Case Study: Reverse M&A at Quy Nhon Port Explained

1. Introduction

The recent share recovery of Quy Nhon Port by Vietnam Maritime Corporation (VIMC) marks a significant development in Vietnam’s maritime sector governance. This case has attracted considerable attention from regulatory authorities, industry experts, and the business community because it is not only related to the port privatization process but also reflects the government’s commitment to protecting and managing strategic assets.

Furthermore, this case is considered a precedent in the context of governance reform and the improvement of privatization processes. Many opinions suggest that through the share recovery process, violations in the initial privatization process have been identified, highlighting inadequacies in state asset valuation, share transfer procedures, and strategic investor selection. These are crucial factors that directly impact the transparency and effectiveness of port privatization—a sector with strategic significance and a major influence on national economic development.

Background of Quy Nhon Port

Located in Binh Dinh Province, Quy Nhon Port has long been regarded as one of Vietnam’s strategic seaports due to its advantageous geographical position and role in facilitating trade between domestic and international markets. Initially, the port was privatized through a share transfer process. However, its ownership structure was closely monitored by regulatory authorities due to concerns over irregularities in the initial privatization process. These concerns included incomplete asset valuation, non-compliance with share transfer regulations, and shortcomings in the selection of strategic investors—factors that led to the share recovery to protect state interests and enhance transparency in public asset governance.

These issues have highlighted the urgent need to review and improve the privatization process in the port sector, to safeguard strategic assets and enhance the efficiency of state-owned enterprise governance. Some improvement proposals include: refining the legal framework for privatization, strengthening independent oversight by competent authorities, applying more transparent methods for business valuation, improving the process of selecting strategic investors through public auctions, and establishing a stakeholder feedback mechanism to facilitate timely policy adjustments.

2. Legal framework for M&A in the maritime industry

2.1 Maritime Sector M&A Regulations

The share recovery process is governed by Vietnam’s comprehensive maritime legal framework, including:

- The Vietnam Maritime Code 2015: This is the fundamental legal document regulating maritime activities in Vietnam, including provisions related to the management and operation of seaports.

Decree 37/2017/ND-CP on seaport business investment conditions: Regulating investment and business conditions for seaport operations, this decree sets out the standards and conditions that enterprises must comply with when engaging in port operations.

Law on Management and Use of State Capital 2014: This law regulates the management and use of state capital invested in production and business activities of enterprises, ensuring efficiency and transparency in the utilization of state capital.

2.2 Government Inspection Process and the Violations

The inspection results of the Government Inspectorate revealed several violations during the initial privatization process:

Incomplete valuation of state assets: The determination of enterprise value for privatization was inaccurate, leading to the undervaluation of state assets.

Decree No. 126/2017/ND-CP regulates the transformation of state-owned enterprises into joint-stock companies, requiring that enterprise valuation must comply with legal valuation methods. (Articles 11 and 12 of Decree No. 126/2017/ND-CP)

Inappropriate valuation methods or signs of irregularities: According to Vietnam Valuation Standard No. 12, enterprise valuation must be based on multiple methods, such as the asset-based approach and the discounted cash flow method. However, the valuation of Quy Nhon Port may have been underestimated, leading to state asset losses due to inappropriate valuation methods. According to Hoa Binh Radio and Television Station, ATC Auditing and Tax Consulting Co., Ltd. used an empirical statistical method to assess the remaining quality of port berths without collecting sufficient records and documents to accurately evaluate the actual technical condition of the assets. This resulted in a valuation that did not reflect the true value of the port. (Article 12 of Decree 126/2017/ND-CP)

Failure to comply with legal procedures in state capital transfer: The sale of Quy Nhon Port shares did not follow the correct privatization process, particularly in the transfer of shares, which showed signs of non-transparency. The Vietnam Maritime Corporation (VIMC) transferred all state capital without conducting a public auction. This may have violated regulations on the responsibility to provide complete and truthful information when valuing the enterprise (according to Article 11 of Decree 126/2017/ND-CP).

