M&A in Manufacturing: Due Diligence on Factory, Environment and Labor

M&A in Manufacturing: Due Diligence on Factory, Environment and Labor When Buying an Operating Company

Buying an operating manufacturing company is fundamentally different from any other M&A deal: the buyer does not just buy machines, orders and brands — it also buys the factory's legal past — how many years remain on the leased land, whether the environmental licence is still valid, whether the soil under the factory was contaminated by the previous owner, and hundreds of labour contracts plus hidden social insurance debts. In our practice, it is precisely the three axes of factory – environment – labor that produce the largest "surprise" costs after closing, sometimes reaching tens of percent of the deal value.

This article is an in-depth due diligence checklist for investors considering acquiring a manufacturing company in Vietnam, with citations to current legislation checked against the original texts.

1. Quick distinction: how this differs from building a new factory

To avoid scope confusion, the two journeys must be clearly distinguished:

• New investment (greenfield / entry FDI): the investor establishes an economic organisation, applies for investment policy approval and an Investment Registration Certificate, leases vacant industrial-park land, builds a new factory, prepares an environmental impact assessment report and obtains an environmental licence for the new project, and enjoys investment incentives for the newly established project. The focus is "applying for permits and building new".
• M&A acquisition of an operating company (brownfield): the investor buys shares/capital contributions or assets of an already-operating manufacturing company. The focus is "reviewing the past and pricing inherited risks": is the old environmental licence still valid, how much land term remains, is there historical contamination, how much social insurance debt, how will the existing workforce be handled.

If you are at the stage of establishing a new manufacturing project from zero, the entry FDI guide for manufacturing investors fits better. But if the goal is buying a running factory, the three due diligence axes below are what decide the deal's success or failure.

2. Axis 1: Factory and land due diligence

The factory is the most valuable asset in most manufacturing M&A deals, and also the "hardest" asset legally: one wrong detail on land use rights can make the entire asset untransferable or unusable as loan collateral later.

2.1. Origin of land use rights: direct lease or sublease

The first step is determining under which mechanism the target company uses the land:

• Direct land lease from the State: the company has a land lease decision/contract with the state authority and a certificate of land use rights. Check the rental payment form: one-off payment for the entire lease term or annual payment — these two forms carry very different rights (transfer, mortgage, capital contribution with land use rights).
• Sublease from the industrial-park infrastructure investor: the most common case for factories in industrial parks. Under Article 202 of the Land Law 2024 (31/2024/QH15, effective 01/8/2024), an infrastructure investor leased land by the State on annual payment may only sublease on annual payment; only the area leased on one-off payment may be subleased on either one-off or annual payment. The buyer must read the land sublease contract carefully: sublease term, conditions for assigning the sublease contract on change of ownership, infrastructure management fees, and the industrial-park investor's obligations.

An important practical point: many industrial-park land sublease contracts require the infrastructure investor's written approval for assignment or change of ownership of the lessee company. Missing this clause can stall the deal at the last minute.

2.2. Remaining land use term — a number that directly impacts price

Under Article 172 of the Land Law 2024, the land lease term for implementing a land-using investment project is considered according to the project's operating term but no more than 50 years; for projects with an operating term over 50 years under investment law, it follows the project term but no more than 70 years. Upon expiry, land users wishing to continue use are considered by the State for extension.

In M&A due diligence, three questions must be answered:

1. How many years remain on the land lease? (Cross-check the certificate/lease decision against reality.)
2. Does the land term "match" the investment project's operating term and the depreciation life of the factory and machinery? A factory with 8 years of land term left but 15-year machinery depreciation is a valuation red flag.
3. Is extension upon expiry feasible (consistent with planning, no violation of financial obligations on land)?

A short remaining land term does not necessarily kill the deal, but it must be reflected in the purchase price — through price adjustment or the seller's commitment on extension.

2.3. Assets attached to land: whose factory, and is it registered

A factory built on leased land is an "asset attached to land". Check:

• Whether factory ownership belongs to the target company (certificate of ownership of the construction work or registered change of attached assets) or to a third party (e.g. the industrial-park investor built it for lease).
• Construction permits, completion acceptance records, especially fire prevention and fighting acceptance — a manufacturing factory without complete fire safety acceptance can be suspended at any time.
• Whether the factory is mortgaged at a bank; if so, the release plan before/at closing.

