Issue 030921 – Procedures for private placement of bonds of a joint stock company

Dear Valued Clients,

Bond offering is one of the capital mobilization channels of enterprises besides offering shares, raising equity or borrowing from banks. Within the scope of this article, we would analyze the procedures for the private placement of bonds of a joint stock company as well as comment on this form of capital raising.

Relevant legislation

The following legal documents are referenced in this article:

1.   Law on Securities No. 54/2019/QH14 promulgated by the National Assembly on November 26, 2019 (“Law on Securities 2019”);

2.   Law on Enterprise No. 59/2020/QH14 promulgated by the National Assembly on June 17, 2020 (“Law on Enterprise 2020”);

3.   Decree No. 163/2018/NĐ-CP dated December 4, 2018 regulating the issuance of corporate bonds (expired on January 1, 2021) (“Decree 163/2018/NĐ-CP”);

4.  Decree No. 81/2020/NĐ-CP dated July 9, 2020 amending and supplementing a number of articles of Decree 163/2018/ND-CP (which expires on January 1, 2021) (“Decree 81/2020/NĐ-CP”);

5.  Decree No. 153/2020/NĐ-CP dated December 31, 2020 stipulating the private offering and trading of corporate bonds in the domestic market and the offering of corporate bonds to the international market (“Decree 153/2020/NĐ-CP”).

Overview of bond and private placement of bonds

 1. Overview of bond 

Article 4.3 of the Law on Securities 2019 stipulates: “Bonds are securities that certify their holders’ lawful rights and interests to part of the debt of the issuer”. Thus, the bond purchasers shall be the creditors of the enterprises. As a result, bonds provide more guarantee to investors as they would be paid priority over company shareholders – who hold shares – in the event of a company bankruptcy or dissolution.

Bonds are issued by enterprises for the main purpose of raising capital. The capital obtained from a bond can be considered as a long-term loan. Bonds can be offered for private placements or issued to the public depending on the conditions and purposes of the business. However, within the scope of this article, we would only focus on analyzing the procedures for private placement of bonds in the domestic market of joint stock companies.

2. Overview of private placement of bonds

 Article 4.20 of the Law on Securities 2019 stipulates: “Private placement of securities means an offer for sale of securities not falling into the case stipulated in clause 19.(a) of this article[1] and made via either of the following methods:

a) An offer for sale to less than one hundred (100) investors excluding professional securities investors;

b) An offer for sale to professional securities investors only”.

The Law on Securities 2019 provides two methods of private placement of bonds: (i) the offering of non-convertible bonds without warrants and (ii) the offering of convertible bonds or bonds with warrants.

Currently, the Law on Securities 2019 does not specifically give provision on the offering of non-convertible bonds without warrants. However, this method is understood as an enterprise offering bonds without any other benefits except the interest of the bond. Offering for sale of convertible bonds or bonds with warrants is an enterprise offering all kinds of bonds in accordance with Articles 4.3 and 4.5 of the Law on Securities 2019[2]. The difference between (ii) and (i) is that investors have the right to convert bonds into shares or buy more shares based on the number of bonds holding. This gives investors other options than buying a non-convertible bond with no warrants.

The private placement of bonds will have certain differences in terms of conditions and procedures between a public company and a non-public company. In the next part of the article, we will analyze these issues in turn.

Conditions of private bond offering 

1. For the offering of non-convertible bonds without warrants

Conditions for offering non-convertible bonds without warrants of a joint stock company are specified in Article 9.1 of Decree 153/2020/NĐ-CP as follows:

a)    Being established and operating in accordance with the laws of Vietnam;

b)     Having fully paid principal and interest on issued bonds (if any) or having fully paid out debts on maturity within the three (03) years immediately preceding the issue tranche, except in the case of an offer of bonds to creditors being selected finance institutions;

c)      Satisfying financial safety ratios and operational safety ratios as prescribed by specialized laws;

d)      Having an issue plan approved and consented to by the authorized level as prescribed in Article 13 of Decree 153/2020/NĐ-CP;

e)     Having financial statements of the year immediately preceding the year of the issue which have been audited by an auditor satisfying the conditions prescribed in Decree 153/2020/NĐ-CP;

 f)       Bond purchasers are professional securities investors.

