Balancing Payment and Ownership Changes in M&A: Resolving the Chicken-and-Egg Dilemma
In Vietnam, balancing the competing interests of a seller wanting full payment before registering the ownership change and a buyer wanting assurance of license transfers (e.g., recording the buyer’s name in the ERC or confirmation on foreign ownership) before payment typically involves structured mechanisms that address both parties’ concerns.
LEGAL SHARING
Nguyễn Thị Lan GIang
12/23/20241 min read
💼 The most common mechanisms include:
🔒 Escrow Agreement
(i) Description: An independent third party (often a bank) holds the payment in an escrow account until the conditions are met.
(ii) Process:
(a) The buyer deposits the full purchase amount into an escrow account.
(b) The seller initiates the process to update ownership details in licenses.
(c) Once the ownership transfer is confirmed, the escrow agent releases funds to the seller’s account.
(iii) Notes: Provides security for both parties and ensures compliance with the agreement. From my observation, this is the most common mechanism for M&A projects involving the acquisition of 100% ownership in Vietnam.📈 Payment Tranches Linked to Milestones
(i) Description: Payments are structured in stages, each tied to the fulfillment of specific milestones.
(ii) Process:
(a) Payments are linked to progress in ownership registration or license transfer.
(b) Final payment is made upon completion of the registration process.
(iii) Notes: Reduces risk for both parties by ensuring incremental progress is tied to payments. From my observations, sellers normally don’t accept this mechanism in cases of acquiring 100% ownership. In such cases, a minimal payment may be held, but it is difficult to negotiate. Instead, parties often retain a minimal percentage of ownership for such payments, which can cause burdens in obtaining the necessary approvals.🏦 Bank Guarantee or Letter of Credit
(i) Description: A financial institution guarantees payment to the seller upon fulfilling specific conditions.
(ii) Process:
(a) The buyer arranges for a bank guarantee, which ensures payment once the seller registers ownership changes.
(b) The seller has assurance that the buyer's obligations are financially secured.
(iii) Notes: This is uncommon in Vietnam’s M&A transactions due to high costs, complexity, and a market preference for escrow agreements.
💬 If you have any comments, feel free to add.
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