Convertible Instruments are increasingly used by investors in Vietnam as a workaround for the limited classes of preference shares recognised under local company law.
Many international investors arrive expecting Delaware-style preference shares — liquidation preference, full-ratchet anti-dilution — but Vietnamese company law recognises only a limited set of preference share classes, creating a meaningful gap that must be bridged with alternative structuring. This briefing, prepared by IVLF Advisors’ private equity practice, analyses the gap between international market practice and Vietnamese law on preference shares and convertible instruments, along with structuring alternatives that hold up in practice.
Preference share classes recognised under Vietnamese law
The 2020 Enterprise Law (as amended by Law No. 76/2025/QH15) recognises four classes of preference shares: voting preference shares, dividend preference shares, redeemable preference shares, and other preference share classes as set out in the company charter under Article 114. This is a closed list — a company cannot simply invent an entirely new preference share class outside this framework without risking enforceability.
Why a Delaware-style liquidation preference is hard to replicate intact
A Delaware-style liquidation preference allows an investor to recover a multiple of its investment before the remainder is distributed to common shareholders on a liquidation or acquisition. Vietnamese company law has no direct equivalent concept; the priority ranking on asset distribution during liquidation is governed by bankruptcy/dissolution law, not automatically by a contractual arrangement among shareholders.
Redeemable preference shares as an alternative: limits on the source of funds for redemption
Redeemable preference shares are the closest practical substitute for a liquidation preference — the company commits to repurchase the shares on agreed conditions. However, redemption may only be funded from the company’s lawful sources (charter capital cannot fall below the statutory minimum, and redemption cannot proceed if it would render the company insolvent) — a limitation foreign investors frequently underestimate.
Convertible bonds and convertible loans: issuance conditions and FX complications for foreign investors
Convertible bonds and convertible loans are common instruments for early funding rounds. For foreign investors, a convertible loan is typically treated as a medium/long-term foreign loan and must be registered with the State Bank of Vietnam under Circular 12/2022/TT-NHNN if the term exceeds one year — a procedural step frequently missed when drafting off an international SAFE/convertible note template.
SAFEs and newer instruments: the risk of no corresponding legal framework
A SAFE (Simple Agreement for Future Equity) has no direct corresponding legal framework under Vietnamese law — it is essentially a civil contractual undertaking, not a securities or debt instrument clearly defined by statute. Using a SAFE in Vietnam requires careful drafting to ensure the conversion undertaking is enforceable when triggered, and requires anticipating risk around the timing of tax liability.
Anti-dilution: full ratchet, weighted average and enforcement through follow-on issuance
Because the Enterprise Law does not directly recognise a “conversion ratio adjustment” mechanism as in international practice, anti-dilution in Vietnam is typically enforced indirectly through a commitment to issue additional shares free or at a discounted price to existing investors upon a down round — this mechanism needs to be clearly set out in the SHA and pre-approved by the General Meeting of Shareholders to ensure enforceability.
Combining the charter, SHA and shareholder resolutions to strengthen enforceability
Because many of an investor’s economic rights lack a direct statutory basis, practical enforceability depends on those rights being consistently reflected at three levels: the company charter (binds third parties), the SHA (binds shareholders to each other), and shareholder resolutions (the legal basis for specific corporate actions such as follow-on issuance or share buy-backs).
Counsel’s view: Don’t copy a Delaware-style SAFE or SHA template verbatim — first identify the core economic rights the investor needs protected, then restructure them using instruments Vietnamese law recognises (redeemable preference shares, follow-on issuance commitments, conditional conversion rights).
Frequently asked questions
Does Vietnam recognise redeemable preference shares? Yes, this is one of the four preference share classes recognised under the Enterprise Law, but redemption is limited to the company’s lawful sources of funds. Can a SAFE be used in Vietnam? It can be used as a civil contractual arrangement, but requires careful drafting since there is no dedicated corresponding legal framework.
Does a convertible loan from a foreign investor need to be registered? Yes, if the term exceeds one year, the loan must be registered with the State Bank of Vietnam under foreign loan regulations. IVLF Advisors’ private equity practice helps structure investment instruments that hold up under Vietnamese law.
Discuss the right structuring option for your investment instrument with the IVLF team.
Convertible Instruments: Practical Takeaway
Choosing the right Convertible Instruments structure in Vietnam means weighing convertible loan agreements against contractual preference terms layered onto ordinary shares, since Vietnamese company law does not recognise the full range of preference share classes seen internationally. For related structuring guidance, see IVLF Advisors’ private equity and venture capital advisory services.
Investors should also review the National Business Registration Portal for charter provisions that affect how Convertible Instruments convert into equity. A well-structured Convertible Instruments arrangement protects investor economics while remaining enforceable under Vietnamese law.
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This article is provided for general information only and does not constitute legal advice for any specific case. Regulations may change – please consult a qualified professional before acting. Should further analysis be required, please contact one of our lawyers below.
