contracts, licences, authorisations, permits and similar rights conferred pursuant to the applicable domestic law, and other tangible or intangible property. However, the overarching requirement is that such assets must have the characteristics of an investment.
  • Most-Favoured-Nation Treatment Clause: Article 5 of the BIT (i.e. the Most-Favoured Nation Treatment clause) clarifies that its provisions will not be construed to oblige a State to extend to the investors of the other State benefits of any treatment, preference or privilege from bilateral investment agreements that were initialled, signed or entered into force prior to the entry into force of the BIT, or geographical arrangements within the framework of specific projects. Article 5 also clarifies that it does not apply to options or procedures for the settlement of disputes available in other agreements, and substantive obligations in other international investment treaties or trade agreements do not themselves constitute “treatment” and will not give rise to a breach of Article 5 per se.
  • Restrictions on transfer of assets: Article 8 of the BIT now clarifies circumstances in which a State may prevent an investor’s transfer of assets out of said State through the equitable, non-discriminatory and good faith application of its laws relating to inter alia, bankruptcy, insolvency or the protection of creditors’ rights; dealing in securities, futures, options or derivatives; criminal or penal offences; financial reporting or record keeping as necessary to assist the authorities; ensuring compliance with judicial and administrative orders or proceedings; or severance entitlements for employees. Article 9 of the BIT also provides that a State may in exceptional circumstances, impose reasonable and non-discriminatory restrictions on the transfer of assets or capital.
  • Right to regulate: Article 11 of the BIT sets out expressly the States’ right to regulate within their respective territories to achieve legitimate policy objectives, and clarifies that the mere fact that a State regulates, including through modification of its laws, in a manner which negatively affects an investment or interferes with an investor’s expectations, will not amount to a breach of an obligation under the BIT.
  • Longer pre-arbitration consultation period between disputing investor and State: Article 17 of the BIT provides for a 1 year consultation period (or recourse to mediation processes) before the investor may submit the dispute to arbitration or relevant national court, this consultation period was 6 months in the Previous BIT.

Comparison with previous generation of investment treaties

The above updates to the investment protection framework between Singapore and Indonesia must be seen in context, and it would be apposite to examine the language of the BIT’s articles in light of key characteristics of other investment-related treaties concluded recently in the region.

The Regional Comprehensive Economic Partnership Agreement (“RCEP“) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP“) are similar to the BIT in being modern treaties promoting regional economic partnerships, containing investment protection provisions. The RCEP was signed on 15 March 2020, whereas the CPTPP was signed on 8 March 2018 and entered into force on 30 December 2018.

An examination of the BIT, the RCEP’s investment provisions and the CPTPP’s investment provisions makes clear that these treaties are part of a new generation of investment treaties which rebalances and recalibrates rights and obligations vis-à-vis contracting States and investors. This has been done by inter alia expressly carving out sufficient regulatory space for the host State through express language of investment provisions, and drafting said treaties with the intent of ensuring that tribunals do not interpret investment protection provisions beyond the scope of what contracting States had intended.

In relation to the BIT’s investment provisions specifically:

  • Sufficient regulatory space for the host State: Article 8(3) allows a host State to restrict investors’ transfer of capital into and out of its territory in connection with legitimate regulatory purposes, and Article 9 allows a host State to impose calibrated restrictions in exceptional circumstances where said transfer may cause serious difficulties for the State’s macroeconomic management. Most pertinently, Article 11 expressly provides for a State’s right to regulate, and clarifies that a State’s regulatory acts do not amount to a breach of the BIT’s obligations per se. Such provisions were uncommon in previous generations of investment treaties.
  • Preventing investment protection provisions from being interpreted too widely: It is apparent that the BIT was drafted with the objective of ensuring that tribunals do not interpret its Articles beyond the scope of what contracting States intended. In this connection, the draftsmen of the BIT have drawn lessons from tribunals’ interpretation of previous generations of investment treaty terms to significantly narrow the scope of interpretative uncertainty in the BIT. For example, the BIT curtails the scope of its Most-Favoured-Nation Treatment clause (Article 5) by expressly providing that it does not apply to dispute resolution procedures and substantive obligations in other agreements. In the same vein, the language of the BIT (Articles 3(2) and 3(3)) expressly clarifies what the BIT means by “fair and equitable treatment” and “full protection and security”, in attempts to foreclose the possibility of such provisions being interpreted in an excessively wide manner (as had notoriously been the case for previous generations of investment treaties).

Concluding observations

The BIT serves as a prime modern example of investment treaties which seek to rebalance the distribution of rights between host States and investors, whilst retaining familiar investor State dispute settlement mechanisms which provides for recourse to ad hoc tribunals. This stands in contrast to the other strand of modern investment treaties, which adopts the more drastic approach of doing away with (or phasing out) traditional investor State dispute settlement mechanisms in favour of a public investment court system (e.g. Chapter 8 of the Comprehensive and Economic Trade Agreement). Only time can tell which approach will set the standard for the next generation of investment treaties.

