SCIC To Take Control of State capitals in a Large Number of Vietnamese Enterprises

The Ministry of Finance has just issued Circular 118/2014 to allow State Capital Investment Corporation (SCIC) to take over State capital currently held by numerous provincial People’s Committees (PCs) and Ministries in a large number of enterprises. In particular, the SCIC will replace the provincial PCs and Ministries as representatives of State’s capital in:

• Limited liability companies with two members or more which have State capital;
• Joint venture companies in which provincial PC or Ministries are joint venture parties;
• Joint stock companies which are converted from wholly State-owned enterprises or which are newly incorporated in which provincial PC or Ministries are shareholders;
• Single member limited liability companies after being restructured pursuant to plans approved by the Prime Minister for the period 2011 – 2015; and
• Large State Economic Groups in case instructed by the Prime Minister.

To show commitment to the SOEs restructuring process, Circular 118/2014 expressly imposes liabilities to provincial PCs or Ministries which delay the transfer process. Circular 118/2014 is another effort in making SCIC to be a “Temasek” of Vietnam.

However, Circular 118/2014 would likely make it more difficult for existing and future strategic investors in SCIC-to-be-transferred enterprises to structure their investments. This is because existing and potential strategic investors in these enterprises usually want to have a shareholder agreement with representative of State capitals being provincial PCs or Ministries. If SCIC is to replace these provincial PCs or Ministries, it is not clear whether SCIC will accede to such shareholder agreement or if the strategic investor will need to re-negotiate and enter into a new shareholder agreement.

Having corporate operational flexibility through company charters in Vietnam

The charter (Điều lệ) (akin to the Articles of Association ) is probably the most an important corporate document of a Vietnamese company. However, many company charters in Vietnam simply just reflect (sometimes word-by-word) standard provisions of the Enterprise Law and its implementing regulations. Following the law in the charter may ensure that the company will have a charter that complies with the law. However, by doing so the shareholders/members of the company may not take advantages of the flexibilities in operation allowed by the Enterprise Law. Below is some examples:

• The Enterprise Law provides that assets that can be used for capital contribution in a company in Vietnam include cash, gold, foreign currencies, land user rights, intellectual property rights and “other assets specified in charter”. So if a company wants to receive other assets as a capital contribution (e.g. shares in other companies, cars), it should specify those other assets in its charter;
• The Civil Code provides that a legal person has the capacity to perform the rights and obligations consistent with its “operational objectives”. The operation objectives of a legal person are provided in the charter of such legal person. As such, having a broad operational objectives in the company’s charter would somehow provide a legal ground (or defense) for a company to perform many activities which are not clearly provided by law;
• The Enterprise Law requires certain matters in a joint stock company to be approved at a physical meeting of the general meeting of shareholders unless otherwise provided by the charter. A joint stock company may therefore opt out of this requirement if it considers having a physical meeting of the shareholders is cumbersome; and
• The Enterprise Law requires the collection of written opinions from shareholders by a joint stock company to follow a quite complicated procedures unless otherwise provided by the charter.  A joint stock company may therefore opt out of these complicated procedures if it considers these procedures cumbersome.

Vietnamese State Owned Economic Groups and State Owned Corporations

Many current problems of Vietnam economy come from large  State-owned Economic Groups (SOE Group)  (Tập đoàn kinh tế nhà nước) and State-Owned Corporation (SOE Corp) (Tổng công ty nhà nước) such as Vinashin and Vinalines. In an effort to restructure these large State-owned enterprises, the Government just issued Decree 69/2014 in July 2014. Decree 69/2014 contains some important points on the management and structure of an SOE Group or SOE Corp as follows:

• The group structure of a SOE Group and SOE Corp can only extend to up to three levels including the highest level being the parent company of the SOE Group or SOE Corp. This requirement would probably require current SOE Groups and SOE Corps to divest from subsidiaries which are not under direct control of the parent company or a direct subsidiary of the parent company within a SOE Group and SOE Corp. Decree 69/2014 sets a deadline of 1 September 2016 for the current SOE Groups and SOE Corps to do so;

• The parent company of a SOE Group now must have a charter capital of VND 10,000 billion (about US$ 480 million). So a few small SOE Groups (e.g. Vinatex or Bao Viet) must either raise its charter capital by September 2017 or lose the status of an SOE Group;

• Decree 69/2014 also requires a SOE Group to operate in both in Vietnam and foreign countries;

• At least 50% of the subsidiaries within an SOE Group must operate within its core business and must account for at least 60% of the capital invested by the parent company to all subsidiaries of an SOE Group;

• A member of the Members’ Council of the parent company in a SOE Group or SOE Corp must not be “leaders” within the State organisation, political or social organisation or subsidiaries of the parent company. It is not clear if this requirement is intended to prevent a manager of an SOE Group from holding concurrent offices in other State authorities or political organisations (including the Communist Party?); and

• Decree 69/2014 provides that an Advisory Committee will be set up to provide “objective opinions and advices” on decisions to be made by an SOE Group or SOE Corp. The Advisory Committee may include experienced researchers or experts in related academic institutions. The Advisory Committee may provide some independent input and monitoring to operation of an SOE Group or SOE Corp. However, its advice is not binding and it is not clear whether members of the Advisory Committee are subject to any confidentiality or fiduciary obligations.