In this article, our Managing Partner Nguyen Van Phuc will address the shares of a real estate company is considered a project transfer. The article was published in The Saigon Times No. 10-2024, dated on March 07, 2024.
Currently, there are many methods of mergers and acquisitions (M&A) for investors to implement a real estate project, such as receiving transfer of shares, contributed capital in the project company, receiving transfer of project, receiving transfer of assets of the project company, etc. However, two common forms that many investors often use in practice are receiving transfer of shares, contributed capital of the project company (hereinafter referred to as "receiving transfer of shares") and receiving transfer of the project. Although they are regulated as two different legal procedures, the two procedures are often confused in practice. In particular, the Da Nang City High People's Court in an appeal decision in 2022 also considered a share transfer transaction in a real estate project company as a project transfer. Is this reasonable under the current laws?
1. Does the company need the approval of the Provincial People's Committee for a share transfer transaction?
Source: The Saigon Times
According to the content of Judgment No. 29/2022/KDTM-PT[1] dated 16/11/2022 of the Da Nang City Higher People's Court on the share transfer dispute between the plaintiff Mr. Nguyen Van K and the defendants Mr./Ms. Ha Van A, Duong Cong D, Nguyen Tri Q and Dao Hoang H. The plaintiff and the defendants entered into Share Transfer Agreement No. 3101/2017-G on August 31, 2018. Accordingly, the parties agreed that the defendant would transfer all of its shares in Company G to the plaintiff. During the progress of the implementation of the contract, the Defendant requested the Plaintiff to provide commitments on the progress of the implementation of the project, to prove its financial capacity, to prove its ability to implement the project, and to commit not to be a project broker as instructed by the Khanh Hoa Provincial People's Committee, so that the Defendant could submit documents to this authority for the approval of the transfer. On the contrary, the plaintiff believes that it is sufficient for the defendant to carry out legal procedures at the Department of Planning and Investment to change the information of the shareholders/members of Company G in accordance with the share transfer procedure. Since the parties insist on defending their views, they cannot perform the work required by the other party. Therefore, the defendant returned the entire deposit and the amount paid by the plaintiff to the plaintiff. As the plaintiff believed that the defendant had breached its contractual obligations, the plaintiff filed a lawsuit to demand that the defendant pay the same amount of deposit and other damages. At the preliminary stage, the Khanh Hoa People's Court partially accepted the plaintiff's claim. Both the Plaintiff and the Defendant subsequently appealed (in whole or in part) the judgment of the trial court. The case continued to be heard by the Da Nang City Higher People's Court, which accepted the Defendant's appeal and therefore did not accept the Plaintiff's claims. It is noteworthy that in its judgment section, the Court of Appeal assessed that the Plaintiff does not have sufficient financial capacity as required by Clause 3 Article 49 of the Law on Real Estate Business 2014, in particular, this provision sets the conditions for the transfer of all or part of the real estate project as follows: "The transferee must be a real estate company, acquire financial competence, and undertake to continue to conduct the business in accordance with the provisions of the law and ensure that the project is conducted in a proper manner and according to the plan."
Thus, with the above statement, it can be seen that the opinion of the Court of Appeal considers the transfer of shares of Company G as a project transfer activity, which requires the fulfillment of the conditions set forth in the Law on Real Estate Business 2014.
2. Is the decision of the Appeal Court reasonable?
In our opinion, it is not really reasonable for the Da Nang City People's Court to consider the share transfer transaction of Company G as a project transfer transaction, for the following reasons:
First, the share transfer transaction and the project transfer transaction have differences in the subjects of the transactions and the subjects involved in the transaction. According to the current regulations, shares are parts of the charter capital that have been divided into equal parts, and the shareholders are individuals who own shares in the company, not the company itself. The ownership of shares in the company allows the shareholders to express opinions and make decisions on the company's business activities, depending on the number of shares they hold. A share transfer transaction is the transfer of share ownership rights from an existing shareholder to other existing shareholders of the company or to another individual/organization. Meanwhile, a real estate project is an activity of the Company in which the Company will spend medium-term or long-term capital to conduct real estate investment and business activities. Since the company is an organization that invests capital in a real estate project, the company is the investor of the project, not the shareholders of the company. Therefore, the transfer of real estate projects where the object of the transaction is a real estate project, where the project company will transfer the real estate project to another company. In contrast to the present dispute, the Plaintiff and the Defendant have entered into a contract to transfer the shares of Company G with the purpose of transferring the shares held by the defendant (who are the shareholders of Company G) to the Plaintiff. Therefore, this cannot be considered as a real estate project transfer transaction.
Second, as mentioned above, the investor of the real estate project in this case is Company G, not the Defendant or the Plaintiff. Therefore, the transfer of shares from the Defendant to the Plaintiff does not change the investor of the real estate project. Therefore, it is unreasonable to require the Plaintiff to meet the requirements of financial capacity and commitment to the progress of the project, which may have been met by Company G at the time the project was approved for implementation. In addition, considering the provisions of Clause 3 Article 49 of the Real Estate Business Law 2014, the investor who receives the whole or part of a real estate project must be a real estate company. Applied to this case, the Plaintiff is an individual, obviously not a real estate company, so it is even more unreasonable for the Court of Appeal to consider the transaction between the parties as a real estate project transfer transaction.
Third, the transfer of shares and the transfer of real estate projects are different activities, which have been specified by laws on conditions, regulations and procedures. Therefore, the attempt to unify these two procedures, for whatever reason, is highly unlikely to be considered reasonable. In the above case, if Company G has only one real estate project, the transfer of shares from the Defendant to the Plaintiff may be aimed at facilitating the plaintiff's management of Company G to carry out this real estate project. This is not an uncommon case in practice, with the inherent difference between the two transactions, many investors choose the option of transferring shares to be able to invest in real estate projects in a more convenient way, including tax optimization. However, given the rather clear distinction in the legal provisions on the nature of the two types of transactions, the attempt to merge them, as the Court of Appeal did in the aforementioned case, unintentionally restricts the rights of the parties in choosing the form of transaction.
In summary, as two fundamentally different methods of M&A transactions have been established in terms of their nature, subject matter and other factors, investors have the right to choose the transaction methods they find most profitable and suitable to their desires. The failure of dispute resolution bodies to clearly distinguish between these two types of transactions may lead to bad precedents for capital transfer activities in the future, when the seller may impose unreasonable demands on the buyer.
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