“Legal capital” for companies in Vietnam
In other countries, legal capital is often understood to be “the amount of a company's equity that cannot legally be allowed to leave the business and cannot be distributed through a dividend or any other means. The closest meaning to this under Vietnamese law is “charter capital”.
However, for a Vietnamese company, the term “legal capital” has a different meaning than it is usually understood in other countries. Currently, under the Enterprise Law, “legal capital” (vốn pháp định) is defined as the minimum amount of capital required by law for the establishment of an enterprise engaging in certain conditional business (e.g. real estate, banking or securities). “Charter capital” is the amount actually contributed or will be contributed by the shareholders of a company. Therefore, the “charter capital” must be at least equal to the “legal capital”, and in most cases are much higher than the “legal capital”. Usually, legal capital is fixed at a specific number. For instance, an entity engaged in real estate business must have a “legal capital” of VND 6 billion. This means that the entity must have a charter capital of VND 6 billion or more.
The above difference may cause certain confusion when interpreting Vietnamese law. For example,
- Before 1 July 2006, for foreign-invested enterprises, under the old Foreign Investment Law, the term “legal capital” is defined to mean the equity capital contributed (or to be contributed) by the investors in a foreign invested enterprise. Certain laws or regulations still use the term “legal capital” in this sense. These laws and regulations are usually issued before 1 July 2006. However, by mistakes, some laws or regulations issued after 1 July 2006 still use the term “legal capital” in this sense (e.g. the amendment to the Law on Cinematography issued in 2009).
- The WTO Commitments of Vietnam also contain various references to “legal capital” in the context of applicable foreign ownership limits. Again the term “legal capital” in this context should be understood as “charter capital”.
That being said, there is no express guidance about how to interpret the term “legal capital” used in the above scenarios. Therefore, if the authority happens to take a restrictive view then the foreign ownership limit in certain sectors provided in the WTO Commitments or certain laws and regulations may be subject to a much lower limit.
In a shareholder agreement (or joint venture agreement) between members of a multiple member limited liability companies (Multiple LLC), the members often agree on various transfer restrictions such as right of first offer (ROFO), right of first refusal (ROFR), tag along or drag along rights. These transfers are intended for the parties to control the ownership structure of the Multiple LLC and their exit from the Multiple LLC. However, implementing such agreements on transfer restriction may be inconsistent with the statutory transfer restrictions provided in Article 52 of the Enterprise Law 2020. Therefore, a shareholder agreement relating to a Multiple LLC should have specific provision to resolve such inconsistencies.
The table below sets out the potential inconsistencies between agreements on ROFO, ROFR, Tag Along and Drag Along and the transfer procedures under Article 52 of the Enterprise Law 2020.
Please download the pdf version here.
In this post, we continue discussing the new changes introduced by the Real Estate Business Law 2023. Part 1 of our discussion can be found Here.
This post is written by Nguyen Hoang Duong and Nguyen Bich Ngọc, and edited by Nguyen Quang Vu.
1) New restriction when collecting deposit for purchase of off-plan real estate
Under the Real Estate Business Law 2023, real estate developers can only collect a deposit of up to 5% of sale price of the relevant real estate from purchasers when the residential houses, construction works are qualified to be put into trading. The law further requires a deposit agreement to expressly set out the sale price and area of the off-plan real estate. The off-plan real estate under the deposit agreement must satisfy conditions for sale under law. This indicates that collecting a deposit is considered putting relevant off-plan real estate into business.
The new requirements may pose significant difficulty for real estate developers with weak financial capacity when it comes to funding for pre-construction phase of their projects.
Introduction
On 18 January 2024, new Law on Credit Institutions (LCI 2024) has been passed by the National Assembly. LCI 2024 will replace the Law on Credit Institutions 2010 (as amended) (LCI 2010) from 1 July 2024. In a series of posts, we will introduce the new changes of LCI 2024.
It seems that the ongoing criminal case against the controlling shareholders of Saigon Commercial Bank (SCB) has motivated the draftsman of LCI 2024 to introduce stricter management toward credit institutions (CIs).
Stricter conditions of independent board members
LCI 2024 tightens the standards and conditions of independent members of the Board of Directors of CIs. Specifically, an independent member of the Board of Directors of a CI must not represent ownership of any share of such CI and not, together with his/her related persons, directly or indirectly own 1% or more of the charter capital of such CI.
A broader range of related persons
LCI 2024 expands the definition of related persons to also cover the relationship between (i) the “grandparent” company/CIs and the “grandchildren” company, (ii) the manager/controller of a parent company/CIs and the subsidiary, and (iii) an individual with his/her wider range of family members.
On 22 June 2023, the National Assembly passed a new Law on E-transactions, set to be effect from 1 July 2024 (LET 2023). The LET 2023 introduces significant changes regarding the use of e-signatures by individuals as outlined below:
1) Restriction on individuals’ right to create and use of their own e-signature
The LET 2023 categorizes e-signatures into three types as below, none of which encompass e-signatures self-generated by individuals:
specialized e-signatures (chữ ký điện tử chuyên dùng), which are created and used by organizations for their “own private operations” in accordance with their function and tasks;
public digital signature (chữ ký số công cộng), which are used for “public activities” and are secured by an e-certificate confirming the public digital signature issued by a qualified service provider; and
specialized digital signature for official use (chữ ký số chuyên dùng công vụ), which are digital signatures used for official activities and are secured by an e-certificate confirming the specialized digital signature for official use issued by a qualified service provider
Unlike the broader definition of e-signatures under the LET 2005, which may cover signatures self-created by individuals, this classification significantly limits individuals' ability to create and use their own e-signatures. Under the LET 2023, individuals may be required to use a public digital signature issued by a third-party service provider in normal e-transactions.
