Post-merger disputes: Old lessons but businesses are still entangled

The post-merger dispute between EQuest and Ms. Pham Bich Nga (related to the investment/transfer of ownership and operation of Hanoi Star Education System) is a "case study" to look directly at post-M&A risks in Vietnam: the buyer has a majority,  have been paid, but can still be "stuck" at the stage of operational control, legal transfer and real control at the target company.

Right from the pre-M&A stage, investors need to conduct comprehensive due diligence on the seller and the target business.

When the buyer denounces the seller

According to public information, the deal signed in December 2021, Ms. Nga and her group of associates transferred 80% of the ownership and operation of the Hanoi Star Education System to EQuest with a total transaction value of more than VND 1,000 billion. This transaction consists of two main campuses: (1) Hanoi Star Primary & Secondary School (under Vietnam Star Education Joint Stock Company) and (2) Hanoi – Hoang Mai Star School (under Hoang Mai Star Education Joint Stock Company). After the merger, EQuest still trusts to appoint Ms. Nga to continue to be the General Director of Vietnam Star Company to run the Hanoi Star School. At the same time, Ms. Nga also holds 20% of shares and is a member of the Board of Directors of Vietnam Star.

However, according to the EQuest statement, during the management period after the M&A, Ms. Pham Bich Nga was accused of serious violations of the law. Specifically, EQuest accused Ms. Nga of showing signs of "embezzlement of assets": Taking advantage of her position as General Director, she made illegal withdrawal transactions, appropriating hundreds of billions of VND from the financial resources of Hanoi Star School. This behavior is believed to have taken place for more than a year after EQuest took over, seriously infringing on the company's assets[1]. The Vietnamese American K-12 side said that it had repeatedly sent written notices and emails asking Ms. Nga to refund the withdrawn amount and remedy the consequences, but Ms. Nga did not cooperate, constantly delaying citing personal reasons. As a result, in July 2023, the Board of Directors of Vietnam Star Company met and dismissed Ms. Pham Bich Nga's executive authority at Hanoi Star School. However, because she still owns a minority stake, Ms. Nga continued to hold a seat as a member of the Board of Directors of Vietnam Star throughout the following process.

EQuest also accused Ms. Nga of showing signs of "fraudulent appropriation of property" related to the Hanoi – Hoang Mai Star School. This new facility has been legally completed (with an operating license) and facilities by the end of 2023, preparing to go into operation. However, Ms. Nga suddenly unilaterally announced to stop cooperating with EQuest and did not hand over the ownership, management and operation of Hoang Mai Star School to EQuest (Hoang Mai Star Company owned by Viet My K-12) as originally agreed. Since the opening of Hoang Mai School until now, Ms. Nga's group has completely refused to cooperate or make any handover moves, contrary to the commitment in the contract. Ms. Nga even held a ceremony to launch a new brand identity and philosophy system for Hoang Mai Star School (August 2024) to legalize the occupation of this facility separately. At the same time, she made false and untrue statements about EQuest's shareholder and investor relations, affecting the group's reputation in the education community and with regulators

Key points in the post-merger dispute of the transaction

It is worth noting that the dispute occurred in the post-merger stage with disputes over executive control, legal documents, voting rights, seals, bank accounts, operations teams, and media discourse.

The right to control and operate the business           
After the deal was completed, Viet My K-12 held 80% of the shares.  However, the founder still holds 20% and has a role in the Board of Directors, leading to a common picture in deals that operational responsibility and organizational power may not "match" with the ownership structure if the internal control mechanism is not transferred synchronously.

Transfer of legal documents

The second key is that the seller did not hand over the ownership/management/operation at the Hoang Mai facility after this facility was "granted an operating license" and was about to go into operation.  In the education sector, "legal assets" such as educational activity licenses, decisions on establishment permits, fire protection documents, lease/land contracts, etc. decide on the lawful operation rights of enterprises. This raises the risk of "the purchase is still not operational", or "operating but disputing the right to operate".

Financial management in the transition period        
The buyer alleged that the "illegal withdrawal" took place for more than a year, the founder remained in the role of General Director.  If the case is placed in the post-M&A management framework, this is a very "traditional" risk when the buyer prioritizes stability, keeping the founder to maintain quality/customers, but has not had time to erect financial control barriers, the seller has caused significant damage to the business.

