PART I. GENERAL ASSESSMENT
Law on Enterprise is one of the fundamental legal documents for business activities, regulates most matters related to enterprises. The lately amended and adopted Enterprise Law is an necessary step to expand the actual right of free trade of enterprises, to build the core principles for Vietnam to be more accessible to the international market economy, to create the solid legal conditions for integration.
In general, the admendemnt of corporate law is an inevitable step for the rise and integration of Vietnam’s economy, affirming the position of Vietnam’s economy in the international market. And to achieve this great goal, it can be seen that the change of the legal provisions in the Law on Enterprise 2020 (“LOE 2020“) is aimed at improving the freedom of business. This is expressed through the LOE 2020 that more issues can be agreed by parties in the company’s charter to enhance the right of the parties to self-determination in business activities. In addition, the protection of the rights of shareholders is also more focused when the LOE 2020 expands the rights and minimizes the number of shares required to own by a large groups of shareholders. Besides, it is worth noting at the LOE 2020 that it is quite clear and specific about the “accountability” of the managers in joint stock company and appreciates the obligations of careful and loyal business managers. This is the official recognition of corporate governance regulations to prevent potential conflicts of interest in the company from the operation of managers; express simultaneously special attention to the prevention and control of private transactions in order to minimize the negative impact on corporate governance.
In the next sections of this article, we will further analyze the issues mentioned and evaluated, in order to provide you with an overview of the changes of the newly issued LOE 2020, as well as the positive legal consequences from these innovations to the Vietnamese business community in the time to come.
PART II. CHANGES IN PROCEDURE
2.1 Supplementing registration dossiers of limited liability company and joint stock company
Compared to LOE 2014, LOE 2020 stipulates that dossiers for registration of establishment of limited liability companies (“LLC“) and joint stock companies (“JSC“) must have copies of legal papers of individuals for legal representatives such as identity card, citizen id or passport. In case the legal representative is a foreign individual then a copy of legal papers of equivalent value issued by a foreign competent authority shall be required.
Accordingly, this is an additional regulation aimed at strengthening the management of State agencies for the establishment of enterprises, limiting the case of enterprises being established but not having the legal representative in reality; at the same time, the addition of this regulation has improved the legal representative of enterprises mechanism compared to the current LOE.
2.2 Abolishing some procedures in enterprise establishment registration
The registration of enterprise establishment might be considered as the first step for entering a business market. And in order to simplify this procedure, LOE 2020 has abolished some procedures that are not really necessary in the enterprise registration procedure such as: (i) registration of stamp before using[1]; (ii) report changes in business manager information[2]; (iii) send information to the business registration office where the enterprise is headquartered when establishing a branch, setting up a new business location[3]; and (iv) submit the enterprise charter when registering the establishment of a joint venture company (“JVC“), a LLC, a JSC[4]. The most notable is the abolition of the procedure for registration of stamp before using. Currently, before using the stamp, enterprises are obliged to notify the business registration office to be publicly posted on the National Portal[5]. However, according to LOE 2020, the form, content and number of seals of enterprise will be entirely decided by enterprises, branches, representative offices and other units of the enterprise and do not need to be notified before using. This regulation has come closer to the international practice of allowing enterprises the freedom to choose and decide whether to use a corporate seal. Although LOE 2020 has not really dropped the requirements for the seal of the enterprise and in fact most transactions and activities of the enterprise need a seal, it can be seen that this is the “open” point for enterprises, reducing administrative procedures has partly helped enterprises save time and effectively use their seal.
In addition, the abolition of the procedure for reporting changes in business manager is also a significant change. Accordingly to LOE 2014, when there is a change in information of the Board of Director for JSC, member of Supervisor Board or Supervisor, Director or General Director, the enterprise is obliged to report to the Business Registration Office within five (05) days after the change[6]. Although in fact, the notification of change to the business manager is for the purpose of publicizing and transparent transactions with third parties but from the effective of LOE 2020, the above provision is abolished. This is the removal of a major obstacle for enterprises due to the business situation or due to the specific nature of the work, it is necessary to change the manager regularly. At the same time, this change still ensures the management of the state and the interests of the parties in the transaction because when conducting the transaction, the legal representative shall carry out the rights and obligations of the enterprise on behalf of the company and they shall be responsible to the company; at the same time, the management titles of the enterprise have been registered for change and noted at the Business Registration Office.
In general, the abolition of the above-mentioned procedures by LOE 2020 represents the state’s efforts in reducing the time and cost of implementing procedures for enterprises, contributing to facilitating the “playground” of the Vietnamese business community.
