Legal Update – Vietnam’s New Law On Enterprises 2020 – Shareholders – Vietnam

The National Assembly of Vietnam recently approved a new Law
on Enterprises 2020 (59/2020/QH14), superseding the
Law on Enterprises 2014 (68/2014/QH13). As with
previous versions, the Enterprise Law continues to
regulate the establishment, operation, and governance of corporate
entities, and exists as the primary legislative instrument in the
area of Vietnamese corporate law. The new law will come into effect
on 1 January 2021. Directors, shareholders, and prospective
investors are encouraged to consider the key amendments discussed
below. Critically, companies should also ensure that their charters
and internal processes are amended and adapted as necessary to
ensure consistency and compliance with the terms of the new law as
of 1 January 2021. If not, they run the risk of taking unlawful
corporate actions which could jeopardise validity of transactions
and/or give rise to potential disputes and liabilities.

One Member Limited Liability Company – Corporate
Owner

Where a one-member limited liability company is owned by a
corporate member, there is now no longer a requirement to appoint
official controllers (sometimes called inspectors). Rather, the
incoming law provides for the following possible two organisational
structures: i) Chairman and Director/General Director; or ii)
Council of Members and Director/General Director.1 Importantly, the
company must appoint at least one legal representative who must
also simultaneously hold the position of Company Chairman, Chairman
of the Members’ Council, or Director/General Director.2

Capital Transfers by Foreign Investors

The Enterprise Law 2014 provided an express blanket
obligation that all foreign capital contributions (as well as
dividend repatriations, and the purchase, sale, and transfer of
shares) must be routed via an authorised capital account with a
Vietnamese bank, except where such transfers were made in the form
of assets.3

The phrasing under the 2020 law remains unchanged, merely
re-stating that all foreign capital transfers must be routed via a
capital account, except for transfers in the form of non-cash
assets.4

In potential conflict with the above position, State Bank of
Vietnam regulations under Circular
06/2019/TT-NHNN provides that transfers between two
non-resident investors need not be routed via a capital account,
irrespective of whether or not the transfer was in the form of cash
or non-cash assets. 5

Issues around Vietnamese foreign exchange control laws and the
use capital accounts remain highly complex and uncertain, and we
intend to produce further publications on such matters in due
course. Whilst the 2020 law does touch on the issue, it is still
silent as to when foreign investments are categorically deemed to
be direct or indirect for the purposes of routing contributions via
a formal capital account. It is strongly recommended to seek
further legal advice prior to the making of any foreign capital
contributions, as non-compliance may result in material transaction
delays and prohibitions on the repatriation of future profits.

Bond Offerings

It has been widely reported that the Vietnamese domestic bond
market has recently experienced significant overheating, largely as
an indirect consequence of the State Bank of Vietnam imposing
credit restrictions, particularly on real estate ventures.

The new law plays a part to address such concerns via the
introduction of additional statutory obligations on corporate bond
issuers and investors. The new law continues to allow for the
issuance of bonds by private joint stock companies, however
placement requires satisfaction of numerous complex transparency
obligations, including in relation to audit procedures, shareholder
approval, stock exchange notification, prudential and debt ratios,
amongst others.6 Such requirements on issuance also
overlap with existing stipulations under the Securities Law
2019 and various guiding decrees, and it is therefore strongly
advised to seek legal counsel on such matters prior to considering
a private placement. Under the 2014 regime, the placement of
private bonds only required the board of management to report on
the issuance to shareholders in the next general meeting, including
details of bond value, timing, class, and an explanation of the
board’s resolution.7

The new law also allows for multiple member limited liability
companies to issue bonds, 8 which was previously restricted to
that of only joint stock companies under the 2014 law.

Additional Protections for Minority Shareholders

The new law allows a group of shareholders (5% or more) of a
joint stock company to access important corporate information,
including financial statements, resolutions, minutes, and
inspection committee reports, amongst others. 9 This is a lowering
of the threshold from 10% under the 2014 law.10

The group may also seek to convene a shareholders’ meeting
in specific circumstances (i.e. serious breach of shareholder
rights by the board of management). 11 Ordinary
shareholders are now no longer required to hold their shares for a
minimum ownership period (i.e. 6 months as under the 2014 law 12)
before being able to exercise general shareholder rights.13

Additionally, a group of shareholders (10% or more) now need not
wait for 6 months post-investment before being able to exercise
their right to nominate a specific director to the board of
management. 14 This amendment is crucial, as in
practice it had been commonplace for such delay to restrain
incoming investors from nominating a preferred director at the time
of investment completion.

