Given the lack of clarity on tender offer rules and the difficulty in enforcing such rules in practice, it is not so difficult for an investor to accumulate significant stake in a public joint stock company (target company) in Vietnam. However, if such investor is not supported by the Board of the target company, then the unwelcomed investor may find a hard time to participate in the management of the target company even if the investor can acquire control of the target company at shareholder level. This is because:
- The General Shareholders’ meeting (GSM) wields the authority to dismiss and to elect directors. And the default way under the Enterprise Law 2014 to dismiss or elect a Board member is by voting at the meeting. Thus, in order for the investor to replace the current Board members, the GSM needs to be convened, but without the support the Board members, new shareholders will find it hard to call a meeting of the GSM.
- Normally, a meeting of the GSM is convened either by the Board or the shareholder or a group of shareholders holding 10% or more of the total ordinary shares for 6 consecutive months (10% Shareholder) under certain conditions. Due to the 6-month holding requirement, a new investor with substantial (or controlling) stake cannot convene a meeting of the GSM immediately after becoming a substantial shareholder of the target company to elect its nominees to the Board. To make the matter worse, the existing Board may even delay the annual GSM up to 6 months.
- Even if the Board may convene a meeting of the GSM, if the new investor does not satisfy the 6-month holding requirement, the new investor is not entitled to propose its nominees to the Board unless (1) there is no 10% Shareholder, or (2) there are 10% Shareholders but they do not propose enough candidates compared to the number of candidates to which they are entitled.
- Under the Enterprise Law 2014, the Board is entitled to approve proposal to be submitted to the GSM. Therefore, an unwelcoming Board may rely on this to refuse to approve any proposal (e.g. proposal to dismiss existing Board directors) put forwards by a substantial shareholder. Of course, the substantial shareholder may initiate a claim against the Board directors for breach of their fiduciary duties. But this is another difficult battle to be fought.
This post is contributed in part by Ha Thanh Phuc, a trainee at Venture North Law.