(First appeared in Vietnamese in Vietnam Lawyers Magazine on 28 July 2020.)

Just two years after the 2014 Enterprise Law was enacted, the process of amending this Law was underway. By mid-June 2020, the new Enterprise Law was promulgated and will take effect in 2021. This article discusses some new points in the 2020 Enterprise Law that are unclear and irrational, which may cause significant difficulties in practice.

Concept of “Related Persons”

Individuals, organizations, or groups of individuals and organizations “capable of controlling the operations” of a company through ownership, acquisition of shares, capital contributions, or through the company’s decision-making are considered “related persons” (Article 4.23).

An example of applying this regulation is as follows: A shareholder owns only 9% of the company’s common shares; transactions between this shareholder and the company may not need approval from the General Meeting of Shareholders or the Board of Directors (Article 167). However, if this shareholder enters into a shareholder agreement with one or more other shareholders, making that group of shareholders capable of controlling the company’s operations, then under the new definition of “related persons,” these shareholders participating in the agreement become “related persons”. Consequently, any transaction between the 9% shareholder and the company would need internal approval.

Another example is a person who establishes a company in someone else’s name but actually runs and manages the company behind the scenes. Transactions between the company and this person (the anonymous person) or their related persons may need the company’s internal approval. Another example is someone about to buy newly issued shares of the company, and there is an agreement between this person and an existing shareholder that helps them control the company’s operations; in that case, the existing shareholder may not have the right to vote on the share issuance transaction between the company and the new shareholder.

In reality, reading the new Law does not easily clarify the role regulated by this definition. The reason is that, according to the exact wording of the Law, unlike the Securities Law, Article 4.23 of the new Enterprise Law only helps identify the related persons of a business, not the related persons of an individual, nor does it create a related person relationship between organizations and individuals.

Moreover, the new Law does not explain how individuals and organizations are considered to “control the operations” of the company. Perhaps when applying the new Law, we will have to look at the Competition Law and make uncertain guesses.

The definition of “related persons” is also not used in some necessary places. For example, regarding transactions between the company and related persons, other concepts will be used, such as in Article 67.2 (members of the Board of Members related to parties in contracts or transactions do not count towards the vote) and Article 167.4 (shareholders with related interests to parties in contracts or transactions do not have voting rights).

Contracts Before Enterprise Registration

The new Law stipulates that after the Enterprise Registration Certificate (ERC) is issued, the parties in contracts serving the establishment and operation of the business before and during the enterprise registration process must transfer the rights and obligations under the contract as stipulated by the Civil Code, except in cases where the contract has other agreements (Article 18). This regulation can be understood as the Enterprise Law requiring the parties to transfer rights and obligations to ensure that the business will (or must) continue to perform the contract. If understood this way, the new Law may complicate the issue because under the old Law, after being established, the business naturally inherits and continues to perform the contract (Article 19 of the Enterprise Law 2014).

If not understood this way, the regulation “must transfer the rights and obligations under the contract” will cause difficulties for the parties for the following reasons:

First, the transfer of obligations requires the consent of the obligee (Article 369 of the Civil Code). Thus, if for any reason the obligee does not agree, the business founder (usually the obligor) will not be able to perform the transfer as required by Enterprise Law.

Second, the transfer agreement is a transaction between the company and the contract parties. Therefore, if the contract parties become related persons of the company (such as members, major shareholders, company managers), those parties may not have the right to vote on that transaction. Hence, if all are related persons of the company and do not have voting rights on that transaction, it is unclear who will give internal approvals. To overcome this obstacle, the parties might need to utilize the exception “except where the contract has other agreements” and agree in the contract that the rights and obligations of those signing contracts serving the establishment and operation of the business will automatically and unconditionally transfer to the business immediately upon issuance of the ERC. The problem is that not everyone knows or remembers to include this clause in the contract, or even understands whether this regulation creates such an exception.

Capital Contribution

After listing the types of assets that can be used for capital contribution, the new Law states, “only individuals or organizations that are lawful owners or have legal use rights over the assets… are allowed to use those assets for capital contribution according to the law” (Article 34). Perhaps the phrase “legal use rights” is applied (and only applied) to the type of asset known as “land use rights,” as no one would understand that those who only have use rights over other types of assets can still use those assets for capital contribution.

The next article states that capital contribution is only considered complete when the legal ownership of the contributed asset has been transferred to the company. So, is capital contribution considered “complete” when the asset is land use rights and has been transferred to the company? Because the contributor certainly cannot have “ownership” over the land use rights asset. These are small points but should be mentioned here to see how the concept of “land use rights” is causing unnecessary trouble.

