Can a limited liability company in Vietnam sell its new capital contribution for a premium?
A profitable and well-run company usually demands a “premium” when it issues new equity to investors. This means that in a profitable company, a new investor may be required to pay more than the price paid by an existing investor for the same amount of equity and voting rights in the past. Usually, the difference between the price of the new equity portion and the nominal value of such equity portion is referred to as premium.
However, it appears that a limited liability company (LLC) in Vietnam may not be able to do so without changing the voting rights of existing members. This is because:
- Other than in the context of a joint stock company (JSC), there is no legal concept of equity capital premium in the Enterprise Law and in accounting regulations. “Par value” of shares only exists in the context of shares in JSCs. And under Circular 19/2003, the difference between issuance price of new shares by a JSC and their aggregate par values could be recorded as “capital premium accounts”. On the other hand, capital contribution in a charter capital of a LLC does not have a “par value”. There is no legal concept for the difference between the price of the new capital contribution portion and the nominal value of such capital contribution portion. Therefore, LLC does not have capital contribution premium if it issues new capital contribution;
- Decree 102/2010 further provides that charter capital of a LLC with two or more members is “the total value of capital portions” already contributed or undertaken to be contributed within a certain period by its members and is stated in the company charter. If the value of all assets contributed by members of a LLC including new members constitutes the charter capital of such LLC then there is no capital contribution premium in a LCC. In addition, under Decree 102/2010, all amounts paid by a new member of a LLC should carry voting rights; and
- Tax regulations only expressly exempt corporate income tax on share premium received by a JSC. Therefore, there is no certainty that a LLC will be exempted from capital contribution premium.
In light of the above, a LLC wishing to issue new capital contribution at a premium may consider an alternative structure which allows such a LLC to record the actual value of the amount to be contributed by the new member and at the same time maintains the desired ownership percentage and voting among all members.
Article 23.1 of Vietnam's 2023 Law on Real Estate Business explicitly allows real estate developers to sell future properties, such as houses, buildings, or floor areas within a building. However, the law is silent on the leasing of future properties (except for hire purchase transactions). This omission has led to uncertainty regarding the legality of such transactions.
On the one hand, leasing of future properties was clearly permitted in a similar Article of the Law on Real Estate Business 2014. Accordingly, one could argue that the omission of leasing from Article 23.1 of the Law on Real Estate Business 2023 indicates that a real estate developer cannot lease future properties.
Under Article 84.2 of the Civil Code 2015, a branch (chi nhánh) of a legal entity has the duties to perform all or parts of the legal entity’s functions. However, a branch is not allowed under the Civil Code 2015 to act as an authorized representative of a legal entity. Accordingly, it is not clear in what capacity a branch would perform the functions of a legal entity.
Logically, in order for a branch to perform all or parts of the legal entity’s functions, either
Option 1: a branch could be allowed to act as an authorized representative of a legal entity under another law; or
Option 2: a branch could perform the functions of a legal entity in its own name and capacity. In other words, a branch can perform the functions of a legal entity without needing an authorization from the parent entity and the action (or inaction) of a branch will be deemed an action or inaction of the parent entity.
The term “economic organisation” (tổ chức kinh tế) was first introduced under the Investment Law 2014 and refers to, among other things, any company or organisation incorporated in Vietnam. Over time, the term “economic organisation” has been used consistently in other legislations and allows for a consistent application of the law. However, the Land Law 2024 has introduced significant confusion as to the meaning of the term “economic organisation”. In particular, it is not clear under the Land Law 2024, if the term “economic organisation” only refers to companies or organisations, which are not controlled by foreign investors and do not include companies or organisations which are controlled by foreign investors. The lack of clarity has important implication on how the Land Law 2024 is implemented. For example, if the term “economic organisations” under the Land Law 2024 includes organisations which are controlled by foreign investors then a foreign bank branch could have a clear legal basis to take mortgage over land use rights and assets attached to land.
The corporate bond crisis in Vietnam started in 2022 during which many corporate bonds issued before September 2022 under Decree 153/2020 were defaulted by the issuers (Pre-2022 Bonds). To facilitate the potential restructuring of Pre-2022 Bonds, in 2023, the Government issued Decree 8/2023 which allows for the bond issuers and the bondholders to agree to amend the terms of a Pre-2022 Bonds including the extension of the duration for the Pre-2022 Bonds to up to two years. However, the rights of a bondholder who disagrees with a restructuring proposal for a Pre-2022 Bond are not clear.
Under Decree 8/2023, the duration and the repayment schedule of a Pre-2022 Bond could be extended if the proposed extension is approved by bondholders representing 65% or more of the total number of outstanding bonds. Decree 8/2023 further provides that for bondholders who do not agree to changes in the conditions and terms of a Pre-2022 Bond (dissenting bondholders), the issuer is required to negotiate with the dissenting bondholders. If a dissenting bondholder does not accept the proposed negotiation plan, the issuer must fully fulfill its obligations to that dissenting bondholder in accordance with the original bond issuance plan. This requirement holds even if the proposed changes have been approved by the other bondholders who hold 65% of the outstanding bonds.
Under anti-money laundering (AML) regulations, reporting entities (e.g., credit institutions) are required to be aware of several key watchlists, maintained by relevant Vietnamese authorities, to ensure compliance with their AML obligations. This blog will introduce those watchlists and discuss specific requirements related to them.