Hong Kong: a world where the old and the new live side by side

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Hong Kong SAR

  1. Hong Kong Limited Partnership Fund (“LPF”) Regime

Hong Kong is the second largest private equity hub in Asia after Mainland China. As an international financial centre, Hong Kong has a vital role to play in the Funds Industry, and is committed to strengthening its position as a jurisdiction of choice for Private Funds in Asia for investment and wealth creation in the region.

Significant milestone for private fund structuring in Hong Kong

The Hong Kong LPF Ordinance was enacted on 31 August 2020, aiming to allow Private Funds to set up and operate locally as Limited Partnerships. The new LPF regime provides an alternative investment vehicle for private fund managers who are raising funds or investing in Asia and looking for a regionally domiciled fund vehicle.

Main Features of the Hong Kong LPF

It is widely used by Closed-Ended Private Funds such as private equity, venture capital, real estate, infrastructure, debt and special situation funds;

  • Fund structure is governed by a Limited Partnership Agreement with General Partner (“GP”) and at least one Limited Partner;
  • A simple and user-friendly set-up process by registration with the Registrar of Companies by a Hong Kong registered law firm or solicitor;
  • Tax benefits: no capital duty and no stamp duty: LPF is typically in scope under the unified funds exemption and carried interest can be tax exempted.

Key parties and operation obligations

  • GP is responsible for daily management and control of the LPF, assuming unlimited liability;
  • Investment Manager must be SFC-licensed if undertaking regulated activities in Hong Kong;
  • Auditor is appointed to perform independent fund audit annually;
  • AML responsible person is to carry out anti-money laundering compliance functions;
  • Proper custody management is required;
  • A registered office is maintained in Hong Kong;
  • Independent party such as fund administrator may be engaged for fund valuation and investor services as necessary and applicable.

It is proposed that the LPF regime will allow re-domiciliation of offshore funds to Hong Kong provided that the migrating offshore fund meets the same set of eligibility requirements of an LPF. Hence the new LPF regime will no doubt provide ample opportunities and long-term growth for the Fund Industry and the Private Equity sector in Asia.

2. Trust or Company Service Providers license

To enhance the due diligence commitments on the designated non-financial businesses and professionals, a licensing regime was introduced under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance on 1 March 2018.

Any person who carries on a trust or company service business as defined in the guideline is required to obtain a Trust or Company Service Providers license (“License”) from the Registrar of Companies. The License will be granted for three years’ period and the Licensee needs to renew it subject to a ‘fit and proper’ test.

Anyone who carries on the relevant business without a TCSP license is liable on conviction for a fine of HK$100,000 and imprisonment for 6 months.

3. Legal update

Waiver of registration fees for annual returns (except for late delivery) for 2 years.

With effect from 1 October 2020, registration fees for annual returns delivered to the Companies Registry on time and within the concession period from 1 October 2020 to 30 September 2022 (both dates inclusive) are waived. This applies to all private and public companies having share capital, companies limited by guarantee and registered non-Hong Kong companies.

Increase of stamp duty rate on transfer of Hong Kong stock

With effect from 1 August 2021, the rate of stamp duty payable on sale or purchase of Hong Kong stock is increased from 0.1% to 0.13% of the consideration or value of each transaction payable by buyers and sellers respectively.

New Inspection Regime under the Companies Ordinance

Proposals have been made to the Legislative Council on the timing of implementation of the new inspection regime by the public about the Usual Residential Addresses (“URAs”) and full identification numbers (“IDNs”) (collectively “Protected Information”) of directors, company secretaries and other relevant persons as follows:

Phase 1 – from 23 August 2021, companies may replace URAs of directors with their correspondence addresses, and replace full IDNs of directors and company secretaries with their partial IDNs for public inspection on their own registers;

Phase 2 – from 24 October 2022, Protected Information on the Index of Directors on the Register of the Registry will be replaced with correspondence addresses and partial IDNs for public inspection. Protected Information in the documents filed with the Registry after commencement of this phase will not be provided for public inspection.

Phase 3 – from 27 December 2023, data subjects could apply to the Registry for protecting from public inspection their Protected Information contained in documents already registered with the Registry before commencement of Phase 2, and replace such information with their correspondence addresses and partial IDNs.

Notwithstanding the above, specified Persons could apply to the Registry for access to Protected Information from Phase 2 onwards

Please do not hesitate to contact us should you require any further information.

ARTICLE BY: Alex Cho 

CEO – Sino Corporate Services Group, Sino Group

Maxwell Chambers Appoints New Chairman

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Maxwell Chambers announced today the appointment of Mr. Daryl Chew as the Chairman of the Board of Directors.

Acclaimed as “one of the brightest” and “most highly regarded” partners in the Asia Pacific region by Who’s Who Legal, Mr. Chew brings more than 12 years of experience in international dispute resolution and is the Managing Partner of Shearman & Sterling’s Singapore office. He acts as counsel and arbitrator in arbitrations involving a wide range of applicable laws, arbitral rules and seats, with a focus on construction, energy, mergers and acquisitions, joint venture and general commercial disputes. Mr. Chew is the Co-Chair of the Young SIAC (YSIAC) Committee and also serves on the Singapore Management University School of Law Advisory Board and various other governmental, international and regional arbitration organisations and committees.