Seal

The business seal still exists and is not completely eliminated. Furthermore, the seal of branches, representative offices, or other units of the business is also legalized. With a new general regulation that “businesses use seals in transactions according to the law,” debates about the “seal culture” and the legal effect of the seal will likely continue to be lively in Vietnam.

90-Day Capital Contribution

The maximum period of 90 days from the issuance of the ERC for members and shareholders to contribute capital remains unchanged (Articles 47, 75, 113). However, perhaps in response to complaints from the business community that the period is too short, the new Law generously does not count the time for transporting, importing contributed assets, or handling administrative procedures to transfer asset ownership into the capital contribution period. The issue is when contributors must start transporting, importing, or handling administrative procedures. Setting a period without a starting point makes it difficult to determine when that period ends. And it is easy to exploit this regulation to prolong the capital contribution period, such as registering a very small cash contribution and a very large asset contribution. Thus, registered capital can be very large, but actual contributed capital in the first three months can be very small. Or initially registering a small capital and registering a larger additional capital contribution; this is because the new Law still does not set a time limit for additional capital contributions. After all, these incomplete regulations are minor issues, but the bigger issue of “fear of virtual capital, preferring real capital” still exists. So, will this help reduce the situation of many “ownerless” businesses leaving behind thousands of workers without insurance? The answer is probably no.

Shareholders’ Right to Access Information

Shareholders or groups of shareholders owning 5% or more of the total number of common shares, or a smaller percentage as stipulated in the company’s charter, have the right to inspect, look up, and extract minutes and resolutions, decisions of the Board of Directors, mid-year and annual financial statements, reports of the Supervisory Board, contracts, transactions requiring the approval of the Board of Directors, and other documents (Article 115). The new Law excludes documents related to the company’s trade secrets and business secrets from this scope, meaning shareholders will not have access to this type of document. The issue is what “trade secrets” are, as the specialized law, the Intellectual Property Law, only stipulates “business secrets.” Thus, the company can abuse this exclusion to claim that a document is a trade secret to deny shareholders’ access.

Moreover, the exclusion scope is too broad. A document, such as a contract that requires the Board of Directors’ approval, may contain (or as the Law says “related to”) trade secrets or business secrets. However, the information shareholders need to know in that document does not necessarily have to be any trade secrets or business secrets but other information. Therefore, excluding the entire content of that document is unnecessary, unreasonable, and narrows the shareholders’ right to access information.

Dismissal of Board Members

The new Law stipulates that the General Meeting of Shareholders dismisses Board members if they submit a resignation letter, and it is approved (Article 160). “Approved” is a new phrase added. The issue is that the Law does not clarify who has the authority to approve the resignation letter. More importantly, if the resignation letter is not approved, will that person still have to continue working for the company, and even the General Meeting of Shareholders cannot dismiss that person?

Shareholders’ Right to Sue

Shareholders and groups of shareholders owning at least 1% of the total number of common shares have the right to personally or on behalf of the company sue for personal liability and joint liability against Board members and Directors, or the General Director to request benefits or compensation for damages to the company or other person (Article 166). “Or others” is a newly added phrase.

This new point is unreasonable. Firstly, the Law does not clarify who “others” are and how the right of shareholders or groups of shareholders to sue differs from the right of those “others” (such as suing for non-contractual compensation). If those “others” are harmed, why can’t they sue directly themselves but need the shareholders or groups of shareholders to do it for them, and can even sue on behalf of the company? Secondly, why do those shareholders or groups of shareholders sue for the benefit of “others” and not for the company, but the litigation costs are counted as the company’s costs, or in other words, such costs will be reimbursed by the company? Thirdly, there will be many cases where the lawsuit arises from the Board members, the Director, or General Director performing their roles in the company. When that happens, their actions or decisions will bind the company, on behalf of the company, and for the benefit of the company. If those actions or decisions cause damage to “others,” normally, “others” will have to sue the company. If the company has to compensate “others” for damages, the company can then sue the Board members, Director, or General Director to claim back the compensation the company paid to those “others” and other damages arising from the lawsuit of those “others.”

The new Law is about to take effect, and any amendments or supplements will take several more years. Not all issues can be resolved or explained by the Government in decrees. It is suggested that the main drafting agency of the Law should have public analyses and explanations about the new Law and respond to the feedback about the new Law. These analyses, explanations, or responses are not laws, have no binding effect, but will help make the new Law easier to apply, more reasonable, and more convincing.

By Ngu Truong and Trang Duong