Essential watchlists under AML regulations
Under AML regulations, the Vietnamese Government maintains the following watchlists:
(1) A Blacklist (danh sách đen in Vietnamese): including (a) list of organizations and individuals involved in terrorism and terrorism financing compiled by the Ministry of Public Security (MPS), and (b) a list of organizations and individuals designated as being involved in the proliferation and financing of the proliferation of weapons of mass destruction, compiled by the Ministry of National Defense (MND);
(2) A warning list/Grey list (danh sách cảnh báo in Vietnamese): A list of organizations and individuals compiled by the State Bank of Vietnam (SBV) to warn about those with a high risk of money laundering; and
(3) A list of Foreign politically exposed person (PEP List) (danh sách cá nhân nước ngoài có ảnh hưởng chính trị in Vietnamese): A list of foreigners who hold a senior position in foreign agencies, organizations, and international organizations, notified by the SBV.
There are no specific guidelines on how to access these watchlists or the procedure for screening data against them. However, except for the Grey List, which has not yet been published by the SBV, the Blacklist ((1)(a) and (1)(b)) and PEP List can be found via the national portals of the MPS, MND, and SBV (see embedded links).
Under the Housing Law 2023, a developer of a commercial housing project could raise financing from the following sources:
equity capital of the developer;
capital raised from joint venture, business cooperation, and contribution from other organizations or individuals (BCC Capital);
capital raised from issuance of corporate bonds, shares, and fund units;
pre-sale proceeds raised from sale and purchase agreements or hire and purchase agreements with regards to future houses signed with customers;
debt financing raised from credit institutions or finance organizations operating in Vietnam (bank loans).
In comparison with the Housing Law 2014, the Housing Law 2023 clearly includes capital raising from issuance of bonds and fund units but excludes pre-sale proceeds of leasing agreements for future houses. In this post, we will discuss each of the sources of financing for a commercial housing project. The Housing Law 2023 still does not allow a developer of a commercial housing project to raise debt financing from offshore lenders.
This post continues discussing some additional changes of the LCI 2024. For changes discussed in our Part 1, please see here.
1. Lowering the limit on total credit balance
The LCI 2024 lowers aggregate credit limit over the CI’s equity capital for a customer, a customer and its related persons over different periods. Specifically:
On 26 March 2024, the Supreme People’s Procuracy of Vietnam (the Supreme Procuracy) issued Official Letter no. 1083/VKSTC-V9 (the Official Letter) to respond to inquiries from local procuracies regarding supervision in legal proceedings regarding civil, marriage and family matters. Although these clarification and interpretation are non-binding, they constitute an important source of interpretation for the procuracy system to rely on. However, one should note that interpretation by a procurator is not binding on the court and therefore is not as important as a guidance issued by the superme court.
In this post, we will discuss some statements of the Supreme Procuracy under the Official Letter that we find interesting or noteworthy:
1) Q&A no. 34: If (i) a civil transaction is not in the required form for it to be legally effective, (ii) the obligation therein cannot be quantified, and (iii) the court cannot determine how many parts of the obligation has been performed by the obligor then (a) Articles 129.1 and 129.2 of the Civil Code 2015, which allow an otherwise invalid transaction to remain valid if two thirds of the relevant obligations have been performed, would not be applicable to recognize the validity of such transaction and (b) such civil transaction would be consider invalid.
Our comments: The Supreme Procuracy seems to have taken the view that a party (i.e., the obligor who has performed a certain amount of work under such transaction) may only seek for recognition of the validity of a civil transaction if their situation is captured under Articles 129.1 and 129.2 of the Civil Code 2015.
Although this might be an understandable deduction from the straightforward reading of Article 129’s wordings, we believe that the aforementioned party should be able to request the court to consider their claim according to Article 14.2 of the Civil Code 2015 (i.e., the court should seek to apply customary practice, analogous law, basic principles of civil law, case law, and equity law to the case if Article 129 is not applicable) instead of being rejected immediately.
There have been numerous discussions about the new direct power purchase mechanisms (DPPA) introduced under Decree 80/2024 our own briefing note. In this post, we focus on issues which are unclear under Decree 80/2024 and require more clarification. Terms defined in our briefing note will have the same meaning when used herein. These issues are:
Decree 80/2024 introduces the concept of “Authorised Electricity Retailer in Zones” (Đơn vị bán lẻ điện tại các mô hình khu, cụm được ủy quyền). However, it is not clear who will verify and determine whether an electricity retailer will qualify as an Authorised Electricity Retailer in Zones. Decree 80/2024 does not make clear if the parties to the DPPA mechanism can verify the qualification of an Authorised Electricity Retailer in Zones or will require a third party (even the authority) to do so.
To purchase power via a DPPA mechanism, a customer is required to consume an average 200,000 kWh per month. If a Consumer consumes less than 200,000 kWh per month then the DPPA relating to such Consumer may have to be terminated. However, it is not clear if the 200,000 kWh threshold includes the amount of power purchased from (1) both EVN and the RE Generator or (2) EVN only. In other words, it is not clear Decree 80/2024 requires a Consumer to purchase at least 200,000 kWh from EVN. This interpretation seems not logical but not impossible.
The most common form of security which is created over houses and buildings is mortgage (thế chấp). However, the Civil Code 2015 also provides for other forms of securities. In this blog, we will discuss whether other forms of securities could be created over houses and buildings.
Pledge (Cầm cố) – Unlikely
Pledge of property means the delivery by one party of “property” under its ownership to another party as security for the performance of an obligation. Since the term “property” includes both moveable properties and immovable properties, it is arguable that a pledge could be created over houses and buildings being immovable properties. However, Article 310.2 of the Civil Code 2015 provides that “Where an immoveable property is the subject matter of a pledge in accordance with law, the pledge of the immoveable property shall be enforceable against a third person as from the time of registration.”
Reference to “in accordance with law” suggests that pledge could only be created over an immovable property if a law specifically allows it. However, currently the Land Law 2024 and the Residentially Housing Law 2023 only specifically allow mortgages to be created over residential houses or assets attached to land.