2.3 Shorten the notice period before the suspension of business
Compared to the LOE 2014, the LOE 2020 has shortened the time for enterprises to notify the business registration office before suspending business from fifteen (15) days to three (03) days. This change is intended to help businesses quickly suspend their business in the face of unexpected incidents such as epidemics, natural disasters, fires, managers or missing legal representative, etc…
2.4 Excluding the dissolution of enterprise due to revocating Enterprise Registration Certificate (“ERC”)
Point g clause 1, Article 125 of the Law on Tax Administration 2019 stipulates that the revocating of the ERCis a measure to enforce the administrative decision on tax administration and under the current LOE, in the above case, the enterprise will be dissoluted[7]. However, this regulation is completely detrimental to enterprises because measures will cease to take effect from the time the tax owed is paid in full to the state budget but the enterprise still faces the situation of having to be dissoluted. Therefore, LOE 2020 has excluded the case of corporate dissolutiondue to the revocating of the ERC due to administrative violations of tax administration in order to ensure the harmonize with the law on tax management, ensuring the interests of enterprises.
2.5 Name of the business place must include the enterprise name
LOE 2014 stipulates that the name of the branch and the representative office must bear the enterprise name attched with the phrase “Branch”, “Representative Office” but not applicable to the business locations of the enterprise. However, since LOE 2020 takes effect, similar to a branch and representative office, the business location name must bear the enterprise name and the phrase “Place of Business”.
2.6 Additional objects that are not allowed to establish and manage the enterprise
In addition to the six (06) groups of subjects who do not have the right to establish and manage the enterprise as stipulated in Clause 2, Article 16 of the LOE 2014, LOE 2020 adds a number of subjects not permitted to establish and manage the business, including:
- People having difficulties in controlling their behaviors;
- People being kept in temporary detention;
- Police workers in agencies and units of Vietnam People’s Army, except for those designated and authorized representatives to manage state-owned stakes in enterprises or to manage state-owned enterprises; and
- Juridical persons that are banned from business operation or banned from certain fields as prescribed by the Criminal Code.
The addition of the above provisions is intended to conform to the provisions of the LOE with the Criminal Code; at the same time, ensuring business ability and efficiency in the business environment.
2.7 Amendments to regulations on share offering and individual share offering
LOE 2020 has amended the provisions on the definition of share offering, accordingly, the share offering is not only the company’s increase in the number of shares entitled to be offered but also added to the definition of share offering is the company increasing the number of shares, the type of shares entitled to be offered to increase charter capital. However, this change is not really clear and it is understandable that, since LOE 2020 came into force, the act of accepting an increase in the type of shares to be offered can also be considered a share offering.
In addition, LOE 2020 has eliminated the obligation to notify the Business Registration Office when offering individual shares, helping to shorten the time in the individual offering process. Besides, LOE 2020 also clarifies the priority of buying shares of existing shareholders when the company offers individually, except for mergers and acquisitions of the company, this issue is not specified in the previous LOE.
2.8 Additional cases of termination of general partners
Compared with the old law, LOE 2020 adds two (02) cases where a general partner may be terminated its membership status when: (1) having difficulties in cognition and behavior control; and (2) serving an imprisonment sentence or be banned by the Court from practicing or doing certain jobs in accordance with the law.
This addition removed the problems for the company and for the general partners themselves because in the above cases, they cannot participate in the company’s operations. Therefore, the termination of their status helps to ensure the effective business operation of the company.
PART III. CHANGE IN TYPES OF ENTERPRISES
3.1 Extend the term of capital contribution by assets
According to the LOE 2014, the members or founding shareholders of the company are required to fully contribute the initial charter capital within ninety (90) days from the date the company is issued with the ERC. However, LOE 2020 has allowed to extend the above time limit corresponding to the time of transportation, importation, and administrative procedures to transfer property ownership. During this period, members or founding shareholders contributing capital for the first time by assets still have rights and obligations corresponding to the committed capital contribution ratio.
As can be seen, this is a highly practical provision, in accordance with the actual situation when a member/ founding shareholder contributes capital with assets with provisions on transfer of ownership. However, the failure to impose restrictions on the time of transportation, importation, and administrative procedures to transfer ownership of property may lead to the deliberate delay of the capital contribution by a member/ founding shareholder by not exercising or extending the time to transfer the ownership mentioned above, affecting the interests of the company and inequality with members/ shareholders contribute capital in cash.
