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MATTER:

Merger and Transfer of Multi-Level Marketing Network

CLIENT:

The US Multinational Corporation specializing in Manufacturing and Distributing New Medicines and Healthcare Products.

BACKGROUND:

The Client is a top-notch U.S multinational manufacturing and trading corporation of healthcare products in the form of multi-level marketing business. Entering into the Vietnam market since May 2012 through a parallel operation of two legal entities, including a 100% foreign-invested company headquartered in Ho Chi Minh City, which carried out marketing and trade promotion activities (“FDI Company”) and a 100% domestic-owned company headquartered in Hanoi city, which was then the Client’s partner in Vietnam and was responsible for establishing, maintaining and expanding distribution network through multi-level marketing business model (“Domestic Company”). The Domestic Company was established by capital contribution of a number of Vietnamese individuals ("Vietnamese Partner”).

In 2014, the Domestic Company established, operated and maintained a network of distributors under the multi-level marketing model nationwide (“Network”). The management of the Network of the Domestic Company, however, encountered some of unavoidable limitations. This resulted in a number of the Distributors having behaviors that were inappropriate with common standards, thereby negatively affecting the Corporation’s reputation. In order to strengthen the Network management efficiency and ensure that the sales performance in Vietnam would be standardized in accordance with the Corporation’s codes of conduct and codes of ethics, the Corporation and the Vietnamese Partner negotiated and reached an agreement that the Corporation would acquire and transfer the Network from the Domestic Company to the FDI Company. At that time, the laws prohibited the purchase, sale and transfer of multi-level marketing networks. The Client worked with various consultants and got stuck in finding solutions.

In the middle of 2014, the Client engaged ATIM LAW FIRM and was advised on an overall alternative for merge of the operations of the two aforementioned legal entities. The Client’s objective was that the FDI Company should receive the entire Network from the Domestic Company and minimize any risk of the business interruption of these two enterprises.   

CHALLENGES AND LEGAL ISSUES

At that time, the Client’s request on merger and transfer of the Network without interrupting the sales activities of the whole system was a major challenge for not only ATIM LAW FIRM but also for any other consultants. This was because the merger process of two enterprises should undergo a wide range of procedures with various legal issues to be resolved, especially in the multi-level marketing sector, the procedures remained much more complicated with a spectrum of licenses to be obtained. Accordingly, in order to receive and operate the Network, after signing merger contract and applying for an Investment Registration Certificate (IRC) to record changes in enterprise’s information and those of the project due to the merger, the FDI Company (the merged company) should obtain trading license, retail outlet establishment license, registration licenses, certificates or announcements of products being distributed and multi-level marketing licenses (MLM Certificate). Completing these procedures requires a lot of efforts and times with a spectrum of dossiers, documents, papers and information to be drafted, collected, submitted, and explained to the competent authorities in order to prove that the FDI Company fully meets all the conditions to be issued with the MLM Certificate. 

After signing the merger contract, the Domestic Company (the merging company) should carry out the required procedures to terminate its operation such as transferring the Network and assets to the FDI Company (the merged company), notifying the tax authority of the merger and conducting the tax finalization procedures and closing the tax code.   

The aforementioned aspects were showing that the risk of business interruption was very high if no coherent and reasonable merger program and plan was well prepared, especially in the period since the Domestic Company (the merging company) has been legally terminated but the FDI Company has not obtained the MLM Certificate for operating the Network. In particular, that was the period as of the date the FDI Company (the merged company) was granted the IRC to record the merger until such company was granted the MLM Certificate, which was expected to be at least 3 months (“Transitional Period”).

In addition, at this time, the legal framework, context and management ideology of the Vietnamese government authorities regarding multi-level marketing activities also made the objective of merge and transfer of the Network without the business interruption of the Client more obscure. Since 2005, the first legal document regulating multi-level marketing activities in Vietnam was promulgated. Until the 2010s, however, multi-level marketing activities remained relatively unfamiliar and was something new in Vietnam with a spectrum of negative information regarding the distributor’s behaviors and ethics. Thus, Vietnamese government authorities kept an extremely cautious and somewhat conservative outlook in administration of multi-level marketing activities in Vietnam market.

Until the time the Client performed the merger and transfer of the Network, Vietnamese government authorities had never settled any similar cases of merging two enterprises, in which, one was a 100% domestic-owned company which had already obtained a multi-level marketing certificate and had operating a network of the distributors, the other was a 100% foreign-invested company, and these two enterprises were headquartered in two different cities. Meanwhile, the regulations on business mergers remained unclear in several respects, especially the time when the merging party transferred assets, rights and obligations to the merged company (“Transfer Date”). Was the Transfer Date the date agreed by the parties in the merger contract or the date recorded on the amended IRC of the merged company? The regulations on multi-level marketing activities in this period regulated that the multi-level marketing enterprises should be allowed to “transfer the network in the event of merger of enterprises” but does not specify the time of transfer and procedures. The laws on food safety also kept silent on whether the merged company should be allowed to inherit and use the results that the merging company has obtained in terms of certification and safety announcement for products for continued distribution for the remainder of the validity period.