“I am honoured by the appointment and privileged to have the opportunity to serve an institution that is not only a lodestar for its counterparts in the region and across the globe, but which also has immense significance to me as a dispute resolution practitioner in Singapore.

Over the past decade, Maxwell Chambers has become an unmistakable feature in the international dispute resolution landscape; it has cemented Singapore’s position as a leading global dispute resolution hub. I am especially grateful to Philip for his leadership over these years, which has seen Maxwell Chambers go from strength to strength.

Maxwell Chambers is now an icon for ADR practitioners both in Singapore and abroad. I personally have vivid memories of the days on end spent in hearings on those premises. But as we navigate a more complex, postpandemic global landscape, where virtual meetings and hearings are more commonplace, I look forward to building on our solid foundations and collaborating with management and the Board to develop a shared vision for the next chapter.

We will remain singularly focused on refining our core offerings to add value and meet the diverse, evolving needs of users in the global ADR community. We are also committed to expanding our global footprint, adopting innovative and transformative technologies and exploiting greater synergies within the unique ecosystem of ADR stakeholders both within and outside of Maxwell Chambers.

This is an exciting time for Maxwell Chambers and the ADR community in Singapore and globally as arbitration continues its steady growth trajectory. We will continue our engagement and collaboration with our partners and stakeholders as we pivot to the future.”

Mr. Chew succeeds Mr Philip Jeyaretnam SC, who was recently appointed as a Supreme Court Judicial Commissioner. Under Mr Jeyaretnam’s leadership, Maxwell Chambers, an integrated alternative dispute resolution complex located in Singapore, has grown into a leading facility providing a range of custom-designed and fully equipped hearing rooms.

Of the 34 legal entities housed in Maxwell Chambers, there are 12 international institutions, of which 6 have case management offices, forming the highest concentration within such a facility in the world. These include the Singapore International Arbitration Centre, the Singapore International Mediation Centre, the International Chamber of Commerce International Court of Arbitration, the Permanent Court of Arbitration, the World Intellectual Property Organisation Arbitration and Mediation Centre, and the American Arbitration Association International Centre for Dispute Resolution.

In 2019, Mr Jeyaretnam championed the expansion at 28 Maxwell Road, Maxwell Chambers Suites, which now houses the local offices of top international ADR institutions, chambers, law firms and ancillary services.

Additionally, in 2020, Maxwell Chambers joined the Arbitration Place of Toronto and Ottawa and London’s International Dispute Resolution Centre to launch the International Arbitration Centre Alliance, a hybrid physical and virtual hearing platform, aimed at addressing distance, time-zone, and other challenges associated with planning and conducting international arbitration hearings in the wake of COVID-19.

Baker McKenzie: Helping Clients Do Business in Japan

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India & Vietnam: Increasing Trade and Investment Relations

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The year 2020 marks the 42nd anniversary of India-Vietnam bilateral trade. Vietnam and India have shared strong bilateral relations historically, and for the past two decades, trade between the two countries has risen considerably. These economic ties have materialized into several Indian investments in Vietnam in various sectors.

The enormous volatility in the global trade environment has pushed businesses into diversifying their supply chains away from China, which has increased the importance of the India-Vietnam trade route for international business.

India, which is one of the fastest-growing economies in the world, currently ranks fifth globally in terms of GDP. The ASEAN-India Free Trade Area (AIFTA), which Vietnam is a part of, was established in 2009 as a result of convergence in interests of all parties in advancing their economic ties across the Asia-Pacific.

Vietnam’s manufacturing industry has rapidly emerged as a highly effective location for incoming electronics and telecom manufacturers who are relocating from China due to increased costs and the US-China trade war. The country has bolstered investor confidence with quick and efficient containment of the COVID-19 pandemic. Vietnam is becoming a leading choice for major companies looking to set up their new manufacturing hubs and diversify their supply chains.

India has significant expertise in IT services, pharmaceuticals, and oil & gas, all of which can significantly benefit Vietnam. Additionally, there are export opportunities in zinc, iron, steel, and man-made staple fibers from India to Vietnam.

A large middle class in India’s 1.3 billion population and its customs-duty exemption for ASEAN products make it a lucrative destination for Vietnamese exports. There is a notable scope for the development of services related to wholesale & retail trade, transportation & storage, business support along with trade opportunities in cotton and knitted clothing.

Bilateral trade

Over the past two decades, bilateral trade between Vietnam and India has steadily grown from US$200 million in 2000 to US$12.3 billion in the financial year 2019-2020.

The two countries aimed to raise bilateral trade to US$15 billion by 2020, but COVID-19 related trade disruption resulted in a 9.9 percent trade shrinkage to US$12.3 billion in the last financial year. Vietnam has emerged as the 18th largest trading partner of India, while the latter ranks seventh among Vietnam’s largest trading partners.