3.2 Expand the rights of general shareholders and remove regulations on the term of ownership of common shares
LOE 2005 and LOE 2014 both stipulated that the group of shareholders owning from 10% of the total common shares for a continuous period of at least six (06) months or a smaller percentage specified in the charter of the company has the right to nomite, apply to the Board of Directors, request the summoning of extraordinary shareholders, consider extracting the minutes and resolutions of the General Meeting, etc. However, according to LOE 2020, this ownership ratio has decreased from 10% to 5% and regulations on continuous ownership period of six (06) months or more are also abolished.
In addition, LOE 2020 has also abolished the requirement for the period of ownership of common shares “continuously for 6 months” for shareholders, groups of shareholders owning at least 1% of common shares themselves or on behalf of the company to initiate civil liability lawsuits against the Board of Director, Director or General Director.
The amendment of the above provisions helps small shareholders to interfere in the management, production and business activities of enterprises, protect minority shareholders and groups of shareholders in enterprises, contributing to strengthening the revised attraction to protect minority shareholders of enterprises , increase the source of attraction of resources to the business, especially small capital sources from individuals; at the same time, this regulation helps ensure the implementation of shareholders’ rights does not affect the normal operation of production and business activities of enterprises.
3.3 Additional obligations to confidentiality of company information of shareholders
According to LOE 2020, shareholders are provided with information from the company in accordance with the law and the company’s Charter may only use the above information to implement and protect their legitimate rights and interests, not to spread or copy, send information to other organizations and individuals. However, LOE 2020 remains open to the issue of providing the above information to potential buyers for the number of shares owned by shareholders.
The addition of this regulation provides a legal basis for forcing shareholders not to disclose the company’s internal information and business secrets to third parties, especially competitors, which is the legal corridor to limit the abuse of power by shareholders, hindering the business activities of the company, causing damage to other shareholders or the company.
3.4 Limit the term of independent members of Board of Director
LOE 2020 limits the term of independent member of the Board of Director from unlimited to no more than two (02) terms. This regulation creates conditions for minority shareholders to increase their ability to send representatives to join the Board of Director, which this is one of the mechanisms to protect minority shareholders in the company.
3.5 Additional obligations and responsibilities of JSC manager
LOE 2020 stipulates that members of the Board of Director, Director on be behalf of individuals or on behalf of others to perform work in any form, within the scope of the company’s work, must explain the nature and contents of such work to the Board of Director, the Supervisory Board and only be done when approved by the majority of the remaining members of the Board of Director; if they are not declared or not approved by the Board of Director, all incomes from such activities belong to the company. At the same time, the regulation of accountability also shows the mastery, responsibility for business activities and the level of transparency in corporate governance activities, contributing to improving the prestige and competitiveness of enterprises in the market.
In order to enhance the obligations of careful and loyal business managers, LOE 2020 has also added the responsibility of the manager, namely, Members of the Board of Director, Director or General Director and other managers who have violated the responsibilities of the manager who is personally or jointly compensating for lost interests , return the received benefit and compensate for all damages to the company and third parties.
In fact, in many cases the Court declares that the manager must compensate the company for causing damage to the company. For example, managers of companies that use foreign workers in Vietnam without work permits, managers of companies that use drivers to engage in transportation business without labor contracts, etc. causing damage to the company will be liable personally, compensating the company and third parties. Even so, the regulations on dispute resolution between the company and regulators in LOE 2014 have not really clearly caused much embarrassment to the trial body. Therefore, LOE 2020 additional regulations on responsibilities of the manager of the above-mentioned JSC have created a legal basis for shareholders or shareholders to sue the company manager on beance of the company in order to protect the legitimate interests of the company and of individual shareholders.
3.6 Change on voting threshold in JSC
According to LOE 2014, the relative majority voting threshold in JSC is 51%. However, at LOE 2020, this rate has dropped to 50%; at the same time, for important corporate matters such as the sale, borrowing of assets, etc. the company’s charter may adjust to increase or decrease these ratios in order to ensure the interests of the company and balance the interests of all shareholders. This change has also partly expressed the right of the parties to self-determination to participate in business activities when LOE 2020 provides many issues that can be noted more issues for the parties to agree in the company’s charter.