SOLUTIONS

In order to achieve the objective of transferring the Network to the FDI company while the laws on multi-level marketing business prohibited the transfer of the network, ATIM LAW FIRM proposed an alternative to merge the Domestic Company (which owns the network) into the FDI Company. Under the current laws, the merged enterprise should inherit all assets, rights and obligations of the merging enterprise and the merging enterprise would be terminated. The principal objective was basically resolved.

For the second objective in relation to minimizing business interruption in the case of transferring the Network, ATIM LAW FIRM advised and proposed a detailed merger plan in close connection with and in accordance with the laws, specifically as follows:                         

(1) Seeking guidance from the competent authorities on all matters which were not specified by laws, including:

• The guidance of the Ministry of Planning and Investment on the conformity of the parties’ agreement to choose the date that the FDI Company would be granted the amended IRC to record the merger as the Transfer Date and the Effective Date of the merger contract.
• The guidance of the Vietnam Competition Authority of the Ministry of Industry and Trade which should confirm the feasibility and legality of the transfer of the Network in the case of merger, when the Domestic Company would be allowed to transfer the Network to the FDI Company.
• The guidance of the Vietnam Food Safety Authority of the Ministry of Health on whether the FDI Company could be allowed to continue to use standard certification and certification of conformity for products that the Domestic Company already obtained during the remaining validity period.

(2) Shortening the Transitional Period as much as possible by combining the following solutions:

• Depending on the guidance of the Ministry of Planning and Investment as set forth in Item (1).(a), established the date the FDI Company (the merged company) would be granted the amended IRC to record the merger as the Transfer Date and the Effective Date of the merger contract.
• Identified and detailed what works, dossiers, procedures, licenses, instructions should be completed or obtained prior to the Transfer Date as set forth above and concentrated on completing them as scheduled.
• Specified the sequence, procedures, processes to be expedited as quickly as possible after the Transfer Date.

(3) The merging company and the merged company closely coordinated to ensure the smoothness of the import, inventory, sales, invoicing, accounting and bonus payments to the Distributors, without shortage of supply, specifically:

• The import and storage of goods: two companies worked together to create a sales forecast from the distributors for at least 6 to 9 months. The import and storage of goods should be done and completed prior to the Transfer Date to ensure that the merging company could book these amounts in the tax finalization statement.
• Sales, collection, invoicing, accounting: The merging company would continue to sell goods during the Transitional Period. Regarding collecting money and issuing VAT invoices for the distributor, the merged company would consult with the General Department of Taxation on allowing the merged party to use its name and tax code to issue invoices within 45 days from the closing date until the date of filing the tax finalization dossier and notification of use of VAT invoices.
• Accumulated commission payments to the Distributors: ATIM LAW FIRM advised the Client to suspend the commission payments to the Distributors during the Transitional Period. After receiving the MLM Certificate, the Merged Company would pay the commission to the Distributors of the newly transferred Network.

(4) Supported the merged company to complete the remaining procedures to continue operating its business during the reception of the Network, including product circulation registration; changing and updating information on packages and labels; transferring the contract to the providers, partners, clients, distributors, employees from the merging company to the merged company.

SERVICES:

ATIM LAW FIRM advised, represented and supported the Client to complete the entire preparation of dossiers, documents, plans, works and procedures for the merger according to the above solutions.

RESULTS:

In light of opinions and explanations of ATIM LAW FIRM, the government authorities consulted gave favorable answers for the merger process of the Client, specifically:  

• The Ministry of Planning and Investment confirmed that the parties should be entitled to agree to choose the date that the FDI Company was granted the amended IRC to record the merger as the Transfer Date, which was also the Effective Date of the merger contract.
• The Vietnam Competition Authority of the Ministry of Industry and Trade confirmed that the transfer of the Network in the case of merger was allowed and in accordance with the laws, the time when the Domestic Company was allowed to transfer the Network to the time the FDI Company was granted the amended IRC to record the merger.
• The Vietnam Food Safety Authority of the Ministry of Health allowed the FDI company to continue to use the results of standard certification and certification of conformity for products that the Domestic Company had obtained during the remaining validity period.

Accordingly, within 12 months, ATIM LAW FIRM successfully carried out the merger of two companies and transferred the Network to achieve the objectives of non-interruption of the Client's business operation.