Under the Law on Bankruptcy 2014, creditors (chủ nợ) of a bankrupt enterprise include unsecured creditors, partially secured creditors (chủ nợ có bảo đảm một phần) and secured creditors (chủ nợ có bảo đảm). While it is not entirely clear, it appears that partially secured creditors are considered as a separate class of creditors and have their own rights during a bankruptcy proceeding.
Under the Law on Bankruptcy 2014,
a secured creditor is defined as a creditor having the right to require the relevant bankrupt enterprise to perform an obligation to repay a secured debt with the assets of the enterprise or a third party; and
a partially secured creditor is defined as a creditor having the right to require the relevant bankrupt enterprise to perform an obligation to repay a secured debt with the assets of the enterprise or a third party “where the value of such assets is less than that debt”.
The definition of a secured creditor does not clearly refer to “fully secured creditors” since it does not require the value of the secured assets is equal or more than the debt owed to a secured creditor. Accordingly, technically, the term “secured creditor” could cover both partially secured creditor and fully secured creditor. That said, a more in-depth reading of the Bankruptcy Law 2014 suggests that partially secured creditors are treated as a separate class of creditors. However, it is not clear whether this distinction is created by design or by chance by the draftsman of the Bankruptcy Law 2014.
From January 2021, under the Enterprise Law 2020, if a member of the board of directors (the Board) hands in his/her letter of resignation to resign as a Board member in a joint stock company (JSC), he/she may not cease to be a Board Member until approved so by the General Meeting of Shareholders (GMS) of the relevant JSC. To mitigate the potential issues arising from this provision, a JSC may consider providing that the GMS must dismiss a Board member when he/she tenders his/her resignation. In addition, the resigning Board Member should give authorisation to another appropriate person until he/she is officially dismissed.
After incorporating a joint stock company (JSC), the founding shareholders of the JSC will typically have 90 days from the issuance of the enterprise registration certificate (Capital Contribution Period) to pay for the shares they have subscribed as at the incorporation of the JSC (Subscription Shares). Under the Enterprise Law 2020, it is reasonable to consider that during the Capital Contribution Period, the founding shareholders who have not paid for the Subscription Shares in full would have all the shareholders rights including rights to transfer the Shares which have not been paid up. However, the drafting of the Enterprise Law 2020 could give rise to the position that during the Capital Contribution Period shareholder rights, the founding shareholders have only the voting right.
Introduction
As detailed in a prior post, in our opinion, representations and warranties (warranties) should constitute obligations of the person giving it under Vietnamese law. They could imply an obligation on the part of the person providing them (Warrantor) to guarantee that the stated facts and matters are true. In this post, we will try to examine the consequences of breaches of representations and warranties under Vietnamese law. As discussed further below, depending on the context, a breach of warranties might give rise to:
· liabilities for breach of warranties as independent obligations; or
· liabilities for breach of obligations to deliver conforming goods; or
· liabilities for breach of obligations to provide information to contracting parties; or
· indemnity (or reimbursement) of losses to the extent the parties have agreed for an indemnity (or reimbursement) of losses arising from a breach of warranties.
Given that “representations and warranties” are exclusively common law concepts and no specific legal framework for them is provided under Vietnamese law, it is important that Vietnamese law contracts should have provisions dealing with the above in order to achieve the intended outcome of the parties.
Based on the discussion below, probably, the preferable approach is to have specific wording in the share sale and purchase agreement that warranties form part of the description and quality of the sale shares so that, among other things, seller could be subject to the remedies applicable to breach of obligation to deliver non-conforming goods.
Please download the pdf version here.
After a quite lengthy debate and discussion, on 28 November 2023, the National Assembly officially adopted a new law on real estate business (Real Estate Business Law 2023). The Real Estate Business Law 2023 is expected to enhance the real estate business environment and resolve some long-standing legal issues. However, the new Real Estate Business Law 2023 will have to wait until 1 January 2025 to take effect. The deferred effectiveness of the Real Estate Business Law 2023 is probably intended to give the National Assembly more time to promulgate the new land law, which to some extent could be considered as the “foundation” for formulating the Real Estate Business Law 2023.
From February 2024, companies and foreign investors applying for a contribution of capital or purchase of share/capital contribution by the foreign investor (M&A Approval) must state the actual price of proposed transfer, instead of the estimated transfer price as previously. This is one critical change in the new template for the application for an M&A Approval under Circular 25/2023 of Ministry of Planning and Investment (MPI).
The change may have an adverse effect on relevant parties, especially the foreign investor, particularly:
The parties of an M&A transaction may find it difficult to declare an “actual transfer price” since the M&A Approval will be issued well in advance of the closing of the transaction.