Exports from Vietnam to India include mobile phones, electronic components, machinery, computer technology, natural rubber, chemicals, and coffee. On the other hand, its key imports from India include meat and fishery products, corn, steel, pharmaceuticals, cotton, and machinery.

After India announced its decision to opt-out of the Regional Comprehensive Economic Partnership (RCEP), the India-ASEAN FTA is expected to be reviewed to compensate for the potential trade loss.

Foreign direct investment

Vietnam’s strategic location close to existing manufacturing hubs, its favorable position in accessing other Southeast Asian markets, and its proactive approach towards opening its markets to the world has helped it gain popularity as an attractive manufacturing and sourcing location.

The rising importance of Vietnam in global supply chains has the potential to strengthen India-Vietnam ties further. India is estimated to have invested nearly US$2 billion in Vietnam including funds channeled via other countries. Over 200 Indian investment projects in Vietnam are primarily focused on sectors including energy, mineral exploration, agrochemicals, sugar, tea, coffee manufacturing, IT, and auto components. Several major Indian businesses such as Adani Group, Mahindra, chemicals major SRF, and renewables giant Suzlon have shown interest in venturing into Vietnam.

India’s salt to IT conglomerate Tata Coffee recently inaugurated their 5000 MTPA freeze-dried coffee production plant in Binh Duong province of Vietnam last year. This US$50 million coffee facility was commissioned within 19 months of the ground-breaking ceremony.

Another example is HCL Technology Group, which is considering establishing a US$650 million technology center in Vietnam and plans to recruit and train over 10,000 engineers within the next five years.

With the implementation of major infrastructure projects like Tata Power’s Long Phu – II 1320 MW thermal power project worth US$2.2 billion, the investment figures are expected to rise considerably. The thermal power project was first coined in 2013 and was originally expected to be fully operational by 2022, but the revised seventh Power Development Plan (PDP7) indicates an eight-year delay, shifting its launch to 2030.

This delay appears to be due to Vietnam’s shift toward renewable energy. Nevertheless, opportunities remain for Indian investors in the renewable energy industry, specifically in solar and wind due to increased power demand. Reports indicate that the Tata group is in talks of investing further in solar- and wind-power projects.

Opportunities for Indian investors

Vietnam provides several lucrative reasons to invest such as increased access to markets, favorable investment policies, free trade agreements, economic growth, political stability, low labor costs, and a young workforce. As per a Standard Chartered report on trade opportunities, Vietnam’s exports to India have the potential to grow by 10 percent annually, or approximately US$633 million. This projected growth is primarily focused on goods export (53 percent) and services (46 percent).

Pharmaceutical

Vietnam’s domestic pharmaceutical industry is currently able to meet just 53 percent of the country’s demand, representing significant opportunities for Indian investors as India is among the leading global producers of generic medicines supplying 20 percent of total global demand by volume. There is an enormous potential for Vietnam to purchase generic medicines from India, but the former is actively trying to get Indian pharmaceutical companies to manufacture in Vietnam instead of importing.

Agriculture

Vietnam is seeking alternate buyers for its agricultural exports, after the reduction in demand from China due to the pandemic. Lifting India’s trade barriers on the import of agricultural products can open a new market for Vietnamese agricultural exporters. Also, there is a significant potential for investment in breeding technology, irrigation technology, and storage facilities. Vietnam’s topography, climate, and fertile soil make it suitable for coffee plantations. The TATA group has expressed plans of investing in the installation of agricultural machinery to serve demand in the Mekong Delta.

Tourism

The tourism industry in Vietnam is a largely untapped market sector for Indian businesses, which is likely to gain strong traction after the pandemic. The country received over 15.5 million international arrivals in 2018, a seven-fold increase from 2.1 million in 2000. Over 31,400 Vietnamese visited India the same year, a 32 percent increase from the previous year. India is a preferred destination for Vietnamese pilgrims and medical tourists.

India’s low-cost carrier Indigo launched direct flights linking India’s Kolkata with Vietnam’s Hanoi and Ho Chi Minh City in November 2019. Following this launch, Vietnamese low-cost carrier, Vietjet Air started direct flights connecting India’s New Delhi with Hanoi and Ho Chi Minh City. Improved connectivity will help Vietnam in diversifying its tourism portfolio, which currently is largely dependent on Chinese and South Korean tourists.

SMEs

SMEs play a large role in both India’s and Vietnam’s economies. Most recently, India and Vietnam held a promotion conference titled ‘Boosting trade-investment cooperation opportunities between Vietnamese and Indian SMEs’ organized by Vietnam’s Trade Office of the Vietnamese Embassy in India, India’s Uttar Pradesh state government, the Indian Industries Association (IIA), and Vietnam’s Hanoi SME Association. The takeaway was that several major businesses have shown interest in coming to Vietnam.