Vietnam Valuation Standard No. 12 (issued under Circular No. 122/2017/TT-BTC dated November 15, 2017, by the Ministry of Finance) provides guidelines for enterprise valuation, requiring the application of appropriate valuation methods to accurately determine the market value of an enterprise. The key contents of this standard are specified in Chapter II of Vietnam Valuation Standard No. 12.

Procedural violations in share transfer documents: The share transfer process did not comply with legal regulations, leading to errors in procedures.

Non-compliance with reporting, inspection, and supervision regulations during privatization: According to Article 50 of Decree 59/2011/ND-CP, responsible agencies must promptly report relevant matters during the privatization process, including financial handling results, valuation, disclosure of enterprise value, privatization plans, share sale results, cost settlement, and handover.
Violation of privatization procedures: According to Decree 59/2011/ND-CP, the privatization process must follow specific steps, including:

Developing a privatization plan: Establishing a Steering Committee and working groups, preparing documentation, financial inventory, determining and disclosing enterprise value, and submitting it for approval by competent authorities.
Implementing the privatization plan.
Completing the conversion to a joint-stock company: Holding the first General Meeting of Shareholders, registering the business, settling accounts, and handing over from a state-owned enterprise to a joint-stock company.

Non-compliance with regulations on selecting strategic investors: The selection of strategic investors was not conducted in accordance with regulations, affecting the transparency and efficiency of the privatization process.

Selling shares without a public auction: The direct sale of shares at Quang Ninh Port through negotiated agreements instead of conducting a public auction, as required under Point c, Clause 1, Article 30 of Decree No. 71/2013/ND-CP dated July 11, 2013, failed to ensure openness, transparency, and efficiency, potentially leading to state capital losses.
Divestment not aligned with the restructuring plan: The proposal to divest 100% of state capital in Quang Ninh Port was not fully considered in terms of basis, rationale, and effectiveness, making it inconsistent with the Vietnam Maritime Corporation (Vinalines, now VIMC) Restructuring Plan.

Specifically, according to Lao Dong Newspaper, the Government Inspectorate recommended that the Ministry of Transport reclaim 75.01% of shares in Quy Nhon Port Joint Stock Company to state ownership, ensuring that the state retains a controlling stake in this company, in line with the Vietnam Maritime Corporation restructuring plan for 2012–2015, as approved by the Prime Minister.

3. Analysis of the Equitization Process in the Quy Nhon Port Case

3.1 Legal Basis for Share Recovery and the Violations

VIMC’s share recovery action was founded on:

Findings from the Government Inspectorate’s comprehensive audit: According to Nhân Dân Newspaper, the Government Inspectorate conducted a comprehensive inspection of the privatization process of Quy Nhơn Port and issued Notice No. 1569/TB-TTCP on September 17, 2018, detailing the audit conclusions.

Violations of state capital management regulations: During the privatization of Quy Nhơn Port, several violations related to state capital management were identified, including:

Unauthorized share transfer: According to Clause 1, Article 51, and Article 49 of Decree 59/2011/ND-CP, the Prime Minister has the authority to approve the privatization plans of enterprises. However, the Ministry of Transport allowed the Vietnam Maritime Corporation (Vinalines) to transfer 75.01% of shares in Quy Nhon Port to Hop Thanh Company through direct negotiation without reporting to or obtaining approval from the Prime Minister. The Government Inspectorate conducted a comprehensive inspection of the privatization process of Quy Nhon Port and issued Inspection Conclusion Notification No. 1569/TB-TTCP on September 17, 2018.
Non-compliance with strategic investor selection regulations: The process of selecting strategic investors did not adhere to legal requirements, affecting the transparency and effectiveness of the privatization process.

Lack of clarity in strategic investor selection criteria: According to Vneconomy, the development and approval of strategic investor selection criteria did not clearly define the required conditions and industry characteristics for seaport business operations. As a result, Hợp Thành JSC was selected as a strategic investor despite lacking experience in the sector.
Unclear commitment to support: According to Dân Trí Newspaper, Hợp Thành JSC’s commitment only referred to supporting the joint-stock company’s business operations without specifying the nature of the support, as required by regulations.

