Legal Article - Ma Law Firrm_ Feb2009 (en)

The merger of law firms in Vietnam for the sake of survival - Why not? Lawyer Nguyen Huu Phuoc - Phuoc & Partners

he period from mid-2005 to 2007, saw an auspicious boom for the legal services sector, particularly, for Vietnamese law limited liability companies and law firms. During this period, an unprecedented injection of foreign investment capital in conjunction with Vietnam’s spectacular yearly economic growth of over 8 percent plus continuous governmental tax exemption incentives and reductions with respect to legal advice services facilitated the strong development of the legal services sector.

T During the period from mid-2005 to 2007, an unprecedented injection of foreign investment capital in conjunction with Vietnam’s spectacular yearly economic growth of over 8% plus continuous governmental tax exemption incentives and reductions with respect to legal advice services facilitated the strong development of the legal services sector.

Also in this time, several directors of many newly established law companies and law firms decided to make their own way by resigning from wellknown domestic Vietnamese law companies and firms or foreign law firms in Vietnam. On the whole, most of them were riding the crest of the wave of imbalanced supply and demand for specialized legal services: high demand in contrast to low supply. As such, already established

Vietnamese law companies, firms, and foreign law firm branches were unable to satisfy the continuous consumer demand in Vietnam despite increased working hours and expanded company recruitment efforts. In addition, most of these companies competed for newer and more spacious offices that were more suitable for specialized legal services in more centralized areas; in recruiting more lawyers, experts of legal advice and experienced logistics team for the purpose of development. For instance, a few Vietnamese law firms took the risk of leasing an office of 400m2 in Class-A buildings in Hanoi and Saigon while concurrently hiring a 100-strong team of lawyers and staff. Despite the massive expansion of this sector, the preponderance of any divisions or separation in lieu of acquisition or merger lingered over this time because most firms actively sought their particular interests in light of the unrelenting opportunity to do business.

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owever, since the end of 2007, a number of Vietnamese law companies and firms began to fall on hard times. First, like most business sectors, the contraction of the global economy that has occurred since this time has forced foreign as well as local client to tighten their belts towards suppliers of legal advice, thus resulting in a considerable decrease in legal service fees. This in turn has enhanced competitiveness among firms; clients tended to pay per resultant case rather than by hours as a general rule in the legal sector; at the same time, the drop in client turnout left Vietnamese law companies in dire straits. Second, office leases have galloped from US $25/m2 for Class A facilities and US $17/m2 for Class B facilities to a number that is three-fold of that at present. Further exacerbating this situation, building owners began to make difficult demands for consumers of such office space including: higher deposits (equivalent to six-months rent); prepaid rent (for a period of 6 to 12 months); a signed long-term lease contract (of 3 to 5 years); as well as increases in office rent upon lease contract expiry. Third, high

inflation rates in early 2008 put Vietnamese law companies and firms under the added strain of soaring costs (mostly, fixed ones) such as stationery, travel, phone, communication costs, and particularly, labor costs. As expected, when costs rise, enterprises usually try to cut costs and/or heighten turnover. However, most costs of Vietnamese law companies and firms are fixed costs, that are difficult to adjust adequately or quickly, if at all. Case in point, firms are typically locked into lease contracts for at least two years and salaries for lawyers and staff apply for the length of their respective labor contracts. If you are able to ease labor costs, costs for staff training are also easier to cut. Having said all that, firms should not take staff-downsizing lightly because, in general, it takes you several years to train a good lawyer; if you keep staff discharged from work face to face with present difficulties, you will find no one in your need, or you will pay new staff a salary a salary you can’t realistically afford For Vietnamese law companies and firms, securing necessary loans from domestic credit banks/institutions to maintain

The Law on Corporate Income Tax, valid since January 1, 2009 thereupon removes them from the list of investment incentives and investment capital of a lawyer will be levied with a tax rate of 5% on interests from dividends, and revenue after corporate income tax with respect to Vietnamese law companies.

operations and development is often a tall order because their properties are of little value (only office computers and electronic devices and cars). In addition, Vietnamese law companies and firms stay away from trust bank loans due to their complicated procedures and high interest rates and service fees. In early 2009, extra pieces of sad news began to emerge for players in the legal services sector.

√ First, in accordance with WTO commitments of Vietnam, such sector will no longer be entitled to tax incentives and the Law on Corporate Income Tax, valid since January 1, 2009, thereupon removes them from the list of investment incentives. As such, the fact that the corporate income tax rate reduced to 25% rather than the previous rate of 28% 1 is of little comfort.

