Legal risks associated with the liquidation of merger agreements

The liquidation of a merger agreement is a critical stage in a corporate merger transaction, directly involving the settlement of rights, obligations, liabilities, assets, and legal responsibilities among the parties. The following article by NPLaw provides enterprises with a comprehensive understanding of the relevant legal regulations, common risks, and effective approaches to handling issues arising during the liquidation of merger agreements.

I. Introduction to issues related to the liquidation of merger agreements

The liquidation of a merger agreement is not merely the final step of a contractual arrangement but also a decisive stage for determining rights, obligations, and the legal consequences arising from the transaction. In practice, many enterprises in Vietnam confuse liquidation, termination, and rescission of contracts, resulting in prolonged disputes and legal risks.

Pursuant to Article 201 of the Law on Enterprise 2020, a corporate merger results in the transfer of all assets, rights, and obligations to the surviving entity. Thus, the liquidation of a merger agreement is not simply a matter of terminating a transaction but also involves confirming the completion of obligations or addressing the legal consequences where the transaction is not ultimately consummated.

II. Understanding the liquidation of merger agreements

1. What is the liquidation of a merger agreement, and how does it differ from contract rescission or ordinary contract termination?

The liquidation of a merger agreement is a process by which the parties confirm the fulfillment of their rights and obligations or agree to terminate the merger arrangement before its intended completion. It constitutes a mandatory legal step to finalize issues relating to asset transfers, debt obligations, personnel matters, and the termination of the legal status of the merged entity. A liquidation record serves as evidence that the parties have settled matters relating to obligations already performed.

Unlike contract cancellation, which makes the contract invalid from the time of its execution under Article 427 of the Civil Code 2015, or unilateral termination, which causes the contract to cease from the time one party gives notice under Article 428 of the Civil Code 2015, contract liquidation primarily serves to confirm the completion of obligations or record any outstanding obligations that remain to be performed.

In corporate mergers, due to the transfer of all obligations under Article 201 of the Law on Enterprise 2020, liquidation does not extinguish obligations but rather identifies the entity that will succeed to and continue performing those obligations.

2. When should the parties consider liquidating a merger agreement instead of continuing with its performance?

The parties should consider liquidating a merger agreement where main legal conditions precedent cannot be satisfied (such as competition authority approvals), where material financial or legal risks are identified during due diligence, or where changes in administrative or tax policies fundamentally alter the commercial objectives of the transaction. Specific circumstances include:

• Failure to satisfy conditions precedent: Merger agreements commonly include conditions that must be fulfilled before the merger can proceed. Where such conditions cannot be met, liquidation becomes necessary.
• Discovery of material adverse changes: If, during due diligence or the transitional period, one party discovers significant discrepancies from previously disclosed information, continuing the transaction may result in substantial losses. In such circumstances, liquidation may be necessary to protect the parties’ interests.
• Changes in legal or regulatory policies: Significant changes in applicable laws or government policies may materially affect the viability of the transaction.
• Serious breach of contractual obligations: Where one party fails to comply with commitments during the transitional period (for example, disposing of assets or replacing main personnel contrary to the agreement), the other party may require termination and liquidation of the agreement to protect its lawful interests.

3. How may indemnification and warranty provisions be incorporated into the liquidation of a merger agreement?

Within a merger agreement liquidation record, indemnification and warranty provisions serve as legal mechanisms for allocating and addressing risks that may arise after termination of the transaction or after the merger has been completed. Such provisions typically cover contractual sanctions, compensation for actual losses, warranties relating to undisclosed liabilities, tax obligations, and responsibilities toward third parties. Main provisions include:

- Indemnification and penalty provisions

• The parties may agree upon a contractual fine payable by a party that fails to fulfill its obligations during the merger process under Clause 1, Article 418 of the Civil Code 2015 (for example, failure to transfer complete documents or disposal of assets prior to the merger).
• A party whose fault causes damage (such as diminishing enterprise value or causing the loss of strategic business partners) must compensate the other party for all actual losses in accordance with Article 360 of the Civil Code 2015.

- Warranty and guarantee provisions

• Debt and financial obligations warranty: The merged company must warrant that all liabilities have been fully disclosed. If undisclosed liabilities are discovered after liquidation and completion of the merger, the transferor or former management may be required to indemnify the surviving company.
• Tax compliance warranty: Although enterprises are exempt from business license tax from January 1st, 2026 under Article 10 of Resolution No. 198/2025/QH, other tax obligations, including corporate income tax and value-added tax for prior periods, must be warranted as fully settled.
• Accuracy of documents warranty: A representation that all transferred records and documents are accurate, complete, and legally valid.
• Successor liability and third-party obligations: The liquidation record should clearly define the responsibilities of the surviving company toward creditors and employees to avoid potential litigation.