Non-compliance with privatization procedures under Decree 59/2011/ND-CP: Decree No. 59/2011/ND-CP dated July 18, 2011, regulates the conversion of wholly state-owned enterprises into joint-stock companies, stating:

Clause 3, Article 6 requires consulting organizations to use accurate and objective valuation methods to establish criteria for selecting suitable investors, ensuring that the share sale process is conducted through public auction (if multiple entities register) or through a strictly controlled negotiated agreement.

In the case of Quy Nhon Port, the selection of the strategic investor (Hop Thanh Company) was conducted through direct negotiation without a public auction, failing to ensure competition and objectivity. This created a risk of undervaluing assets below their actual worth, affecting state interests and reducing the transparency and efficiency of the privatization process.

Article 51 (including its annex) requires enterprises to develop a comprehensive privatization plan, including enterprise valuation, conducting a public auction (where mandatory), and converting a 100% state-owned enterprise into a joint-stock company according to a specific procedure.

At Quy Nhon Port, the share sale was conducted through direct negotiation instead of a public auction, leading to a lack of transparency and a potential loss of state assets. Additionally, delays in financial settlement for privatization and incomplete handling of outstanding debts further indicate that the process did not adhere to the prescribed procedures, impacting the accurate determination of enterprise value and state capital.

3.2 Implementation Timeline

According to Báo Đầu tư, the Quy Nhon Port case has yet to be fully resolved due to obstacles in determining and settling the legitimate benefits owed to Hop Thanh Company under the transfer contract. Although VIMC reclaimed 75.01% of the shares to state ownership as per Inspection Conclusion No. 1566/KL-TTCP, Hop Thanh Company has not cooperated in determining this value since 2022. VIMC has repeatedly requested meetings and reported the issue to the Ministry of Transport and the Government Inspectorate but has not received specific guidance. Currently, VIMC has proposed that the Ministry of Construction take the lead in resolving these difficulties.

To fully resolve the equitization issue at Quy Nhon Port, the following steps need to be taken:

Determine and settle the legitimate benefits: VIMC and Hop Thanh Company must collaborate to agree on calculation methods and specific figures.
Strengthen the role of regulatory authorities: The Ministry of Transport, the Government Inspectorate, and the Ministry of Construction must intervene and provide guidance to address obstacles and ensure transparency.
Hold individuals and organizations accountable: Conduct reviews and enforce accountability for violations in the equitization process to uphold legal integrity and prevent similar infractions.
Improve the equitization framework: Draw lessons from this case, amend and supplement legal regulations to enhance transparency, fairness, and safeguard the interests of the state and relevant stakeholders.

4. The Impact of the Quy Nhon Port Case on the Port Industry

4.1 Impact on Port Governance and Operations

The restoration of state ownership has led to several significant changes:

Strengthening State Management of Strategic Port Assets: After the restoration of state ownership, the government regained primary control over Quy Nhon Port, ensuring that strategic decisions related to the port align with national interests and the sustainable development of the maritime sector.
Enhancing Operational Oversight Mechanisms: Returning to state management has driven the establishment and enforcement of stricter oversight mechanisms for port operations, thereby improving efficiency and transparency in management.
Implementing Stricter Compliance Procedures: Quy Nhon Port has adopted more rigorous compliance procedures to ensure that all activities adhere to legal regulations and international standards, enhancing the port’s reputation and competitiveness in the global market.

The restoration of state ownership at Quy Nhon Port not only reinforces government oversight of strategic assets but also necessitates the adoption of modern digital technologies to enhance operational efficiency and ensure transparency. State control has facilitated the implementation of stricter oversight mechanisms while requiring rigorous compliance procedures to align all activities with legal regulations and international standards.

4.2 Impact of the Case on State-Owned Enterprise Equitization Policy

The equitization of Quy Nhon Port has raised significant legal and managerial issues in the process of transitioning state-owned enterprises to private ownership. This is not merely an isolated case but also reflects broader challenges in implementing legal regulations to ensure transparency, fairness, and the protection of public assets. This event has had far-reaching consequences for Vietnam’s port industry.

