Law on Securities 2019 is revised to serve the strong development of Vietnam’s stock market recently, and facilitate its level in the near future. Besides, the securities regulations also need to be amended to meet and adapt to the changing process of the Law on Enterprise 2020.
As policy-makers wishes to have a transparent business environment, the principle of power balance between major shareholders and minor ones in controlling business will be of great importance when amending the related legal regulations, in order to attract more investors to participate in the production and business activities of each company in particular and the entire economy in general.
Therefore, the Law on Enterprise 2020 and the Law on Securities 2019 have amended and supplemented many breakthroughs to encourage more individuals engaging in investment activities of the capital market. In such a situation, it is necessary that the shareholders’ rights of individuals group will have specific characteristics, together with its protection mechanism.
1. Shareholders’ defense mechanism according to law
Based on the amending contents of Law on Enterprise 2020, lawmakers have increased power for new investors by removing regulations of shareholders owning 10% or more, holding shares continuously for 6 months or more to perform its right of nominating members of the Board of Directors at the Company. This provision is considered a form of protecting the rights and interests of shareholders when having invested and the shareholder rights are fully implemented since becoming a shareholder.
In addition, the Law on Securities 2019 has codified a part of public company administrations with the provision that major shareholders are not allowed to take advantage of their status to influence the rights and interests of the company and other shareholders as prescribed by law and the company’s charter. This regulation restricts the misconduct of the group holding the dominant power of the company, as the fact in recent times showing that it has resulted in being deeply divided of the shareholders’ interests, seriously affected production and business activities.
Revised regulations are necessary and will help the stock market to ensure fairer and more transparency in the future. Most economists suppose it shall “enhance minor shareholders” or “enlarge minor shareholder rights” that lawmakers have tried to implement in writing.
However, are these regulations effective to create more power or protections to minor shareholders with lesser rights to influent companies in general, public listed companies in particular? The correct answer may have to wait for the practical work of reporting business investment results and economic indicators.
Currently, from a theoretical point of view, these new regulations exist as inadequacies in the shares ownership ratio to exercise its rights. Because, if it is impossible to identify who the major shareholders are and who are the minor ones, the defense mechanism will not be activated and the prevention of power abuse by major shareholders will not be affected. So, who are the major shareholders and who are the minor shareholders?
2. Identification of minor shareholders and major shareholders
The Law on Securities 2019 stipulates that a major shareholder is “ a shareholder that holds at least five percent of the voting shares of an issuer“. Looking back at history from the Law on Securities 2006 and the revised one in 2010, the figure of 5% to identify major shareholders remains unchanged.
However, the biggest difference in the Law on Securities 2019 is that it does not consider indirect ownership of shares to calculate the value of ownership from 5% of voting shares at the issuer. Specifically, the major shareholders in the Law on Securities 2019 will be “shareholders directly owning at least 5% of the voting shares of an issuer“.
In such a case, who are minor shareholders? Lawmakers still cannot introduce the concept of minor shareholders in the Law on Securities 2019 and the Vietnamese legal system does not identify this object. If the Author temporarily assumes from the definition of Major shareholders, the definition of Minor shareholders will probably be “a group of shareholders directly owning 5% or less of the voting shares of an issuer”.
Is the elimination of indirect ownership to regulate major shareholders consistent with the reality of the stock market? Is it capable of the upcoming trend of giving more protection tools for minor shareholders? We shall try to assess activities of a public company written by Nhip Song Electronic Magazine, published on its Financial Information section which is CompanionNewspaper (https://ndh.vn/doanh-nghiep/tan-tam-ma-va-bi-an-o-cii-1153073.html)
In 2016, Mr. Le Vu Hoang, Chairman of the Board of Directors of Ho Chi Minh City Infrastructure Investment Joint Stock Company (HOSE: CII) owned 1.3 million shares equaled to 0.58% shares of CII. Thus, Mr. Hoang is not a major shareholder in CII according to the Law on Securities 2006 and the revised one in 2010
In March 2016, Tan Tam Ma Investment Joint Stock Company bought 11 million shares of CII, equivalent to 4.39% of CII shares. However, Tan Tam Ma has a structure as members of the Board of Directors include Mr. Le Vu Hoang – Chairman of the Board of CII, Mr. Le Quoc Binh – Chief Executive Officer of CII and Ms. Nguyen Mai Bao Tram – a member of the Board of Directors of CII, in which Mr. Hoang is Chairman of the Board of Directors. Hence, if Mr. Hoang owns a large number of shares in Tan Tam Ma Company, then at that time Mr. Hoang is a major shareholder of CII when including the number of shares indirectly owned through Tan Tam Ma.
However, the Law on Securities 2019 will consider Mr. Hoang only a small shareholder and in the spirit of the law, Mr. Hoang should be treated fairly because he is in minor group.
As such, removing indirect ownership to calculate about major shareholders is creating a gap for shareholders holding dominant shares to use some trading techniques and change the nature of influential shares.
Returning to the above-mentioned CII story, the reason for establishing Tan Tam Ma emerged from the pressure of members of CII’s Board of Directors who have regularly traded CII shares, affecting the market and being opposed by investors when it affected CII’s share price. Mr. Le Quoc Binh, CII’s General Director also explained in the local media that “Recently, CII’s staff and employees agreed that they will not buy and sell shares on the stock exchange anymore, such annoying register transactions will concentrate on Tan Tam Ma company. You can contribute as much money as you have, then buy shares to save it. Most officers and employees of CII, as well as leaders, participate in Tan Tam Ma“. Thus, Tan Tam Ma will be an effective securities trading tool for members of CII’s Board of Directors without making any general impact on investors.
So, since the need for indirect investment exists and is inevitable, the waiver of this content in the way of determining major shareholders is whether distorting the understanding of major shareholders and minor ones?
If the story of CII happens in 2021, Mr. Le Vu Hoang will be a minor shareholder and if CII has a protection policy and fair treatment for the minor group that is extremely effective (in addition to the regulations of law), the Chairman of the Board of CII will be the one needing the protection of rights and interests. Perhaps some investors will feel a noticeable conflict when a person with the most powerful position on the Board is someone who needs to be protected from the abuse of other shareholders’ power concerning his interests at the Company.
The consequences of removing this indirect shareholding rate will need to wait for a practical time to prove whether this decision is right or not. However, an immediate consequence that will occur when the Law on Securities 2019 comes into effect is that (1) the identification of shareholders will become increasingly complex and difficult to determine when and (2) major shareholders dividing the ownership of their direct shares into indirect through other investment companies to avoid status and obligations of major shareholders will be a big trend of the stock market.
According to the law and reality of the stock market, a joint stock company is eligible for publicizing when there are still major shareholders, accounting for 85-90% of the company’s shares. So, if the major shareholders “smartly” transfer their shares to the investment company, the opacity will reappear and the minor shareholders will fall into situations of power abuse but cannot use legal mechanisms to protect themselves.
3. Conclusion
The stock market is considered as a “barometer” of the economy, the efficient operation of the market has a profound effect on the socio-economic indicators of the country. It is possible that managing and creating a fairer and more transparent mechanism in the stock market will be very difficult for policy-makers since it needs practice to be proved. However, retaining the trusts of investors, especially small ones, and minor shareholders, will need more efforts by policy-makers to find suitable defensive tools.
Mr. Nguyen Le Anh – Penfield Law Company Limited