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WTO commitments require legal reforms
Since its accession to the World Trade Organisation four years ago, Viet Nam has gradually opened its doors to more foreign competition and strived to harmonize its maze of domestic laws with its WTO commitments.
Sections 502 and 503 of the Report of the Working Party on Accession of Viet Nam to the WTO confirmed, for instance, Viet Nam's commitment to a 51 percent voting requirement for shareholders of enterprises to approve management board proposals. National Assembly Resolution No.71, ratifying the WTO commitments, affirmed this position.
However, Viet Nam's Law on Enterprises conflicts with this commitment. Articles 52 and 104 of that law provide that "the required percentage of votes, based on charter capital ownership or shares, to adopt a decision of the Member's Council of a limited liability company or the Shareholder's General Meeting of a joint-stock company, is 65 percent."
It is a fundamental principle of law that, when domestic law conflicts with provisions of an international treaty to which the country is a signatory, the latter should prevail. In fact, Viet Nam has adopted this fundamental principle, as made clear in Article 6.1 of the Law on Signing and Accession to International Treaties. That article states: "in cases where a legal normative document and an international treaty to which Viet Nam is a member conflict with one another on the same matter, the international treaty shall be applied." This principle is reaffirmed by Article 3.3 of the Law on Enterprises.
In 2007, the Ministry of Planning and Investment proposed a draft decree providing 51 percent as the standard voting percentage applicable to all types of enterprises. However, to date, this draft decree has not been adopted. To the contrary, a number of legal instruments have been adopted by various government entities which reiterate the 65 percent voting rule.
Ministry of Finance Decision No 17/2007/QD-BTC, for instance, proposing a model charter applicable to a company listed on the stock exchange, provides for a minimum percentage of 65 percent to adopt a decision. State Bank of Viet Nam Official Letter No.2217/NHNN-CNH of March 2007 also reiterates the 65 percent rule.
Pronouncements from the Viet Nam Association of Financial Investors, the State Securities Commission, and the Ministry of Planning and Investment, as well as Government Decree No.59/2009/ND-CP of July, 2009, have all upheld the 65 percent voting rule.
In practice, provincial departments of planning and investment, which are the authorities in charge of issuing licenses to enterprises, have refused to allow companies to adopt a 51 percent voting rule.
The departments seem to have adopted a very literal interpretation of Resolution No.71, arguing that it applies only to "joint ventures" jointly established by foreign and local partners, and that it does not apply to any other type of enterprise, such as wholly foreign-owned or State-owned enterprises.
However, if Resolution No.71 only applies to joint ventures, the fundamental principles of WTO and the laws of Viet Nam, requiring equal treatment among enterprises, have not been upheld.
Indeed, the Law on Enterprises actually eliminated the concept of a "joint venture" as a distinct form of business organisation. As such, this narrow view of Resolution No.71 applied by many provincial authorities has led to the nonsensical conclusion that the 51 percent rule does not apply to any companies.
Also attracting the attention of the business community was recent Ministry of Finance Circular No.122/2010/TT-BTC on price stabilization. Under Circular No.122, certain enterprises in Viet Nam face new price registration requirements, and possible government intervention in setting prices, for a wide variety of products and services.
Vocal champions of the business community, including EuroCham, AmCham, and the ambassadors of Australia, Canada, New Zealand, the US and the European Commission, have argued that the price registration requirements specified in Circular No.122 appear to be aimed at foreign companies and as such are not consistent with WTO commitments prohibiting discrimination. Further, some have alleged that "implementation of the new law has focused primarily on imports from foreign companies – a clear violation of the letter and spirit of Viet Nam's WTO commitments."
Retail competition
Newcomers and visitors to Viet Nam are also often struck by the near-total absence of well-known global retailers such as Wal-Mart, Tesco, Carrefour, etc. This lies in stark contrast to many other countries in the region, including mainland China which is home to 189 Wal-Mart stores – a number which is growing rapidly. While some argue that keeping out such global franchise giants is critical to preserving Viet Nam's unique historical character, it is nevertheless remarkable that, four years after accession to the WTO, so few global retailers are established in the country.
There is no doubt that the economics and demographics of Viet Nam are highly attractive to retailers. With a population of nearly 90 million, rapid economic growth, and a youthful population eager to keep up with the latest material trends, Viet Nam is a potential gold mine for retailers.
Foreign investors, however, often find that the regulatory challenges of entering the Vietnamese marketplace outweigh the potential benefits. Vietnamese law requires franchise retailers to fulfill a cumbersome economic needs test (ENT) before being permitted to establish any retail outlets beyond an initial outlet, a requirement that suggests a fundamental lack of understanding of basic economics. Once again, Vietnamese domestic law appears to be at odds with its WTO commitments and with the WTO's spirit of market-driven economics.
The ENT is imposed by Ministry of Industry and Trade Circular 09/2007/TT-BTM, Section 4.3(a) of Chapter I, which states: "the establishment of retail sales outlets in addition to the first retail sales outlet shall be considered on a case-by-case basis and shall depend on the number of retail sales outlets, market stability, population density in the province or city where the retail sales outlet is to be set up, and consistency of the investment project with the master plan of such province or city."
This provision, along with related provisions which provide formulas for the "case-by-case" analysis, explains why Ha Noi, with a metropolitan population of over 6 million, has a pathetic grand total of two legitimate supermarkets, namely one Big-C and one Metro.
Admittedly, Viet Nam's WTO commitments allow for some level of control over the establishment of multiple retail outlets. According to the Schedule of Specific Commitments in Services in Viet Nam's WTO accession documents, Viet Nam may establish objective criteria for deciding to grant or deny an application for additional retail outlets, including "the number of existing service suppliers in a particular geographic area, the stability of market and geographic scale."
The argument against Circular No.09 is that it fails to provide truly "objective criteria." For example, Circular 09 requires "the sustainability of the investment project to the plans of the province or city" where the additional retail outlet would be located. Whether or not a proposed retail outlet meets this particular criteria is highly subjective.
Simply put, foreign investors are not willing to make a substantial investment in opening one retail outlet, without some level of confidence that they will be permitted to open additional outlets in the future. The business model of large retailers requires a high volume of product turnover, which cannot be accomplished with only a single outlet.
The Ministry of Justice, in collaboration with other ministries and agencies, has taken the initiative in reviewing Vietnamese regulations in goods, services and intellectual property for consistency with WTO commitments. This initiative demonstrates the good-faith efforts of high-level officials to continue Viet Nam's advancement towards international standards of law and market-based economics.
But domestic laws in many areas continue to be inconsistent with Viet Nam's international obligations. Whether the root cause is protectionism, bureaucratic inefficiency, or ignorance, the nation is obligated to rectify these inconsistencies.
Tran Si Vy & Alex Thomas Larkin Leadco Legal Counsel
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