Increased Oversight of the Port Privatization Process: This event has highlighted the importance of strict supervision over the port privatization process to ensure transparency, fairness, and the protection of state and stakeholder interests.
Strengthening Legal Enforcement: The case has driven stricter enforcement of legal regulations related to the management and operation of seaports, thereby improving the overall quality and efficiency of the sector.
Higher Transparency Requirements for Future Transactions: This event has set higher standards for transparency and accountability in transactions involving public assets, particularly in the port sector, to prevent similar violations in the future.

5. Proposed Solutions to Improve the Privatization Process

Some proposals for improving the equitization process:

Enhancing the Legal Framework and Process: Develop, review, and approve privatization plans in accordance with Decree 59/2011/ND-CP, ensuring that enterprise valuation, share transfer, and financial settlements are conducted fully and transparently.
Improving the Strategic Investor Selection Process: Establish clear and specific criteria for selecting strategic investors, apply public auctions to ensure competition and transparency, and choose investors with appropriate expertise and experience.
Strengthening Independent Oversight and Control: Establish a comprehensive monitoring mechanism, from reviewing and inspecting documentation to reporting results, enabling timely detection and resolution of violations, ensuring that the entire privatization process complies with the law and protects state interests.

The impacts underscore the importance of selecting an appropriate port management model that balances operational efficiency with transparency and stringent public asset management. According to Transport Magazine, there are four main port management models widely applied worldwide:

Public Service Port: The government owns and operates all port activities, from infrastructure management to service provision.
Tool Port: The government owns and maintains the infrastructure, while private enterprises handle port operations and service provision.
Landlord Port: The government owns the land and basic infrastructure, while private enterprises lease the facilities to invest in and operate port activities. This model is common in major ports such as Rotterdam and Singapore.
Private Port: The entire port, including infrastructure and operations, is owned and managed by private enterprises.

In Vietnam, the most commonly applied model is the Public Service Port, as seen in Hai Phong Port and Saigon Port. In the past, these ports were directly invested in and managed by the state through wholly state-owned companies such as Hai Phong Port One Member Limited Liability Company and Saigon Port One Member Limited Liability Company.

Over time, to enhance management and operational efficiency, these ports have transitioned to a “landlord port” model. In this model, the state retains ownership of all land and water areas within the port, investing in port infrastructure such as berths, while private entities lease the infrastructure to develop storage facilities, invest in equipment, and provide cargo handling, transportation, and warehousing services.

Adopting this model helps strike a balance between public and private interests, leveraging private sector capital and flexibility in port operations while ensuring that the state retains control over strategic assets.

6. Future Outlook

The Quy Nhon Port case has established important precedents for:

Port sector governance reforms: The case has driven discussions on the need to reform governance mechanisms in the port sector to ensure efficiency, transparency, and compliance with international standards.
Privatization process improvements: The incident has exposed flaws in past privatization procedures, prompting efforts to refine and enhance these processes to ensure fairness, transparency, and effectiveness.
Regulatory compliance standards: The case has raised the bar for compliance with legal and international regulations in port management and operations, improving the credibility and competitiveness of Vietnam’s port sector globally.

7. Conclusion

Effective port management not only enhances competitiveness but also ensures the sustainable development of the maritime industry. Adhering to modern governance regulations and collaborating with legal advisory firms play a crucial role in optimizing operations and minimizing risks.

VIMC’s restoration of shares at Quy Nhon Port marks a turning point in Vietnam’s maritime governance, demonstrating the Government’s commitment to strictly managing strategic assets and complying with stringent regulations. This not only improves governance efficiency and ensures the security of port operations but also fosters a transparent and stable trading environment for the future.

At the same time, partnering with professional law firms for in-depth legal advisory services helps businesses navigate complex legal issues, protect their interests, and promote the sustainable development of the maritime industry. With extensive experience in M&A, the team at Harley Miller Law Firm possesses deep expertise in both domestic and international legal regulations, assisting businesses in optimizing transactions, ensuring transparency, and safeguarding their interests in privatization and strategic share acquisitions.

Case Study: Reverse M&A at Quy Nhon Port: Legal Analysis & Implications