2.  For the offering of convertible bonds or bonds with warrants

Conditions for offering convertible bonds or bonds with warrants of joint-stock companies are specified in Article 9.3 of Decree 153/2020/NĐ-CP as follows:

a)    The subjects participating in the offering are professional securities investors and strategic investors, in which the number of strategic investors must be less than 100 investors;

b)  The individual offers of convertible bonds, bonds with warrants must be separated by at least 06 months from the date of completion of the latest offering;

 c)   The conversion of bonds into shares and the exercise of warrants must satisfy the regulations on the foreign investor’s ownership ratio as prescribed by law;

d)   Other conditions similar to the offering of non-convertible bonds without warrants method are satisfied (similar to points b to point e, Section 1).

3.  Comment on the conditions for private placement of bonds 

Compared to Decree 163/2018/NĐ-CP (as amended and supplemented by Decree 81/2020/NĐ-CP), Decree 153/2020/NĐ-CP for the first time specifies that the investors of bonds must be: (i) professional investors or (ii) strategic investors. In addition, Decree 153/2020/NĐ-CP gives more provisions on the liabilities and rights of bond investors. Such change indicates that the legislators are aiming to ensure the sustainable and professional development of the market. At the same time, this article also ensures the consistency between legal legislations when the concept of professional investor has been explicitly regulated in the Law on Securities 2019. In short, giving clear provisions determining the liabilities as well as the rights of bond investors shall increase the awareness of the investors in connection with their investment products.

Additionally, compared to the offering of non-convertible bonds without warrants, the offering of convertible bonds or bonds with warrants is limited in terms of time between the offerings. Such a difference is regulated in Article 9.3(d) Decree 153/2020/NĐ-CP. Besides, Decree 153/2020/NĐ-CP also stipulates the conditions for issuing bonds in tranches in Article 10.1. These two regulations create favorable conditions for enterprises to mobilize capital with regard to certain schedules as long as the needs of capital mobilization are proved at different times.

In general, Decree 153/2020/NĐ-CP has more specific and more practical regulations on bond offering conditions than Decree 163/2018/NĐ-CP. These regulations contribute to helping joint stock companies comply with the conditions regarding the private placement of bonds – one of the important forms of capital mobilization of enterprises.

Procedures for private placement of bonds 

1. General requirements 

Article 11 of Decree 153/2020/NĐ-CP stipulates the procedures for bond offering by joint-stock companies. The Article provides procedures for: (i) offering for sale of non-convertible bonds without warrants of public companies and non-public companies; offering for sale of convertible bonds and bonds with warrants of non-public companies and (ii) offering for sale of convertible bonds and bonds with warrants of public companies.

Before performing the procedure for each type of bond private placement, all bond offerings must satisfy the following requirements:

Firstly, a joint stock company must develop a plan for a private placement of bonds and submit to the competent authority for approval and consent in order to provide a basis for information disclosure  before the bond issuance date (such authority is usually the General Meeting of Shareholders, unless otherwise provided in the company’s charter).

Secondly, a joint stock company must prepare a bond offering dossier as prescribed in Article 12.2 of Decree 153/2020/NĐ-CP. This dossier shall include:

a)  Bond issuance plan;

b) Documents for publishing information about the bond offering;

c) Contracts signed between the issuer and service providers related to the bond issuance, including:

–  Contract signed with consulting organization on bond offering documents;

–  Contract signed with the bidding organization, underwriter, bond issuance agent in accordance with the bond issuance method specified in Article 14 of Decree 153/2020/NĐ-CP, except for the case of credit organization sold directly to bond investors;

–  Contract signed with the bond registration and depository organization;

– A contract signed with the representative of the bond holder in accordance with the securities law (if any) to supervise the implementation of the commitments of the issuer;

–  Contract signed with the security asset management agent for secured bonds (if any);

–  Contracts signed with other organizations related to the bond offering (if any).

d)  The financial statement of the year preceding the audited year;

e)  The credit rating results of the credit rating organization for the bond issuer and the type of bond issued (if any);

f)  A competent authority’s decision approving the bond issuance plan;

g)  Written approval of a competent state management agency in accordance with specialized laws (if any);

h)   Documents proving the satisfaction of financial safety ratios and operational safety ratios for enterprises operating under specialized laws;

i)   For the offering of convertible bonds or warrant-linked bonds of public companies, apart from the documents specified at point a, point b, point c, point d, point e, point f and point g of the above section, the bond offering dossier also includes:

–    Application for registration of an offer according to the form in Appendix I issued with Decree Article 13.2(a) Decree 153/2020/NĐ-CP.

–    A copy of the decision of the General Meeting of Shareholders/Board of Directors approving the bond offering document.

–   The enterprise’s commitment not to violate the regulations on cross-ownership in accordance with the Law on Enterprises at the time of converting the bonds into shares and the time of exercising the warrant’s rights.

