(First appeared in Vietnamese in The Saigon Times, print edition on 15 April 2021, and online edition on 17 April 2021.)

This article reviews two recent court rulings on disputes among company members, raising concerns about how judges applied certain fundamental principles of corporate law. It should be noted that the author has not had access to the case files; thus, the assessment is primarily based on information reported by the media.

From the Case of Dau Tieng Lake Forest Mr. Tùng was the sole owner of a company in Tây Ninh, which primarily engaged in forest planting and care. In 2014, he entered into an agreement with Ms. Hồng for her to invest capital into the company. Ultimately, neither party contributed the agreed capital fully, though Ms. Hồng did invest over ten billion VND in actual cash. As a result, both parties sued to annul each other’s company membership. The People’s Court of Tây Ninh ruled in favor of Ms. Hồng. The High People’s Court in Ho Chi Minh City appellate hearing declared the capital contribution agreement invalid due to its fraudulent nature (the form being a capital contribution agreement but the substance being a project transfer), reversing the outcome in favor of Mr. Tùng.

In approaching and resolving the issue this way, the Court seemed to overlook several fundamental principles of corporate law:

1. The Right of the Company to Raise Additional Capital: This right has existed in all three versions of the Enterprise Law over the past decade. When a company lacks capital, it seeks additional funding to enable project execution, prevent land from lying fallow, and ensure continued existence and development. Investors who have money can seize opportunities, while those with less capital can leverage others’ money to conduct business. By ruling as the Court did, it may have deprived the company of this right, sided with the defaulting party, and harmed the common interest.
2. The Legal Status of the Entity: It appears that the Court only saw Mr. Tùng and Ms. Hồng as individuals who contributed capital to the company without recognizing the company’s independent existence, separate assets, responsibility to creditors, and capacity to be sued and to sue. If the forest planting project was acknowledged as Mr. Tùng’s contribution, it must belong to the company. As it belongs to the company, Mr. Tùng would not have the authority to transfer it. Furthermore, in the capital contribution relationship with Ms. Hồng, the company was the entity receiving the capital contribution. Within the company, Mr. Tùng had the authority to make decisions regarding the acceptance of capital contributions. In external relations, Mr. Tùng was the legal representative of the company at that time. However, according to the law, the transaction of receiving and contributing capital is essentially between the company and Ms. Hồng, giving rise to rights and obligations between the company and Ms. Hồng. In this case, Mr. Tùng and the company should not be conflated.

Regarding the author’s observation, the concept of the legal status of the entity in Vietnam seems to exist only in theory. The judiciary appears to consider the individuals who contributed capital to the company, especially the initial and largest contributors, as the company itself. Perhaps for this reason, using the above case as an example, the company’s right to raise capital and the right of subsequent contributors like Ms. Hồng have not been respected.

3. The Right to Transfer a Project: This right is entirely different from the right to raise capital and the right to transfer shares or capital contributions. The right to transfer a project may be restricted under certain circumstances by civil, investment, land, and specialized laws. However, if the enterprise law does not prohibit capital raising and capital transfer rights, exercising these rights is legal.

Regarding the Case Involving the Owner of Sunwah Pearl

Bay Water Company has two members: Sun Wah and SATO, holding ownership stakes of 90% and 10%, respectively. In 2016, the charter of the company was approved, clearly stating that any amendments to the charter require the approval of all members. In 2019, the representative of Sun Wah requested an amendment to the charter to remove the requirement for unanimous voting. Despite SATO’s disagreement, the board of members of Bay Water passed a resolution amending the charter with only Sun Wah’s approval.

SATO sued to annul the resolution and won at the trial court. The High People’s Court in Ho Chi Minh City overturned the decision on appeal, accepting the amendment. By doing so, the Court seemed to overlook the principle of “freedom of contract” under corporate law, which allows a company’s charter to stipulate different provisions from the law in many cases. Setting a minimum voting threshold (100%) higher than the law default (at least 75%) as in this case is a typical example.

The purpose of these open regulations is for the law to protect minor capital contributors to the extent possible. Those who contribute more capital generally have more power. However, the law aims for fairness by requiring a higher consensus level for extremely important decisions than a usual level of more than half. The law also allows parties to agree and state higher thresholds in the charter than the minimum law default, even the maximum level. In this way, the law facilitates parties “tailoring the rules to suit.” Thus, even very minor capital contributors are protected, avoiding oppression by the other party. Using this way, the law encourages people to contribute capital, regardless of the amount, for business purposes.

Why do minor capital contributors need such high thresholds? Consider the specific example of a decision to increase company capital. If the charter does not stipulate that a capital increase decision requires the approval of a minor capital contributor, a major capital contributor (usually with more voting power) could continuously propose and implement capital increases. Those who can contribute more capital themselves or invite others to contribute. As a result, minor capital contributors, if not “deep-pocketed,” will eventually see their ownership percentage diluted and devalued. Similar to two partners making a cake, one contributes flour and the other contributes sugar. If the other continuously adds more flour, the sugar will become diluted even if the cake gets bigger. Foreseeing this, the sugar contributor initially demanded that the flour could only be added with their consent. Why would the flour contributor, even if provided with expensive flour, agree to this? Perhaps the sugar contributor had something valuable to offer in return, like baking skills, an oven, or access to electricity. Similarly, the major capital contributor might accept high thresholds, effectively “tying their hands and legs” because the minor capital contributor has something the major capital contributor needs to trade for, such as land, high technology, or even connections.

Once they have veto power, the charter becomes the “amulet” of the minor capital contributor. Therefore, they would also demand that any amendments to the charter require a high approval rate, to the extent that they have veto power. Otherwise, the other party could easily tear up the amulet before the minor capital contributor has a chance to use it. Returning to the case above, by recognizing the amendment resolution passed without the unanimous agreement of all company members, the court supported Sun Wah in tearing up SATO’s amulet. In doing so, the court seems to have disregarded the law.

What Will Happen Then?

Several years ago, the judiciary raised the issue of whether the right to contribute capital or purchase shares was a statutory right or required registration. Since then, according to the author’s observation, capital contributions and share purchases have continued without needing to register a separate business sector of the buyer. Similarly, after the court’s judgment in the Dau Tieng Lake forest case, people have still raised additional capital or transferred capital as usual, especially in the real estate field. It seems that even after the Sun Wah case, people will continue to draft charters granting veto rights to minor capital contributors. They do so because they rely on the law to protect themselves. However, this trend may change if more court judgments appear to contradict the fundamental principles of enterprise law.

Deeper into these cases lies the nature of contractual agreements. Historically, people initially engaged in transactions based on genuine trust. From trust came promises. But promises are often easily forgotten, so to ensure peace of mind, people need the power of the state to compel the promisor to fulfill their obligations or be held accountable for breaking them. Promises become contracts. Saying a contract is effective means the promisee can rely on the state, through the courts and enforcement agencies, to compel the other party to keep their word. Transactions, therefore, continuously occur. But when state power is abused, whether through intentional or unintentional misapplication of the law, contracts become meaningless, promises are as fleeting as the wind, and trust gradually erodes. So, on what basis can people purchase, conduct business, or cooperate?

By Ngu Truong