2.4. Special points when the buyer is a foreign investor

Buying shares/capital contributions of a Vietnamese company is a form of investment under Article 21 of the Investment Law 143/2025/QH15 (passed by the National Assembly on 11/12/2025, effective 01/3/2026, replacing the Investment Law 61/2020/QH14). Foreign investors must complete the registration of capital contribution, share or capital contribution purchase before changing members/shareholders if falling into one of the cases in Clause 3, Article 21 — including where the target company holds a certificate of land use rights on islands, in border, coastal or other areas affecting national defense and security — in which case the investment registration authority must also seek opinions on national defense and security assurance.

For manufacturing plants this is not rare: many coastal industrial parks, border-gate economic zones, areas adjacent to borders. This item must be put into the deal timeline from the start because inter-agency consultation takes time. For the key changes under this framework, see 12 key changes of the Investment Law 143/2025 foreign investors must know.

3. Axis 2: Environmental due diligence

This is the most "hidden" risk axis: a perfectly normal-looking factory may be standing on soil contaminated with heavy metals from 10 years ago, and the remediation bill will land on the new owner.

3.1. The 3-tier environmental dossier system under the Law on Environmental Protection 2020

The Law on Environmental Protection 2020 (72/2020/QH14, promulgated 17/11/2020, effective 01/01/2022) establishes three main types of environmental dossiers:

1. Environmental impact assessment report (EIA) — Article 30: prepared before implementing projects subject to EIA.
2. Environmental licence — Articles 39–49: an integrated licence (integrating discharge permits, hazardous waste generator registration books, completion certificates of environmental protection works…). This is the factory's most important "operating licence".
3. Environmental registration — Article 49: for projects/facilities generating waste but not subject to an environmental licence.

The transition point buyers often miss lies in Article 171: EIA approval decisions, detailed/simplified environmental protection schemes, environmental protection commitments and environmental protection plans issued before 01/01/2022 are treated as equivalent to decisions approving EIA appraisal results when considering and issuing environmental licences. In other words, a factory operating since before 2022 may be "living" on old dossiers — lawful, but the buyer must verify whether those old dossiers qualify for a new environmental licence upon expiry or need supplementation or re-preparation.

Decree 08/2022/ND-CP (10/01/2022) and Circular 02/2022/TT-BTNMT detail the subject classification and licence issuance procedures. Whether a specific factory is subject to EIA, must hold an environmental licence, or only needs environmental registration depends on the scale, capacity and production stages under the decree's appendix — this needs careful cross-checking for each production line, not mechanical application.

3.2. Environmental dossier checklist when diligencing the target

• Is the environmental licence still valid, how much term remains? (Environmental licences have terms; near-expiry means the buyer will need to handle re-issuance right after takeover.)
• Is the subject information on the environmental licence and other environmental dossiers still correct after M&A? Changes of owner/project investor usually trigger licence adjustment obligations.
• Do waste treatment works (wastewater, exhaust gas) operate at design capacity, with operation logs and periodic monitoring results meeting standards?
• History of inspection and administrative sanctions for environmental protection violations (Decree 45/2022/ND-CP): what violations were sanctioned, have they been remediated, are there any pending suspension decisions?
• Contracts for hazardous waste collection and treatment with qualified units; are hazardous waste handover documents complete and continuous? Gaps in documentation signal improper discharge.

3.3. Historical contamination risk: debt not on the balance sheet

The Law on Environmental Protection 2020 applies the polluter-pays principle and provides for liability to compensate environmental damage (Articles 130–132). In actual transactions, the buyer inheriting the enterprise will be the party facing contamination remediation orders, sanction decisions and compensation claims — even if the contamination occurred under the previous owner.

Therefore, for high-risk industries (electroplating, textile dyeing, chemicals, tanning, mineral processing, battery manufacturing…), the DD checklist should include:

• Phase I environmental site assessment: reviewing land use history, production processes over time, interviews, preliminary risk assessment.
• Phase II assessment: soil and groundwater sampling for laboratory analysis when Phase I finds risk signals.
• Contract clauses: the seller warrants the environmental condition, retains part of the purchase price (retention/escrow) for a defined period to handle post-closing discovered environmental issues, and an indemnity mechanism for historical contamination remediation costs.

Phase II survey costs are only a tiny fraction of contaminated soil remediation costs — this is the due diligence investment with the highest "insurance" return in a manufacturing M&A deal.

4. Axis 3: Labor due diligence

A manufacturing plant often has a workforce of hundreds to thousands. Each labour contract is a "running" legal relationship, and each month of social insurance debt is a debt with potential criminal sanctions.