–  A written certification of the bank or foreign bank branch that the enterprise opens an escrow account to receive money to buy convertible bonds or warrant-linked bonds of the offering.

Third, a joint-stock company must disclose information about the results of the bond offering as prescribed in Article 20 of Decree 153/2020/NĐ-CP.

Fourthly, a joint-stock company must register for a change in its charter capital within 10 days from the date of completion of the conversion of bonds into shares (in the case of a convertible bond offering).

The following section is the procedures for the private placement of bonds in the domestic market of a joint stock company in each case:

2. For non-public companies and public companies offering non-convertible bonds without warrants 

The procedures for this case are specified in Article 11.1 of Decree 153/2020/NĐ-CP. Accordingly, a joint stock company needs to:

a) Prepare a bond offering document (components of the application include the documents mentioned in Section 1, part [Procedures for private placement of bonds]);

b) Disclosure of information before the offering;

c) Organize bond offering according to approved bond offering methods. Enterprises must complete the distribution of bonds within 90 days from the date of information disclosure before the bond offering;

d) Register and deposit bonds.

3. For public companies offering convertible bonds, warrant-linked bonds 

The procedures for this case are specified in Article 11.2 of Decree 153/2020/NĐ-CP. Accordingly, a joint stock company needs to:

a) Prepare a bond offering document (components of the application include the documents mentioned in Section 1, part [Procedures for private placement of bonds]);

b) Send 01 set of bond offering documents as prescribed to the State Securities Commission. Within 10 days from the date of receipt of a complete and valid dossier, the State Securities Commission shall approve it in writing; in case of refusal, the State Securities Commission shall reply in writing and clearly state the reason;

c)  After the State Securities Commission approves, the enterprise discloses information before the offering and organizes the bond issue (the publication period is similar to Section 2, part [Procedures for private placement of bonds]). The proceeds from the offering must be transferred to an escrow account opened at a bank or foreign bank branch. The opening and use of escrow accounts shall be applied in accordance with the provisions of the Decree No. 155/2020/NĐ-CP);

d)  Within 10 days from the date of completion of the offering, the enterprise shall report the results of the offering according to the form in Appendix III attached to Decree 153/2020/NĐ-CP, enclosed with the bank’s certification, foreign banks branch and banks where the escrow account is opened, the proceeds shall be submitted to the State Securities Commission. Within 03 working days from the date of receipt of the complete report on the offering results, the State Securities Commission shall notify the issuer and post it on the website of the State Securities Commission on the receipt of the report on the results of the offering;

e)     After the State Securities Commission notifies the receipt of the report on the results of the offering, the issuing enterprise is entitled to release the proceeds from the offering;

f)      Issuing enterprises register and deposit bonds (registration and depository period similar to Section 2, part [Procedures for private placement of bonds]).

4.  Comment on procedures for bond offering

In general, procedures for the private placement of bonds in Decree 153/2020/NĐ-CP have many changes in a more specific and clear direction than in Decree 163/2018/NĐ-CP.

Firstly, Decree 153/2020/NĐ-CP has more specific regulations on contracts signed between issuers and service providers related to the bond issuance. This makes it easier for businesses to prepare full bond offering documents.

Secondly, regarding the bond issuance plan, Decree 153/2020/NĐ-CP has added bond outstanding/equity as a criterion to evaluate the financial indicators of enterprises for 3 consecutive years preceding the year of issue and the change after the release. Decree 153/2020/NĐ-CP also stipulates the criteria for selecting strategic investors and the list of strategic investors for the issuance of convertible bonds and the issuance of warrant-linked bonds as part of the bond issuance plan.

Thirdly, temporal changes include:

–  Shorten the time limit for bond registration and depository to 05 working days and clearly distinguish between ordinary bonds and individual convertible bonds, bonds with individual warrants.

–  Shorten the time limit for information disclosure before the bond issuance or the next offering to 01 day.

–  Increase the time limit for information disclosure on bond offering results to 10 days.

In short, the regulations on the procedures for the private placement of bonds of Decree 153/2020/NĐ-CP are developed in a more specific, clearer way with shorter time – procedures and focus on professional investors as well as strategic investors. This direction shows that the law on enterprises and securities is creating a professional, safe and transparent investment environment for large investors. At the same time, businesses also benefit from mobilizing abundant capital from professional investors. Therefore, it will be more convenient for enterprises to conduct their business activities.

Kind regards, 

ENT Law LLC

The full version of this Legal Aritcle can be found here.