Root causes and system weaknesses leading to disputes

The control transfer mechanism still has loopholes  
The dispute arose around the failure to hand over control even though the transaction was completed and the buyer controlled 80% of the target company's shares.  In the practice of M&A transactions, this case is usually secured by the parties by the provisions in the prerequisites that need to be carried out in order for the transaction to be completed/paid. In addition, the buyer can agree to retain part of the transaction value until the handover is completed, as well as establish a compensation mechanism strong enough so that when the seller "does not hand over", he will suffer heavy consequences and damages.

Lack of post-M&A control mechanism from the beginning  
Many "hidden" risk problems are often revealed at the stage of operation.  With the education deal, if the right to sign the bank, the seal, the right to approve spending, and the right to access the tuition/ERP system are not immediately locked, the "actual operation" may still lie in the founder/seller team even though the papers have changed hands. This is a procedural weakness, not just "human error".

Signing of the agreement between EQuest Education Group and Ms. Pham Bich Nga – Founder of Hanoi Star Education System. Source: EQuest

Some solutions to avoid post-M&A disputes

The conflict between EQuest and Ms. Pham Bich Nga brings many valuable lessons for mergers, especially in the field of education. In order to overcome the consequences and prevent similar risks, it is necessary to combine many legal, administrative and business strategy solutions as follows:

Strengthen due diligence of partners and deal conditions: Right from the pre-M&A stage, investors need to conduct comprehensive due diligence on the seller and the target business. Carefully assessing the reputation and business ethics of the founder, as well as checking the legal status of the target company's assets will help detect potential risks early. Choosing a partner with a similar vision and culture is also very important so that the company transition process is more or less unnecessary risk to people. In the field of education, it is necessary to further evaluate the educational philosophy and the founder's commitment to quality, avoiding the case of disagreement on the future orientation, which is also a point that the buyer needs to pay attention to.

Draft a strict contract with a strong enough binding mechanism: M&A contracts need to have detailed terms that protect the buyer in case the seller breaches the commitment. For example, a retention/escrow of a portion of the transfer funds can be applied for a certain period of time, which can only be fully disbursed when the seller completes the handover obligation and there is no wrongdoing. In addition, it is necessary to clearly stipulate sanctions and penalties for violations if the seller does not transfer the property or commits acts of causing damage after the M&A. In the EQuest deal, if there is a heavy penalty clause or a mechanism to force the legal handover of Hoang Mai School, Ms. Nga will carefully consider when causing "difficulties" for the new owner. Non-compete clauses or a commitment not to harm the after-sale business should also be included, in order to prevent the former founder from using influence to hinder the company's operations.

Improve corporate governance and internal control after the merger:  The post-M&A stage is considered the most challenging, requiring investors to quickly establish a new governance system while still ensuring consensus from the old side. To avoid gut withdrawal cases,  it is necessary to strengthen financial control soon. In the world, similar incidents have also occurred when the seller before handing over has caused significant damage to the buyer[2]. The method of appointing reliable financial personnel immediately, applying transparent accounting standards, and decentralizing the authority to approve expenditures clearly to prevent an individual from withdrawing money on their own. Periodic internal audits and monitoring of the former manager's activities are also essential. If EQuest soon brings the control team into the Hanoi Star School, it can detect and prevent abnormal behavior before the damage is too great. At the same time, it is advisable to gradually reduce the dependence on the former founder: have a route to replace key personnel or limit the scope of their authority (for example, assign them an advisory role instead of direct management). This ensures that new investors grasp the real power, avoiding the situation of "giving eggs to evil" like the case of Ms. Nga.

Ensure timely legal updates and ownership procedures: In the education industry, important assets such as school operation licenses, land use rights, school branding need to be transferred to new legal entities immediately after M&A. Parties should actively coordinate with the authorities to register changes in shareholders.  legal representatives of companies that own schools quickly, avoiding the seller from holding a key legal role for too long. The solution to this is to divide it into several stages of transfer. For example, complete the transfer of land name, license first, and then transfer the last money. The strictness of legal procedures will close the loopholes for partners to make it difficult in the process of enforcing ownership.

Finally, in all solutions, the interests of students, parents and teachers should be put first. Conflicting parties must ensure that stable learning activities are maintained at the school, not allowing disputes to affect teaching and learning. A stable and transparent educational environment will avoid harm to learners and maintain the reputation of the entire private education industry.

The EQuest dispute – Pham Bich Nga emphasizes an "old but always new" truth in M&A: completing a transaction is not a destination; The post-merger is the place where the real victory belongs to both parties, the seller or just the buyer. The case once again shows that in order to avoid post-M&A disputes, businesses must consider that controlling and managing the risk of a deal is not a simple task, requiring the participation of professional and experienced consulting units.

Lawyer Nguyen Van Phuc

HM&P Law Firm