4.1. Workforce inventory and contracts

• Workforce structure: headcount, contract types (definite/indefinite term), foreign workers (check work permits under Decree 219/2025/ND-CP, replacing Decree 152/2020/ND-CP from 07/8/2025 — note the expert standard in Clause 3, Article 3: a university degree or higher plus at least 02 years of relevant experience; see the work permit dossier checklist for foreign experts in Vietnam).
• Whether wages, bonuses and allowances are paid correctly, fully and on time; any "hanging" 13th-month salary or Tet bonuses under internal agreements?
• Whether working hours and overtime in manufacturing comply with the Labour Code 2019; are timesheets and overtime agreements complete?
• Collective labour agreements, registered internal labour regulations, salary scales: the buyer inherits all these documents.

4.2. Insurance obligations: the Law on Social Insurance 2024 is in force

The Law on Social Insurance 2024 (41/2024/QH15, passed 29/6/2024, effective from 01/7/2025, replacing Law 58/2014/QH13) is the current framework for compulsory social, health and unemployment insurance. Due diligence items include:

• Cross-checking the employee list against the social/health/unemployment insurance contribution list: any cases subject to contribution but not contributed, or under-contributed (contributing on minimum wage instead of actual salary)?
• Social insurance arrears: months owed, principal and late-payment interest; any inspection or sanction decisions?
• Current law strengthens sanctions for late or evaded social insurance contributions. Social insurance debt is not only a financial obligation but a legal risk that can escalate — it must be quantified and put into price adjustment or a retention mechanism.

4.3. Labour utilisation plan and severance allowance — statutory obligations on change of ownership

This is a deal-specific legal point many buyers underestimate. Under Article 43 of the Labour Code 2019 (45/2019/QH14, effective 01/01/2021), when transferring enterprise ownership or asset use rights affecting many employees' jobs, the employer must formulate a labour utilisation plan under Article 44. The current and succeeding employers are responsible for implementing the approved plan.

The plan's contents (Article 44) include: the list of employees to be retained, retrained or moved to part-time work; the retirement list; the list whose contracts must be terminated; the parties' rights and obligations; and measures and financial sources to ensure implementation. The plan must be consulted with the employees' representative organisation and publicly notified to employees within 15 days from approval.

And under Article 47, employees regularly working 12 months or more who lose their jobs due to enterprise ownership/asset use right transfer are entitled to severance allowance: 01 month's salary per working year, minimum 02 months' salary.

Consequences for the deal: if the buyer plans post-M&A restructuring and headcount reduction, the total severance/termination cost must be modelled into the valuation right away, not calculated after closing. In addition, existing collective labour disputes (strikes, mass complaints) are red flags needing separate assessment.

5. From due diligence findings to deal structuring

Due diligence only has value when it changes the transaction structure. Common tools:

5.1. Structure choice: share deal or asset deal

• Share deal (buying shares/capital contributions): simpler procedures, inheriting all the company's legal relationships — including undiscovered environmental, labour and tax risks. Suitable when the target has clean legal dossiers and licences tied to the legal entity that are hard to re-apply for. The full legal process of a deal is described in M&A transactions in Vietnam: the complete legal process, 8 steps from SPA to integration.
• Asset deal (buying assets): the buyer only picks the factory, machinery, inventory… and in principle does not inherit historical obligations. However, asset deals are far more complex on land (transferring land lease rights in industrial parks must meet Land Law 2024 conditions and the infrastructure investor's approval), on contract assignment, and on obligations to employees when transferring operations.

No structure is "right" for every deal — the choice depends on the risk map the DD process draws.

5.2. Price protection mechanisms

• Purchase price adjustment: directly deducting quantifiable items (social insurance debts, owed land rentals, identified environmental remediation costs).
• Retention/escrow: holding part of the price for 12–24 months for not-fully-quantified risks (later-discovered contamination, tax arrears, labour disputes).
• Representations & warranties + indemnity: the seller warrants the status of environmental licences, land, labour and no hidden disputes; breaches trigger indemnification.
• Conditions precedent: completing Phase II environmental survey with acceptable results; confirmation of no social insurance arrears; adjusting/re-issuing the environmental licence to the new subject; the industrial-park investor's approval of the land sublease contract assignment; completing the share/capital purchase registration under Article 21 of the Investment Law 143/2025 (if the buyer is a foreign investor subject to registration).

