The Enterprise Law 2020 (EL2020) was adopted in June 17th, 2020 and shall take effect as of January 1st, 2020 with a number of fundamental changes listed out in our previous article, “The State returns seals to enterprises”. In addition to new regulations on enterprises’ right to manage and use their seals on their own discretion, EL2020 also omitted the regulation on shareholders or group of shareholders’ ownership of 10% or more of total common ordinary shares for at least 6 consecutive months in order to execute a number of rights.
Overview
The regulation on shareholders or group of shareholders’ ownership of 10% (or more) of total common ordinary shares for at least 6 consecutive months in order to execute a number of rights was first introduced in Enterprise Law 1999 (Clause 2, Article 53), followed by Enterprise Law 2005 (Clause 2, Article 79) and Enterprise Law 2014 (Clause 2, Article 114). It is stated that any shareholder or group of shareholders that holds at least 10% of ordinary shares wishing to nominate candidates for the Board of Directors and the Control Board, request convention of the General Meeting of Shareholders, examine company’s documents and execute other rights must maintain such ownership for at least 6 consecutive months.
The theoretical foundation originated from the fact that joint stock company is a legal entity. Due to the entity’s independence from it owners (i.e. shareholders), it should be secured from all changes made by them. As a result, when new shareholders acquires shares from current ones, it takes some time for them to examine and maintain company’s business, to avoid any immediate interventions that may disturb management activities in the company. Furthermore, the minimum proportion of shares (10%) and the six-month period also help prevent negative behaviors from hostile individuals and organizations who spend money to holds a small amount of shares, harrass and destabilize company’s operations.
For that reason, the share ownership proportion (10%) and the minimum period of share ownership (6 months), along with a number of shareholders’ rights have featured in Enterprise Law since 1999 – for the last 21 years. However, in light of an ever-changing market and the global M&A activity surge, these regulations have shown some inadequacies and irrationalities in practice.
Cons
These regulations have their own reasonable theoritical foundations; however, they are no longer appropriate to the current situation, for several reasons:
First, the regulation that any shareholder or group of shareholders that holds at least 10% of ordinary shares for at least 06 consecutive months shall have the right to nominate candidates for the Board of Directors and the Control Board; examine, copy minutes of meetings and Resolutions of the Board of Directors, mid-year and annual financial statement using the forms of Vietnam’s Accounting System, and reports of the Control Board; and request convention of the General Meeting of Shareholders prescribed in Article 114.2 Enterprise Law 2014, shall in fact, conflict with the enterprise law itself. For a newly established company, how can its founding shareholders elect the BODs and BOC when it has just been issued an ERC and it is impossible to guarantee a 06 consecutive month period in this case.
Second, the provision of a six consecutive month period is not consistent with the principles of civil law on property and property ownership. When a subject gets property from owners in accordance with the law, he or she is automatically a person who inherits full and complete ownership of property and property rights related to the property. The fact that Enterprise Law 2014 and earlier introduced a six-month period automatically caused new shareholders in the companies to lose some basic rights within six months from the date they are officially recognised as owners. It should be noted that, these are rights related to the protection of investment assets, the right to check transparency in the management of investment assets of the shareholders. Under civil law, these are the basic and constitutional rights of the property owner.
Third, the six-month period prescribed by former and current Enterprise Law is the origin of interest conflict between new shareholders and current managers. When there are not enough statutory rights to protect shareholders and to supervise company’s business during the transition, these managers will have enough administrative space to disperse assets and/or transfer transactions’ price to bring the company’s profits to other entities. Our practice shows that these are many cases that have happened in practice and during our advisory process for joint-stock M&A transactions, we always have to negotiate with the seller to dismiss former managers, elect/appoint individuals appointed by the buyer before full payment of transfer value of shares.
Verdict
There is always a historical reason behind a legal regulation. The regulation on minimum share ownership period as discussed above was born and existed during the time when investors and enterprises officially started to get acquainted, learn and accumulate regulations on investment system and corporate governance. For policy makers, this is also the time to gain knowledge on corporate governance from other advanced legal systems.
In an ever evolving and developing economy, the removal of legal barriers – i.e. minimum shareholding time limit to allow investors to access and take over the businesses they invest in is a must to grant them the right to protect and make sure the assets they invest are completely intact. In particular, when lawmakers consider joint stock enterprises as the center of the type of counterpart company, focusing on capital linkages, the rotation of investment capital flows, the adjustment of this small content In order to ensure the consistency of property ownership as recognized in civil law, thereby increasing the powers of investors in the Enterprise Law is even more necessary.
Lawyer Vuong Van Quang – Penfield Law Company Limited