4. What rights and obligations typically remain after the liquidation of a merger agreement?

- Obligation to receive all lawful rights and interests

Pursuant to Clause 4, Article 201 of the Law on Enterprise 2020, liquidation marks the completion of the transfer process. The surviving company assumes all rights and legal interests previously held by the merged entity.

- Outstanding debts and financial obligations to third parties, including:

• Bank loans and obligations owed to business partners;
• Warranty obligations;
• Liability for damages and compensation claims.

- Employee-related obligations: The surviving company must continue performing obligations under employment contracts entered into prior to the merger.

- Tax and administrative obligations: The surviving company is responsible for finalizing corporate income tax and value-added tax obligations relating to the final operating periods of the merged company.

- Continuing contractual obligations: The parties commonly agree that certain provisions remain effective after contract termination, including:

• Confidentiality obligations;
• Indemnification obligations;
• Dispute resolution provisions.

III. Legal regulations relevant to the liquidation of merger agreements

1. What are the principal legal instruments governing the liquidation of merger agreements in Vietnam?

• Law on Enterprise 2020: It is the principal legislation directly governing corporate mergers, from the preparation of merger agreements to the dissolution of the legal existence of the merged company (Article 201 of the Law on Enterprise 2020).
• Civil Code 2015: It serves as the foundational legal framework governing civil transactions and contracts. It provides for contract termination, rescission, and liability for damages arising from contractual breaches.
• Law on Competition 2018: For large-scale merger transactions, liquidation may be affected by regulations governing economic concentrations.
• Labour Code 2019: Personnel-related matters are inseparable from the liquidation of merger agreements. Such legislation protects employee rights during business transfers.
• Law on Securities 2019 (for public companies): If the merging entities are public companies, the liquidation or termination of merger agreements must comply with disclosure requirements designed to protect shareholders’ interests.

2. In the case of a dispute relating to the liquidation of a merger agreement, what is the applicable statute of limitations, and what procedures apply?

Depending on the nature of the dispute and the contractual provisions involved, the statute of limitations may vary as follows:

• Pursuant to Article 429 of the Civil Code 2015, the limitation period for initiating legal proceedings in relation to contractual disputes is three (03) years from the date on which the claimant knew or should have known that its lawful rights and interests had been infringed.
• Pursuant to Article 319 of the Law on Commerce 2005, where the transaction constitutes a purely commercial activity, the limitation period is two (02) years. However, in complex merger and acquisition transactions, courts often favor the application of the three-year limitation period under the Civil Code to provide broader protection of the parties’ rights.

The dispute resolution process generally includes the following stages:

• Step 1: Negotiation and mediation: It is the preferred method because it preserves confidentiality and helps maintain business relationships. The parties may negotiate directly or engage a mediator to facilitate a mutually acceptable solution.
• Step 2: Commercial arbitration: If the merger agreement or liquidation record contains an arbitration clause, the dispute must be referred to an arbitration institution (such as VIAC). Arbitral awards are final and immediately enforceable.
• Step 3: Court proceedings: Where no arbitration agreement exists, the parties may initiate proceedings before the competent court.

3. What are the common risks associated with the liquidation of merger agreements, and how can they be mitigated?

• Risk of undisclosed liabilities and unreported financial obligations: It is the most significant risk for the surviving company.
• Risk of employment and social insurance disputes: Pursuant to Article 48 of the Labour Code 2019, the successor employer is responsible for continuing employment relationships and fulfilling related obligations. Corporate mergers often involve workforce restructuring, creating potential disputes regarding redundancy allowances or unpaid social insurance contributions.
• Risk of tax liabilities and tax finalization: Although enterprises are exempt from business license tax from 1 January 2026 under Article 10 of Resolution No. 198/2025/QH, outstanding corporate income tax and value-added tax obligations from prior periods remain significant risks if not fully settled.

To mitigate these risks, enterprises should:

• Require the merged company to provide written representations and warranties confirming the completeness of its debt disclosures;
• Carefully review social insurance reconciliation records up to the liquidation date;
• Develop a detailed labor utilization plan and consult employee representative organizations before completing the liquidation process;
• Require the merged company to finalize all tax obligations and obtain written confirmation from the tax authorities prior to signing the liquidation record.