The IIA noted that Vietnam is looking to attract investment in sectors such as energy, mineral exploration, agriculture, tea, IT, and automobiles. Nevertheless, challenges remain regarding high corporate income tax rates for specific sectors such as oil and gas.

SMEs contribute close to 40 percent of India’s exports but also need government support to thrive. Indian SMEs will have to further internationalize. For example, India’s Tamil Nadu state has a diversified manufacturing industry dominated by SMEs with a number of factories and special economic zones. However, at the moment, SMEs in Tamil Nadu are yet to connect to business opportunities in Vietnam. This is a missed opportunity. As per ADB such businesses can connect through India’s Market Access Initiative and Market Development Assistance schemes to tap into potential businesses and market sectors.

Apart from streamlining regulatory standards between both countries, both governments will also have to hold seminars, events, and trade fairs to ensure that SME are aware of the various opportunities in the relevant market fields.

Supporting industries

Vietnam is an attractive destination to produce and export, thanks to its assortment of free trade agreements with several countries, allowing products to be exported to these countries with attractive low tariffs. There is a need for the development of the local supporting industry to support major manufacturers, and Indian businesses have the potential to fill the gaps in this sector.

Takeaways

With Vietnam’s strong economic growth in the past few years, a review of the India-ASEAN free trade agreement is necessary to foster further trade in promising emerging sectors between both countries. As per Vietnam’s Foreign Investment Agency (FIA), India had almost 300 projects in Vietnam accounting for almost US$900 million as of December 2020.

As pointed out by the Standard Chartered report, there is considerable scope to increase trade between India and Vietnam should both governments take a proactive approach to trade and investment and realize this potential.

 

Vietnam: Legal and Financial Aspects in the M&A Process

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Mergers and Acquisitions (M&A’s) are an increasingly popular route for foreign investors looking to begin operations in Vietnam – and due diligence is a key component of the M&A process.

While there are several aspects to consider in a due diligence – such as the company’s reputational profile, strategic position in the market, and assets – we focus on legal and financial due diligence because they represent the starting point for most investors.

Before commencing due diligence on a target company, the acquiring company typically signs an agreement such as a Memorandum of Understanding (MoU) with the target company. The acquiring company may also make a deposit to confirm that the deal is serious enough for the target company to spend time to prepare and release documents needed for the due diligence.

Legal and financial due diligence may take several months, depending on the size of the company being acquired, as well as the location where it is based. This work is typically conducted by a third-party professional services firm.

Foreign investors should seek to select a firm that has an office in-country with staff fluent in both Vietnamese and the language spoken at the investors’ headquarters. This profile will help ensure your service provider can work more efficiently during both on-site visits and communication with overseas managers.

Legal due diligence of a target company

During the legal due diligence process, service providers may ask to review the target company’s documents, certificates, qualifications, and licenses. These may include:

  • Business licenses;
  • Approval certificate;
  • Company charter;
  • Meeting minutes of Board of Management (BoM); and
  • Shareholders and capital contribution of shareholders.

Ownership

The percentage of foreign ownership to the target company based on applicable local laws, World Trade Organization (WTO) and other free trade agreements (FTAs) where Vietnam is a member will also need to be determined before the acquisition.

Contracts

Commercial contracts, loan agreements, MoUs, and non-disclosure agreements signed by the owners of the target company.

Litigation

Any ongoing litigation of the target company may affect its value. A thorough review of the litigation status is recommended.

Financial due diligence of a target company

Financial due diligence allows the investor to audit the target company and analyze the company’s earnings, its working capital needs, as well as sales and operating expenses.

Financial diligence can be broken down in two parts: assets and liabilities.

Ingraphic: Financial Status Review M&A

Internal financial statements

Review all of the target company’s documents related to revenue, expenditure and other accounts. This should be done to ensure the documents are factual and to identify any discrepancies.

Internal and tax reports

Analyze the target company’s internal and tax documents to see if there are any discrepancies between internal reports and tax reports. This review should evaluate relevant risks due to any discrepancies between the tax declaration and the actual status.

Other items that may need to be reviewed are capital contribution, cash on hand, cash flows and any other key financial indicators.

Timeframe and reporting

Once all the documents have been reviewed by the service provider, it submits a report, with details outlining to see if the target company is in compliance with all the rules and regulations in Vietnam.

At this stage, the third party can advise on any issues that need to be resolved between the acquiring and target company. Typically, the entire process of legal and financial due diligence in Vietnam can up to three months or more.

[Read more]

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This article is produced by Vietnam Briefing, a premium source of information for investors looking to set up and conduct business in Vietnam. The site is a publishing arm of Dezan Shira & Associates, a leading foreign investment consultancy in Asiawith over 27 years of experience assisting businesses with market entry, site selection, legal, tax, accounting, HR and payroll services throughout the region.

Japan’s Law Firms Benefit as Companies Move From China to SE Asia

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As an increasing number of Japanese companies move production out of China in order to protect their supply chains, hefty investments made by Japan’s Big 4 law firms into Southeast Asia are paying off.