√ Second, the Law on Personal Income Tax, valid since January 1, 2009, stipulates investment capital of a lawyer will be levied with a tax rate of 5% on interests from dividends, and revenue after corporate income tax with respect to Vietnamese law companies 2 .

√ Third, health insurance costs for lawyers and staff will rise from 3% (2% for employers and 1% 1

Article 10 of the new Law on Corporate Income Tax

2

Article 3.3 of the new Law on Personal Income Tax

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for employees) to 6% of monthly salary/wages as of July 01, 2009 (where employers pay 2/3 and employees pay 1/3) 3 .

√ Fourth,

new unemployment insurance fees now stand at 2% (1% of monthly salary/wages for employees and 1% of monthly salary/wages fund for employers), which went into effect January 1, 2009 4 .

√ Fifth, until early 2010, the rate of social insurance fees will rise from the present rate of 20% (5% of monthly salary/wages for employees and 15% of monthly salary/wages fund for employers) to 22% (6% of monthly salary/wages for employees and 16% of monthly salary/wages fund for 5 employers) . Because most Vietnamese law companies pay their staff net salaries (aftertaxes), such new augmentations must be incurred by them and regarded as a noticeable, financial burden. Thus, what must Vietnamese law companies and firms do to survive the span of economic difficulties? According to IMF projections as well as Vietnam’s forecast, the 2009 global economy landscape appears bleak. Of course, cost reduction will 3

Article 13 of the new Law on Health Insurance

4

Article 102 of the new Law on Social Insurance

5

Article 91 and 92 of the new Law on Social Insurance

be prioritized by Vietnamese law companies and firms while turnover augmentation is unlikely to be met by client service fees; but as aforesaid, the costs of Vietnamese law companies and firms are mostly fixed ones that cannot be quickly dealt with. A few Vietnamese law companies and firms, that are fortunate to terminate office lease contracts upon their expiry, will have to make haste in trying to move to cheaper villas to cut costs regardless of whether this resigns them to spending a rather big sum of money on re-designing villas to the motif of a law office. Others will try to lessen costs for entertainment, staff training, and socialization and travel. Some will try to get more clients by diversifying their legal services to block drops in turnover. Some will try to increase reasonable and legitimate costs to reduce taxable incomes (for example, increasing the percentage of property amortization as regulated, strictly supervising purchases of goods or services with fully legal invoices and documents.) However, these are only short-term measures, and in general, most Vietnamese law companies and firms are on the brink of needing a rescue from this economic plight. In the current economic landscape, self-preservation is still the best way to survive rather than relying on governmental aid (for instance, extended time of paying personal income tax and exemption and reduction of corporate income tax in 2009, subsidized interest rate of

loans towards small and medium enterprises.) Therefore, the potential merger of Vietnamese law companies and firms has recently become a hot topic after the release of a few articles on this matter in 2006. To this point, there have been a variety of either direct or indirect contacts or dialogues on mergers among Vietnamese law companies and firms. In light of this, some major mergers among firms in Vietnam have become a distinct possibility in the not-so-distant future.

From 2009, some rates of insurance payment shall be increased: √ health insurance payment will rise to 6% of monthly salary/wages (as of July 01, 2009); √ unemployment insurance payment shall be 2% of monthly salary/wages (as of January 01, 2009); and √ Social insurance payment shall be 22% of monthly salary/wages (from the year of 2010).

Merger in the present economic landscape mainly aims at survival rather development. For Vietnamese law companies and firms, merging will help them save not less than 2/5

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of operation costs thanks to considerable diminution of fixed costs. In addition, this will contribute to turnover increase by diversifying the types of legal services to clients. For example, an increase in legal services with respect to labor dismissal, corporate restructuring, acquisition and merger, and dispute resolutions can offset a fall in the services of corporate establishment or legal advice to enterprises; therefore, the

merger of two Vietnamese law companies or firms with different specializations of legal service will result in an improvement in turnover through the augmentation in services. Is merger feasible for the time being? Such question is in need of an answer; it is only a matter of time if the global economy landscape, in general, and

Vietnam’s economy, in particular, remains in its current gloomy state. Furthermore, this rides on whether Vietnamese law companies and firms have been interested in the tobe-or-not-to-be matter. Merger for surviving the current economic plight and then developing together with tokens of rebounding, why not? What good for thought!

Merger will help Vietnamese law companies and firms: √ Save not less than 2/5 of operation costs thanks to considerable diminution of fixed costs; √ Contribute to turnover increase by diversifying the types of legal services to clients; and

√ Reduce pressure on finance and cash.

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