Conducting due diligence (including legal due diligence) is the preliminary work performed by an investor intending to enter into an asset or equity transaction. The purpose of legal due diligence is to assess the potential risks of a transaction by investigating the legal obligations and liabilities of the target company so that the potential investor can determine whether to proceed with the transaction or to set transaction conditions, eliminate or limit risks, and negotiate a purchase price. This is a common practice and applies to most major mergers and acquisitions.
The fact that a target company is a listed company that proactively provides information (which may or may not be public, which may or may not be price-sensitive) at the request of potential investors to meet their due diligence requirements and to let potential investors know that they can rely on that information to conduct share purchase transactions may encounter practical difficulties. Specifically, Article 12 of the Securities Law 54/2019/QH14 issued on November 26, 11 (“Securities Law”) stipulates “prohibited acts in securities and securities market activities” including “use inside information to buy or sell securities for oneself or for others; disclose or provide inside information or advise others to buy or sell securities based on inside information” (Clause 2, Article 12). Inside information (in Clause 44, Article 4 of the Securities Law) is defined as “Information relating to a public company, listed organization, registered trading organization, public fund, public securities investment company that has not been announced and, if announced, could have a major impact on the securities price of this organization“.
We (when involved in similar transactions) typically advise our clients on how to provide information to potential investors and seek written guidance from the competent authority on this particular issue to resolve the above mentioned issues. Chapter IX (Articles 129 – 132) of the Securities Law provides for the authority “Inspect, examine and handle violations of laws on securities and the securities market” under the State Securities Commission (‘SSC“).
During our practice, we learned that the State Securities Commission has issued official dispatches stating that “The Securities Law does not prohibit the provision of information to potential investors during the negotiation process for the offering of shares. However, the provision of inside information to potential investors for the purpose of serving the offering of shares to partners must ensure a number of specific principles”. The principles/conditions accepted by the State Securities Commission in practice may include:
- The potential investor has entered into a confidentiality agreement with the target company prior to receiving any information and undertakes to use it only for the agreed purpose and to keep all information provided confidential; and
- During the due diligence phase and prior to the formal signing of the purchase and sale agreement, the potential investor must undertake not to engage in any purchase or sale activities or advise any other party to purchase or sell shares of the target company.
Phung Anh Tuan
Managing Attorney