All four of the firms—Mori, Hamada & Matsumoto; Nishimura & Asahi; Anderson Mori & Tomotsune; and Nagashima Ohno & Tsunematsu—have established offices in Southeast Asia and are well-positioned in the region, where their clients, assisted by the Japanese government, are now actively relocating factories from China. In July, the Japanese government announced subsidies of up to US$114 million for 30 companies that were transferring their factories from China to Southeast Asia.

The moves have accelerated as Japanese companies seek to avoid getting caught up in increased U.S.-China trade tensions, political turmoil in Hong Kong and country lockdowns prompted by the COVID-19 pandemic. But for the Japanese firms, moving into Southeast Asia is not new. Mori Hamada was one of the first Japanese firms to make its foray into the region, opening an office in Singapore back in 2012. Since then, it has established offices in Yangon, Ho Chi Minch City and Bangkok.*

In a sense, Southeast Asia was a fallback for the firms. Before 2012, they had assessed global markets for expansion opportunities but decided against Hong Kong because there was too much foreign firm competition there, all chasing after major Chinese state-owned enterprise M&As. They also concluded it would be too costly to set up offices in the U.S. and the U.K., where there was already a deep pool of well-entrenched competitors, lawyers say.

So all four firms followed their clients, which included major trading houses such as Mitsubishi Corp., Mitsui & Co., Sumitomo Corp., Itochu and Marubeni, into the greenfield that was Southeast Asia.

Now, their investments are reaping rewards. Over the past decade, Japanese companies have invested US$139 billion into Indonesia, Malaysia, Vietnam, Thailand and the Philippines. The pace of total investment over 10 years is double that of Japanese investment into China.

Nishimura & Asahi partner Masato Yamanaka, the Singapore office co-representative, said Japanese clients are investing in a much broader range of sectors in Southeast Asia. Traditional sectors included infrastructure projects and manufacturing, but technology and real estate have taken over in a big way. While the bulk of the firm’s work was traditionally dominated by banks and construction companies, it is increasingly adding tech companies to its list.

“We are also starting to see more funds, startups and financial services companies moving their operations to Singapore as a result of Hong Kong’s political challenges,” Yamanaka said.

But law firms and their clients are not just benefiting from their presence in Singapore. Indonesia, for example, Southeast Asia’s largest economy, has seen a surge in Japanese investment as companies look to protect supply chains and avoid repercussions of the U.S.-China conflict and Hong Kong political turmoil. In June, the Indonesian government announced that three Japanese companies, including Denso Corp. and Panasonic Corp., have relocated their plants from China to Indonesia.

And the work in Southeast Asia is not limited to Japanese law firms. Earlier this year, U.S.-based Morrison & Foerster, one of the largest international law firms in Japan, advised three entities within the Mitsubishi UFJ Financial Group—MUFG Bank, MUFG Innovation Partners and Krungsri Finnovate—on a US$706 million investment into Grab Holdings, Southeast Asia’s biggest ride-hailing company. Grab had separately received a US$3 billion investment from the Japanese conglomerate Softbank in 2019.

Law firms are also benefiting as Japanese industry makes moves into Vietnam, Myanmar and the Philippines. Last year, Sumitomo bought a 19 percent stake in the Light Rail Manila Corp., the operator of the Manila Light Rail Transit System Line 1—the only privately-operated rail system in the Philippines, for US$60 million. Morrison Foerster advised on the deal.

In 2019, Japan became the second-largest foreign investor in Vietnam, with over 4,300 projects totaling more than US$59 billion. Japanese investors see great opportunity in the country’s infrastructure sector, with pending projects worth over US$200 billion.

With such a positive outlook, lawyers predict more competitors will scurry into the region.

“I don’t think the traditional, smaller but long-standing Japanese firms will expand much internationally, but there is a new group of young lawyers that have trained in big local and international firms that are setting up their own firms,” said Nishimura & Asahi’s Yamanaka. “These lawyers will see and understand the opportunities outside of Japan; they have experience in advising startups. So we should see more of those [coming in].”

In June, Nishimura & Asahi became the first Japanese legal practice to establish a Formal Law Alliance (FLA) with a local Singapore firm. Nishimura & Asahi-Bayfront Law Alliance focuses on corporate M&A and arbitration matters. “The alliance is still new but we believe there will be an increase in ASEAN clients wanting to invest in real estate in Japan as a result of our alliance.”

Just weeks after Nishimura & Asahi’s formal law alliance announcement, Anderson Mori & Tomotsune announced it had formed an alliance with seven-lawyer DOP Law Corp.

However, Mori Hamada has not announced plans for a tie-up, despite it being among the first Japanese firms to break into the region. Nor has Nagashima Ohno.*

“It is not easy. We have spent years trying to look for the right partner,” said one Big 4 Japanese law firm partner who did not wish to be named. “Bigger firms don’t want to link up and smaller firms have not been the right fit.”