IV. Questions regarding the liquidation of merger agreements

1. What are the legal grounds for one party to unilaterally request the liquidation of a merger agreement?

A party is entitled to unilaterally request the liquidation of a merger agreement only if the other party has committed a material breach of its contractual obligations under Clause 1, Article 428 of the Civil Code 2015, if there has been a fundamental change of circumstances under Clause 2, Article 420 of the Civil Code 2015 (such as the occurrence of force majeure), or if the parties have expressly agreed upon specific termination conditions in the agreement. If a party unilaterally terminates the agreement without a valid legal basis, it must compensate the other party for all losses and damages arising therefrom.

Unilateral liquidation may only be implemented where the merger process has not yet been legally completed (i.e., the enterprise registration amendment reflecting the merger has not yet been registered).

2. How should a situation be handled where a party transfers material assets prior to the liquidation of a merger agreement in order to evade liability?

The transfer of material assets for the purpose of avoiding obligations prior to the liquidation of a merger agreement may be deemed a sham transaction or an asset dissipation arrangement and therefore declared invalid under Article 124 of the Civil Code 2015.

The aggrieved party (whether the surviving company or a creditor) has the right to petition the Court to declare such transaction invalid, recover the transferred assets under Article 131 of the Civil Code 2015, and seek compensation from the relevant individuals responsible. In serious cases, such conduct may even lead to criminal liability for the offence of abuse of trust to appropriate property.

In the merger context, managers of the transferring entity (including directors and members of the board of directors) are subject to duties of honesty, loyalty, and prudence. The dissipation of assets constitutes a serious breach of managerial duties. Pursuant to Article 165 of the Law on Enterprise 2020, managers who breach their fiduciary obligations and cause losses to the enterprise or related parties are personally liable for such damages. Where the transfer of assets results from a collective decision of the management body made in bad faith, the individuals involved may be jointly liable with their personal assets for debts or losses incurred by the surviving company.

To prevent the continued transfer of assets to bona fide third parties, the aggrieved party should promptly initiate legal proceedings and simultaneously request the Court to apply interim emergency measures.

3. In the case of a conflict between the original merger agreement and the liquidation minutes, which document takes precedence for dispute resolution purposes?

If inconsistencies arise, the general principle is that the liquidation minutes shall prevail, as it reflects the parties’ most recent and final intentions regarding the settlement and termination of their rights and obligations.

Under the principle of freedom of contract, agreements entered into at a later date supersede or amend earlier agreements to the extent that they govern the same subject matter. However, provisions in the original merger agreement relating to dispute resolution, confidentiality, and indemnification may continue to take precedence if the parties have expressly agreed that such provisions survive termination or have established an order of priority among contractual documents.

4. Does the competition authority have the power to intervene where the liquidation of a merger agreement shows signs of distorting competition, and what is the intervention process?

The National Competition Commission has full authority to intervene in the liquidation of a merger agreement if the liquidation process is used to conceal anti-competitive arrangements or violates conditions imposed upon a previously approved economic concentration transaction.

The intervention process generally involves the following stages:

• Step 1: The National Competition Commission may either independently detect signs of a violation or receive complaints from competitors, consumers, or other interested parties alleging that the liquidation of the merger agreement adversely affects competition.
• Step 2: The competition investigation authority reviews documents and information relating to the liquidation process. Pursuant to Article 80 of the Competition Law 2018, the preliminary investigation period is thirty (30) days from the date the investigation decision is issued.
• Step 3: Where sufficient evidence of a violation exists, the authority proceeds to a formal investigation to assess the extent of the violation and its anti-competitive effects in accordance with Article 81 of the Competition Law 2018.
• Step 4: The Competition Case Handling Council convenes and issues a decision imposing appropriate remedies or sanctions.

V. Are you looking for a reputable law firm to assist with issues relating to the liquidation of merger agreements?

The corporate merger process does not end with the execution of transfer and handover documents. The liquidation of a merger agreement represents a critical stage that requires absolute legal precision to ensure that the rights and interests of all parties are protected and that future disputes are avoided.

The liquidation of a merger agreement is not merely the termination of an arrangement. Rather, it is a comprehensive process involving the review and settlement of all commitments relating to:

• Financial and tax obligations;
• Asset-related responsibilities;
• Personnel commitments and confidentiality obligations.

NPLaw provides comprehensive legal solutions to help enterprises complete the liquidation process safely, efficiently, and in full compliance with applicable laws.

The above information is provided for reference purposes only. Should you require detailed legal advice tailored to your specific circumstances, please contact NPLaw Firm for immediate assistance.