5.3. Don't forget the competition aspect

If the buyer and the target operate in the same relevant market and the deal scale exceeds thresholds, the transaction may constitute an economic concentration subject to economic concentration notification before implementation under the Competition Law 2018 and Decree 35/2020/ND-CP. In highly concentrated manufacturing industries (cement, steel, packaging, animal feed…), this needs early assessment to avoid timeline surprises.

6. Summary checklist: 3 due diligence axes in one table

7. Frequently asked questions

Q1: How does buying an operating manufacturing company (brownfield) differ from building a new factory (greenfield)? A: Building new means starting from zero: applying for investment policy approval, leasing industrial-park land, building the factory, preparing an EIA and obtaining an environmental licence for the new project. Buying an operating company means inheriting the target's entire legal history: old environmental licences, historical EIA dossiers, land obligations, social insurance debts and the existing workforce. The due diligence focus therefore shifts from "applying for new permits" to "reviewing the past and pricing inherited risks".

Q2: Does the target company's environmental licence automatically transfer to the buyer after M&A? A: There is no "automatic transfer" mechanism. When the owner/project investor changes, the buyer needs to check whether the environmental licence is still valid, whether the subject information on the licence is still correct, and carry out adjustment/re-issuance procedures under the Law on Environmental Protection 2020 and Decree 08/2022/ND-CP. This is a condition precedent to include in the M&A contract.

Q3: Must a foreign investor buying shares in a Vietnamese manufacturing company register with the investment authority? A: Yes, in the cases prescribed in Clause 3, Article 21 of the Investment Law 143/2025/QH15: when the purchase increases the foreign investor's ownership ratio in an economic organisation operating in a conditional market-access sector; when it results in the foreign investor holding over 50% of charter capital; or when the target holds a certificate of land use rights on islands, in border, coastal or other areas affecting national defense and security.

Q4: Is the acquiring company liable for environmental pollution caused by the previous owner? A: In principle, environmental law applies the polluter-pays principle and provides for liability to compensate environmental damage (Articles 5 and 130–132 of the Law on Environmental Protection 2020). In practice, the buyer inheriting the enterprise will be the party facing remediation orders, sanctions and compensation claims. So soil and groundwater contamination surveys (Phase I/Phase II) are a due diligence item not to be skipped, especially in electroplating, textile dyeing and chemical industries.

Q5: When a company is acquired, do existing employees automatically transfer to the new owner? A: Labour contracts do not automatically terminate when the enterprise changes owner, but the law requires the employer to formulate a labour utilisation plan when transferring enterprise ownership or asset use rights affecting many employees' jobs (Articles 43–44 of the Labour Code 2019). Employees who lose their jobs are entitled to severance allowance under Article 47. This cost must be built into the deal pricing model.

8. Conclusion

In manufacturing M&A, the most expensive risks rarely sit on the balance sheet — they lie under the factory floor, in old environmental dossier cabinets, and in employee lists with underpaid insurance. A methodical due diligence process across the three axes of factory – environment – labor does not slow the deal down; it makes the purchase price reflect true value and protects the buyer with appropriate contractual mechanisms.

FLAT Law Firm advises comprehensively on M&A transactions in manufacturing: legal due diligence on factories and industrial-park land, review of environmental dossiers and historical contamination risk assessment, checking of labour and social insurance obligations, transaction structuring and sale contract negotiation. Contact hotline 0988424851 for advice on your specific deal.

References

• Investment Law 143/2025/QH15 (passed 11/12/2025, effective 01/3/2026)
• Decree 96/2026/ND-CP detailing the Investment Law (effective 31/3/2026)
• Enterprise Law 59/2020/QH14 (amended by Law 76/2025/QH15, effective 01/7/2025)
• Law on Environmental Protection 72/2020/QH14 (effective 01/01/2022)
• Decree 08/2022/ND-CP detailing the Law on Environmental Protection
• Circular 02/2022/TT-BTNMT detailing the Law on Environmental Protection
• Decree 45/2022/ND-CP on environmental administrative sanctions
• Land Law 31/2024/QH15 (effective 01/8/2024)
• Labour Code 45/2019/QH14 (effective 01/01/2021)
• Law on Social Insurance 41/2024/QH15 (effective 01/7/2025)
• Decree 219/2025/ND-CP dated 07/8/2025 of the Government on foreign workers in Vietnam (replacing Decree 152/2020/ND-CP)
• Competition Law 23/2018/QH14; Decree 35/2020/ND-CP detailing the Competition Law