More Measures For Enforcement Of A Share Mortgage For A Project Company In Vietnam

For a project financing or limited recourse financing in Vietnam, a mortgage over shares (or equity capital) of the project company usually forms part of the security package due to the ease of creating and perfecting a mortgage over shares. That said, when an enforcement event occurs and if the borrower or the project company does not cooperate, the lenders (usually foreign lenders), who wish to immediately taking over the mortgaged shares, may find it difficult to actually enforce the mortgage due to the need to complete various licensing procedures for the sale or transfer of the mortgaged shares.

Thanks to the flexibility offered by the Enterprises Law 2014 and the Investment Law 2014, lenders may now consider taking some extra measures to increase their ability to enforce the mortgaged over shares of a project company in Vietnam. In particular,

Conversion of preference shares into ordinary shares in a Vietnamese joint stock company

The Enterprise Law 2014 does not have specific provisions on alteration of rights attached to a class of shares other than ordinary shares. Since the Shareholder Meeting has the right to create a class of shares, logically, an amendment to class rights should also be approved by the Shareholder Meeting. Under Article 113.6 of the Enterprise Law 2014,

·        ordinary shares may not be “converted” (chuyển đổi) into preference shares; and

·        preference shares may be converted into ordinary shares pursuant to a resolution of the Shareholder Meeting.

There is no definition of “conversion” in the context of Article 113.6. However, a conversion from one class of shares into another class of shares would likely result in the change of rights attached to the shares being converted. Therefore, arguably conversion of shares could qualify as an alteration of class rights. Each share in the charter capital of a JSC has the same par value. Therefore, logically, one preference share should be converted into one ordinary share only. If one preference share is not converted into one ordinary share then the charter capital of a JSC will be increased or reduced which may not be clearly permitted by law.

Proposed changes to the treatment of deemed foreign investors under the Investment Law 2014

The Ministry of Planning and Investment (MPI) has just released various draft amendments to the Investment Law 2014 ( Regarding deemed foreign investors,

·        The MPI proposes that an economic organisation controlled by foreign investors (a Foreign Controlled Organisation) must comply with investment conditions applicable to foreign investors when the Foreign Controlled Organisation establishes a new company, or acquires equity interests in another company.

·        A Foreign Controlled Organisation is a company in Vietnam of which foreign investors (1) own more than 50% charter capital or ordinary shares of such company; or (2) directly or indirectly have the right to appoint members of the Board[,] the legal representative of such company; or (3) have the right to decide to amend the charter of such company.

This approach is broader and more logical than the approach under the current Investment Law 2014. Under the Investment Law 2014, the following foreign invested companies will be subject to the investment conditions applicable to foreign investors when setting up a new company or acquiring equity interests in another company:

(a)    Companies, 51% or more of its chapter capital is held by a foreign investor(s);

(b)    Companies, 51% or more of its chapter capital is held by an economic organization(s) prescribed in paragraph (a); and

(c)     Companies, 51% or more of its chapter capital is held by a foreign investor(s) and an economic organization(s) prescribed in paragraph (a).

The current approach may allow investors to use various structures to circumvent the restrictions (see If the new amendment is adopted then such structures may no longer work.

Timing of a reconvened Board meeting in a Vietnamese joint stock company

Under Article 153 of Enterprise Law 2014, the Chairman of Board of Director (BOD Chairman) must convene the meeting of BOD within 7 days as from the date of receiving a request for an irregular meeting. In case the first meeting is not attended by three quarter or more of total BOD members, the second meeting must be convened within seven days as from the intended date of the first meeting unless a shorter time limit is provided in the company charter.  

According to the above regulations, there may be a dispute as to time for “convention” of the second meeting. One may argue that the second meeting of BOD must be held within 7 days or a shorter period provided in the company charter.

On the other hand, one may argue that the BOD Chairman only need to send notice of convening the BOD meeting within seven days or shorter period specified in the company charter. The second meeting may be held at any time provided in the notice sent by the BOD Chairman which may not be within the time limit as provided in Article 153 of Enterprise Law 2014.

If the latter understanding applies to the convention of the BOD second meeting, it appears that there is no time limit for organizing and conducting the second meeting. Based on the wording of laws and the company charter, the BOD Chairman may take advantage of this provision to prolong the organizing time of the second meeting if he/she considers that the request for BOD irregular meeting is not beneficial for him/her.

This post is contributed by Le Minh Thuy, a trainee at Venture North Law.