Of note, the amendment comes on the back of a 2018 controversy,
whereby incoming majority shareholder, ThaiBev, was denied the
ability to nominate members to the board of management of Sabeco,
Vietnam’s largest domestic brewer. This occurred due to the
fact that ThaiBev had not held their shares for at least 6 months
prior to the holding of Sabeco’s extraordinary general meeting,
which was principally held for the purposes of nominating board of
management members post-investment completion.

Rights of Preference Shareholders

Preference shares are a form of non-voting shares under current
Vietnamese law. Significantly, the new law allows for shareholders
holding preferred dividends and redeemable preferred shares to have
limited participation rights. Such shareholders will be allowed to
attend and vote in shareholder meetings where proposed resolutions
adversely impact their rights and obligations.15 In such cases, a
resolution will only pass where it is approved by at least 75% of
shareholders who hold that specific class of shares.16 It
is important to note that the incoming provision does not provide
an express definition of “adverse” should a shareholder
dispute scenario arise.

This is a crucial amendment, providing much needed statutory
protection to the rights of preference shareholders. In principle,
Vietnamese law currently allows ordinary shareholders to alter the
substantive terms of a class of preference shares via the passing
of a general shareholders’ resolution. The above incoming 75%
threshold seemingly serves to restrain such adverse action. Of
course, the minority 25% shareholding group will nevertheless still
be potentially subject to adverse alteration, and it is strongly
recommended that appropriate consent rights are negotiated and
drafted into the shareholders’ agreement at the time of
investment.

Pre-emptive Rights

Where a private joint stock company seeks to issue new shares by
way of private placement, the amended law provides that existing
shareholders are to be given pre-emptive rights over the
subscription of such shares, except in a situation of merger or
consolidation. 17

Accordingly, in practice, a private joint stock company should
obtain a formal waiver of pre-emptive rights from existing
shareholders prior to undertaking a private placement of new
shares. It may also be necessary for a general resolution to pass
where such shares are offered on more favourable terms than those
currently in existence. 18

While this amendment will be welcome to some, it will serve as a
potential constraint and unwelcome development for others. This
sort of change in the 2020 law also highlights a significant point
that has not been addressed: the role and scope of shareholder
agreements in which shareholders may reach agreement on points that
run contrary to otherwise mandatory terms of the Enterprise Law
(e.g. – agreement to be issued new shares in priority to other
shareholders). Despite the common use of shareholder agreements in
Vietnam, there remains significant question marks over their
validity and enforcement in practice. Nothing in the 2020 law
suggests a change to this status quo.

Legal Representative Liability

A joint stock company or limited liability company may now
appoint multiple official legal representatives. The specific
rights and duties of each appointed representative must be recorded
in the charter of the company. 19

Should the charter be silent as to such allocation of duties,
each individual legal representative stands to represent the
company before third parties.20 Under the new law, legal
representatives are also now jointly liable for any loss
or damage related to the company.21 There continues to be no express
indication that companies can agree to insure or indemnify legal
representatives against such liabilities.

Shareholder Confidentiality Obligations

Shareholders of joint stock companies are now under an
obligation to keep corporate information confidential and refrain
from distribution to third parties (presumably most relevant to
substantive financial reports, strategic planning etc). 22

The provision does not precisely identify the forms of relevant
information nor circumstances where distribution would otherwise be
permitted. It is also unclear whether such obligations would
materially prevent a shareholder from providing corporate
information to a prospective purchaser of shares.

State Owned Enterprises – Lower Threshold

The new law amends the 2014 position, providing that State-owned
enterprises (SOEs) are now to be defined as enterprises comprising
of a State shareholding of more than 50% charter capital or voting
rights. 23 The 2014 law previously defined
SOEs as those enterprises with 100% State owned charter capital. 24

This will have the effect of increasing the number of SOEs
significantly. While this may serve a policy position of enhancing
State control over use of State capital, it may have an adverse
impact, especially when considering the drive to speed up the
equitization process in general. SOEs are, in general, subject to
stringent rules on audit, fund raising, and procurement, and such
rules may serve to dampen the interest of potential strategic
minority investors.