Chinese Investment in US Plummets Under Increased Scrutiny

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New U.S. government data shows a massive drop in acquisitions of U.S. businesses by Chinese investors, particularly in critical technologies, evidence of the chilling effect of the Trump administration’s heightened scrutiny of Chinese investments.

The data, released by the Committee on Foreign Investment in the United States, provides evidence of the impact of strained U.S.-China relations on U.S. inbound Chinese investment. It also sheds light on the practical impact of recent reforms bolstering CFIUS’s powers.

In 2019, China was not the biggest source of transaction notices filed to CFIUS, a position it had held since 2011. Instead, that distinction fell to Japan, which filed 46 notices to CFIUS. This indicates that inbound Chinese investment to the U.S. for the year was lower than previous years, as CFIUS had fewer Chinese transactions to review, according to Darshak Dholakia, a partner at Dechert in Washington, D.C.

According to its annual report to Congress for 2019, published on July 31, CFIUS reviewed 25 Chinese transactions last year, a more than 50% drop from 55 the previous year and 60 in 2017. There was also a corresponding drop in Chinese investment in critical technologies, from eight acquisitions in 2018 to just three last year.

“Most of these publicly notified transactions that have received CFIUS scrutiny and CFIUS has either killed the deal through onerous mitigation measures or President Trump has recommended blocking the deal—those overwhelmingly have involved critical technologies,” Dholakia said.

In March, President Donald Trump blocked the acquisition of U.S. hotel management software company StayNTouch Inc. by Chinese company Beijing Shiji Information Technology Co. through a presidential order. Although there were no such orders issued in 2019, according to the CFIUS report, five of the six presidential orders issued over CFIUS’s 40-year history were issued in the last eight years. Moreover, five of the six orders related to Chinese investments.

According to a Rhodium Group report published in May, Chinese investment in the U.S. in 2019 fell to $5 billion, its lowest level in more than a decade. In addition to growing CFIUS scrutiny, the report also cited China’s restrictions on outbound investment and worsening U.S.-China relations as significant headwinds for Chinese investors.

CFIUS reviews foreign investment for national security risks. According to Cooley, examples of transactions that CFIUS typically scrutinizes include those involving U.S. businesses that have contracts with the U.S. government, as well as transactions that would result in foreign control over critical infrastructure.

Comprising nine government agencies, including the Department of Justice and the Department of the Treasury, CFIUS has the power to recommend the president block or unwind transactions as well as modify transactions by imposing mitigation measures.

In recent years, CFIUS has seen its review powers bolstered, most notably in 2018 with the passage of the Foreign Investment Risk Review Modernization Act. Some of the main changes include a greater focus on foreign investment in U.S. critical technologies, as well as the introduction of mandatory filing requirements for certain transactions, including those involving critical technologies.

“This discussion about how to properly frame CFIUS’s jurisdiction has been caught up in a larger discussion about cybersecurity, IP theft, resilience of American critical infrastructure, and sufficiency of its national industrial base,” said Jeremy Zucker, co-chair of Dechert’s international trade and government regulation practice based in Washington. D.C.

Chinese investors should pay close attention to CFIUS’s tightened filing requirements as a result of FIRRMA, Zucker said. He pointed out that CFIUS has seen its budget significantly expanded, which has led to the establishment of a new office dedicated to reviewing transactions that are not voluntarily submitted to CFIUS for review.

“There is more monitoring of the investment universe than ever, so a decision not to file is a riskier decision than it used to be. If the goal is to be able to close the deal with confidence that the U.S. government won’t interfere, then it’s certainly wiser to seek that clearance on a preclose basis than to close and then hide and hope that the government won’t come looking for you later,” Zucker said.

In recent years, CFIUS has unwound Chinese acquisitions of U.S. businesses several years following their completion. In March, Chinese company Kunlun was forced to divest from its acquisition of gay dating app Grindr in 2016 following a CFIUS review. Earlier this month, Trump issued an executive order banning TikTok from the U.S. market following a CFIUS review of the Chinese video-sharing platform’s acquisition of U.S. social media app Musical.ly in 2017.

Zucker believes Chinese investment in the U.S. is still possible, as long as Chinese investors are proactive in addressing known concerns of the U.S. government. These include whether the Chinese investor is an operating entity in the same industry as the investment target; the commercial merits of the investment; and the ultimate ownership of the investor itself.

“The most important thing for Chinese investors to do [moving forward] is to try put themselves in the shoes of U.S. government officials reviewing their investments,” Zucker said. “We’re representing Chinese investors in front of CFIUS right now, and we certainly are not under the impression that those investments are doomed.”

Goldman Sachs to pay $3.9B settlement in Malaysia 1MDB corruption case

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The Malaysian government announced Friday that Goldman Sachs has agreed to a total settlement of USD $3.9 billion in the 1Malaysia Development Berhad (1MDB) corruption scandal. In return, the government will dissolve all the criminal charges and proceedings against the firm. The agreement includes a $2.5 billion cash payout by the investment bank and a guarantee to return at least $1.4 billion in proceeds from assets seized by authorities all over the world in relation to this scandal.

