Share Transfers in Lao Companies: More Than Just a Commercial Agreement

In brief:

• Share transfers in the Lao PDR are regulated transactions, not purely private contracts.
• A transfer is not effective until approved, notarized, and registered.
• Foreign involvement causes additional examination and approvals.
• Early legal and tax due diligence is critical to avoid delays or invalidity.

Introduction

Share transfers are often perceived by investors as a private commercial matter between a buyer and a seller. In the Lao PDR, however, a share transfer, particularly where a foreign investor is involved, is a regulated corporate and investment transaction, subject to multiple layers of legal and administrative approval.

In practice, many share transfer transactions fail or are delayed not because of commercial disagreement, but due to non-compliance with enterprise, investment, or sector-specific regulations. This article examines the most common legal issues and approval traps investors face when acquiring or disposing of shares in Lao companies.

Legal framework governing share transfers

Share transfers in the Lao PDR are governed primarily by:

• The Enterprise Law
• The Investment Promotion Law
• Relevant implementing regulations and instructions
• Sector-specific laws (where applicable)
• The company’s articles of association (“AOA”) and shareholder agreements

It is important to note that contractual freedom in share transfers is limited by mandatory legal provisions and administrative practice, particularly where foreign ownership is involved.

Share transfer effectiveness requires more than just a signature

A common misunderstanding among investors is that ownership changes upon the signing of the share purchase agreement. Under Lao law and practice, a share transfer is not legally effective until it is:

• Approved by the competent authority (where required);
• Notarized by the relevant Notary Office (in respect of the share purchase agreement); and
• Properly registered with the enterprise registration office.

Until notarization and registration are completed, the transferee does not legally acquire shareholder status, regardless of payment or contractual agreement.

Key approval requirements

Corporate level approvals

At the corporate level, a share transfer typically requires:

• Approval of the shareholders’ meeting, in accordance with the AOA, the shareholders’ agreement, and the Lao Enterprise Law; and
• Compliance with any pre-emptive rights of existing shareholders.

Failure to comply with internal approval requirements may result in the transfer being rejected during registration.

Investment authority approval

Where an investor acquires or disposes of shares in a concession or controlled business or conditional business for foreign investors, investment authority approval or notification is commonly required, especially if the transfer results in a change in the foreign ownership percentage.

In practice, the investment authority may check:

• The foreign investor’s eligibility.
• Compliance with foreign investment requirements.
• Compliance with the requirements provided in the Investment Promotion Law.
• Consistency with the approved investment structure.

Sector-specific restrictions

Certain business sectors in the Lao PDR are:

• Restricted to Lao nationals; or
• Subject to foreign ownership caps.

Foreign investors often encounter issues where:

• The target company operates in a partially-restricted sector in which foreign shareholding is limited or subject to conditions; or
• The original investment approval did not allow for this share transfer.

In such cases, a share transfer may be legally impossible, regardless of commercial agreement.

Common approval traps in practice

• Ignoring pre-emptive rights: The Enterprise Law grants existing shareholders a right of first refusal, requiring a selling shareholder to first offer the shares to existing shareholders before offering them to any third party. Transactions conducted without respecting these rights could be challenged by existing shareholders, which may render the share transfer invalid.
• Mismatch between the certificates and the actual shareholding: Authorities often compare the proposed share transfer against the investment and enterprise registration certificates. Any inconsistency—such as unrecorded prior transfers—can halt the process.
• Assumption that nominee structures are acceptable: Investors sometimes rely on informal nominee arrangements to bypass ownership restrictions. Such structures carry significant legal risk and may render the share transfer invalid or unenforceable.
• Incomplete capital contribution history: If the selling shareholder has not fully contributed capital as registered, the authorities may refuse to approve the transfer until compliance is sorted out.
• Tax non-compliance: Share transfers commonly trigger (i) capital gains tax (2%) for the seller; and (ii) potential withholding tax obligations.Unsettled tax issues may delay or prevent approval of the transfer.

Legal consequences of non-compliant share transfers

Where share transfers are carried out without proper approval or registration, consequences may include:

• Rejection of registration by the authorities.
• Invalidity of the transfer under Lao law.
• The continued liability of the seller as a shareholder.
• Exposure to administrative penalties.
• The inability of the buyer to exercise shareholder rights.

Practical guidance for investors

Share transfers should be treated as a regulated legal process, not merely a contractual transaction. To mitigate risks, investors should:

• Conduct legal due diligence on the entity.
• Review the AOA and any shareholder agreements carefully.
• Confirm sectoral foreign ownership eligibility at an early stage.
• Structure transactions with approval timelines in mind.
• Address tax implications before submission to the authorities.
• Avoid reliance on informal or nominee arrangements.

In practice, these steps are best carried out with the assistance of an experienced local legal adviser who is familiar with Lao regulatory procedures and the actual practices of the authorities.

VDB Loi has a practice grounded in hands-on dealings with the government authorities. We have extensive experience assisting both local and foreign investors to successfully complete share transfers in the Lao PDR, including obtaining regulatory approvals, completing authority filings, and handling the associated tax and compliance matters.

If you have any questions or require further clarification or legal assistance in relation to share transfers or related regulatory matters in the Lao PDR, please contact the undersigned or your usual VDB Loi adviser.