Digital Signatures

Enterprises are now free to utilise both physical seals
and digital signatures when executing company
documentation. Consistent with the current Law on Electronic
Transactions,25 digital signatures will be given
the same legal weight with that of traditional physical seals. This
is particularly relevant due to the current Covid-19 situation,
introducing timely flexibility and practicality into corporate
administrative practice. 26

Board of Management – Rights and Obligations

The rights, duties, and liabilities of members of the board of
management of joint stock companies remain largely unchanged under
the new law, albeit with the following technical amendments.

Firstly, a shareholder holding as little as 1% has standing to
commence legal proceedings against a director or member of a board
of management who is in breach of their duties, regardless of how
long the shareholder has held their shares (previously minimum 6
month holding requirement under the 2014 law).27

Secondly, where the board of management passes a resolution
contrary to law or the charter of the company, a single shareholder
now has the right to commence legal proceedings and request that
the resolution be suspended or rescinded,28 again with no
minimum holding requirement (previously 1 year under the 2014 law).
29
This will importantly empower incoming shareholders who would
otherwise have limited formal legal recourse against unlawful board
action.

Thirdly, a board appointed independent director can now only
serve for two consecutive terms. 30 There was previously no limit
under the 2014 law. 31 This amendment will ensure that
appointed independent directors are better able to meet their
corporate governance objectives, bringing greater transparency and
impartial oversight to the management of joint stock companies in
Vietnam.

Finally, a board member of a joint stock company which is also a
State-owned enterprise (i.e. State shareholding / charter capital
of more than 50%), must not have a family relationship with a
manger of the company, or with a manager of the parent company.32
Again, such amendment brings greater transparency and governance
standards, better protecting shareholders against improper
corporate conduct.

Transitional Requirements

It is highly recommended that all enterprises undertake a
thorough review of their existing company charters and proactively
identify and amend any clauses which are inconsistent with the
incoming law prior to 1 January 2021.

Where a company charter is inconsistent with the new law, board
actions based on such outdated clauses (e.g. prohibiting a new
shareholder from nominating a specific director until at least 6
months of shareholding has passed) may be legally challenged and
potentially deemed invalid at law.

Conclusion

In conclusion, Vietnamese corporate law continues to positively
evolve with the approval of the amended Enterprise Law
2020.

Significantly, the new law enhances protections for minority and
preference shareholders, whilst consolidating pre-emptive rights.
Importantly, the law also simplifies organisational structures for
one-member limited liability companies, and allows for the use of
digital signatures in the execution of corporate documentation.

Finally, the new law seeks to address recent concerns around
overheating and transparency in the Vietnamese domestic bond
market, introducing greater statutory obligations on private
issuers and investors alike.

Footnotes

1 Art
79(1), LoE 2020.

2 Art
79(3), LoE 2020.

3 Art
36(3), LoE 2014.

4 Art
35(5), LoE 2020.

5 Art
10(1), Circular 06/2019/TT-NHNN.

6 Art
128(3), LoE 2020.

7 Art
127(4), LoE 2014.

8 Art
46(4), LoE 2020.

9 Art
115(2)(a), LoE 2020.

10 Art
114(2), LoE 2014.

11 Art
115(3), LoE 2020.

12 Art
114(2), LoE 2014.

13 Art
115(2)(a), LoE 2020.

14 Art
115(5), LoE 2020.

15 Art
148(6), LoE 2020.

16 Art
148(6), LoE 2020.

17 Art
125(2)(b), LoE 2020.

18 Art
125(2)(c), LoE 2020.

19 Art
12(2), LoE 2020.

20 Art
12(2), LoE 2020.

21 Art
12(2), LoE 2020.

22 Art
119(5), LoE 2020.

23 Art
88(1), LoE 2020.

24 Art
4(8), LoE 2014.

25
Law on Electronic Transactions 51/2005/QH11.

26 Art
43(1), LoE 2020.

27 Art
166(1), LoE 2020; Art 161(1), LoE
2014.

28 Art
153(4), LoE 2020.

29 Art
149(4), LoE 2014.

30 Art
154(2), LoE 2020.

31 Art
150(2), LoE 2014.

32 Art
155(1)(d), LoE 2020.

Disclaimer: This Alert has been
prepared and published for informational purposes only and is not
offered, nor should be construed, as legal advice. For more
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