In addition, LOE 2020 also recognizes that preferential shareholders have the right to vote on changes affecting their own rights and obligations. Specifically, for contents that “detrimental change” the rights and obligations of shareholders owning preferential shares may only be adopted if the number of preferential shareholders of the same type of meeting owns 75% of the total number of preferred shares of that type or more or is agreed by the preferential shareholders of the same type of ownership of 75% of the total number of preferred shares of that type or more in case of adopting resolutions in the form of written opinions. Although until now, there are no regulations and specific guidelines as to how a “detrimental change” for preferential shareholders, it is clear that the addition of the above provisions is a turning point of LOE 2020, recognizing the equality of all shareholders in the company and clearly depicting the proximity to good corporate governance LOE 2020.
3.7 Expand the concept of state-owned enterprises
LOE 2020 has revised the concept of state-owned enterprises (“SOE“) to expand the understanding of the scope of SOE in accordance with international practices and Vietnamese practices. Accordingly, SOE are managed in the form of LLC and JSC including: (1) state-owned enterprises holding 100% of charter capital; and (2) state-owned enterprises holding more than 50% of charter capital or total voting shares.
This change is one of the highlights and most notable of the amendments and supplements to the LOE to ensure equality between SOE and enterprises of other economic sectors but still ensure the state holds the dominant capital or shares. Specifically, the State holds more than 50% of the guaranteed charter capital: (1) the right to directly govern the decision-making of ordinary decisions requires an endorsement rate of 50% or more; and (2) the right to indirectly govern the decision-making that requires an endorsement rate of 65% or more through its veto.
It can be seen that the new definition of SOE does not completely eliminate the concept of state-owned enterprises with 100% charter capital but instead, new regulations towards the division of state-owned enterprises according to different levels of ownership, each type of enterprise has separate regulations to improve the efficiency of corporate governance , transparency in business, the type of stricter control over the use of state capital in SOE.
3.8 SOE must establish a Supervisory Board
SOE regulated by LOE 2014 may or may not have a Supervisory Board (“SB“) in the management organizational structure of the enterprise. However, when LOE 2020 takes effect, in the management organizational structure of SOE, it is mandatory to have SB, specifically, based on the size of the company, the representative office of the owner decides to establish a SB with from one (01) to five (05) Controllers, including the Head of SB. The term of controller must not exceed five (05) years and may be re-appointed but not more than two (02) ongoing period at the company. In case the SB has only one (01) Controller, the Controller is also the Head of SB and must meet the standards of the Head of SB.
In addition, in terms of rights, obligations and working regime of SB, LOE 2020 almost inherits the entire spirit of LOE 2014, only further expanding the rights of the Head of SB and other controllers can simultaneously be appointed as Head of SB, Controller of no more than four (04) SOE without the written consent of the representative office of the owner.
3.9 Supplement regulations on corporate bonds and non-vonting depositary receipt
In addition to changing the concept of SOE, another notable change of LOE is the expansion of regulations on the offering of individual bonds by non-public companies. If LOE 2014 has only one regulation on bond issuance of JSC, by LOE 2020 there are many regulations on bond issuance. Accordingly, LLC and JSC can issue corporate bonds, but non-public JSC can issue “other securities”. Thus, it can be understood that a LLC is not allowed to issue any securities other than bonds.
In addition, LOE 2020 also stipulates that JSC is allowed to issue non-voting depositary receipt (“NVDR“). Until now, there is no definition of NVDR. However, it can be understood that NVDR is a special type of deposition receipt, issued by a third organization that is a subsidiary of the Stock Exchange, which will transfer to the investor all financial interests associated with the stock such as dividends, the right to buy new shares, etc. According to LOE 2020, NVDR has economic interests and obligations corresponding to the base common shares, except for voting rights.
From the above basic analysis, it can be seen that LOE 2020 is a turning point, marking a remarkable development in concretizing the regulations on enterprises of our country gradually compatible with international practice and the principles of corporate governance of the Organization for Economic Cooperation and Development (OECD); mechanisms and methods of protecting the interests of investors in Vietnam have many progressive regulations, somewhat overcoming the shortcomings of procedures, time and costs for business; to shape the relative protection mechanism to balance the rights and obligations of members/shareholders in the enterprise; improving the business environment towards business is the driving force to improve the competitiveness and autonomy of the economy with the aim of promoting international integration.
[1] Clause 2 and Clause 5 Article 44 Enterprise Law 2014
[2] Article 12 Enterprise Law 2014
[3] Clause 1 Article 34, Clause 4 Article 46 Enterprise Law 2014
[4] Article 21, 22, and 23 Enterprise Law 2014
[5] Clause 2 Article 44 Enterprise Law 2014
[6] Article 12 Enterprise Law 2014
[7] Point d clause 1 Article 201 Enterprise Law 2014