Goldman had raised $6.5 billion for 1MDB by arranging three bond sales in 2012 and 2013. Malaysian government officials, including former prime minister Najib Razak, had allegedly siphoned money from the state investment fund. Consequently, the Attorney General of Malaysia instituted criminal proceedings against the Goldman Sachs subsidiaries in December 2018.

The US Department of Justice (DOJ) had finalized a settlement agreement with Malaysian authorities in October 2019. The DOJ had recovered $700 million from Low Taek Jho, who was the mastermind behind the scheme. Combining all the agreements, the Malaysian government will now receive over $4.5 billion. Minister of Finance Tengku Dato’ Sri Zafrul Aziz said, “This settlement represents assets that rightfully belong to the Malaysian people. We are confident that we are securing more money from Goldman Sachs compared to previous attempts, which were far below expectations.”

Vietnam Adopts Amended Law on Enterprises and Law on Investment

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On June 17, Vietnam’s National Assembly (NA) passed the amended Law on Investment and Law on Enterprises, both of which will take effect on January 1, 2021.

The amended Law on Enterprises simplifies the business registration process, redefines state-owned enterprise (SOE), and excludes household business from the scope of the current law. The amended Law on Investment provides updates on conditional business lines, investment incentives, support mechanisms while removing administrative approval for certain types of investment projects.

To understand the changes, Vietnam Briefing discusses these key updates in detail:

Changes to the Law on Enterprises

  1. Removal of seal specimen

The amended Law on Enterprises removes the procedure to notify the seal specimens, including the carving seal and digital signatures, to the Business Registration Authority (BRA). Additionally, enterprises are allowed to decide on the type, number, form, and content of the seals for its branch, representative offices (ROs) and other units without notifying the BRA.

The requirement on changes to the personal information of a businesses’ manager has also been removed.

  1. Separate law for household businesses

Due to the differences between household businesses and enterprises, the NA voted to form a separate law for household business. Until this law is issued, the government will oversee regulations related to household businesses.

  1. New definition of SOE

Enterprises with more than 50 percent of the charter capital owned by the State will be considered SOEs as compared to the current ratio of 100 percent. Article 88 of the Law on Enterprises also divides types of SOE according to the different levels of ownership.

  1. Protection for minority shareholders

The revised law removes the requirement that a shareholder or a group of shareholders must hold ordinary shares for at least six consecutive months to exercise the rights of shareholders. Moreover, shareholder(s) that own five percent or more of common shares have the following rights:

  • Review, search, and extract the minutes’ books and resolution, decisions of the Board of Directors, financial statements, except documents related to trade and business secrets;
  • Request a convening of a general meeting of shareholders in some specific cases; and
  • Request the Supervisory Board to examine each specific issue related to management and administration when deeming it necessary.

Changes to the Law on Investment

  1. Conditional business lines

Among the new changes, the law makes amendments to the list of sectors and business lines requiring conditional market access. Conditional market access are business lines in which the investment must satisfy specific statutory conditions in order to gain market access. Especially, the amended law outlaw’s debt collection services, while abolishing or reducing conditions for 22 business lines, such as commercial arbitration, and franchising and logistics services.

In addition, several sectors have been added to the list that are subject to conditional market access. These are:

  • Tobacco detoxication provision services;
  • HIV/AIDS treatment;
  • Elderly care;
  • Water sanitization;
  • Architectural services;
  • Import press distribution services;
  • Electronic identification and authentication services;
  • Fishing vessel registration; and
  • Fishing vessel crew training, among others.

The law also contemplates a list of business lines restricted to foreign investment. The NA Standing Committee has emphasized the need to balance national security and investment attraction for socio-economic development, especially for coastal and remote areas.

  1. Incentives and investment support

To ensure the quality of foreign investment, the amended law includes specific conditions for sectors that are entitled to investment incentives. These include:

  • Innovation-related sectors such as Information Technology (IT), R&D, digital content, hi-tech, new and clean energy, and production of intermediate goods participating in value chains and industry clusters, among others;
  • To ensure the effectiveness of incentive schemes, maintaining incentives is conditional to the performance of the previous support package. More specifically, the government would set a definite term for incentives and would extend or scrap it in accordance with the outcome of the incentive;
  • The Prime Minister can apply special incentives to create a favorable mechanism and policies to attract FDI inflows. Notably, the law allows a maximum discount rate of more than 50 percent compared to the highest level prescribed by the current law; and
  • The law also provides special incentives for projects with an investment capital of over VND 3 trillion (USD 128.4 million), and VND 10 trillion (USD 428 million), with certain conditions.

[Read more]

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This article is produced by Vietnam Briefing, a premium source of information for investors looking to set up and conduct business in Vietnam. The site is a publishing arm of Dezan Shira & Associates, a leading foreign investment consultancy in Asia with over 27 years of experience assisting businesses with market entry, site selection, legal, tax, accounting, HR and payroll services throughout the region.