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.