If a director of a joint stock company (the Company) breaches his/her fiduciary duties and causes damage to the Company, under Article 161.1 of the Enterprises Law 2014, a shareholder or group of shareholders holding 1% or more ordinary shares for six consecutive months (1% Shareholder) can on its own behalf or on behalf of the Company to make a civil claim against the director. However, it is unclear whether (1) the 1% Shareholder can request the director to pay compensation directly to the 1% Shareholder or (2) the 1% Shareholder can only request the director to pay compensation to the Company. In other words, it is not clear if the 1% Shareholder can claim the director for reflective loss (e.g., the diminution of the value of such Shareholder’s shareholding in the Company).

The following arguments support the view that the 1% Shareholder cannot claim for reflective loss:

· Under the Enterprises Law 2014, a shareholder is not allowed to withdraw capital from the Company in any form. If a claim for reflective loss is permitted then the 1% Shareholder is indirectly allowed to withdraw capital from the Company which is contrary to the principle provided by the Enterprises Law 2014;

· Under Article 190 of the Enterprises Law 2014, where the parent company interferes beyond the authority of the owner, member or shareholder and compels a subsidiary company to conduct business operations inconsistently with normal business practices or conduct non-profitable activities without reasonable compensation in a relevant fiscal year which causes loss to the subsidiary company, the parent company shall be responsible for such loss. If the parent company fails to compensate the subsidiary company, a 1% Shareholder of the subsidiary company may on their own behalf or on behalf of the subsidiary company require the parent company to compensate the subsidiary company. The scenario under Article 190 of the Enterprise Law 2014 is similar to the scenario under Article 161 of the Enterprises Law 2014;

· Article 149.4 of the Enterprise Law 2014 provides that the members of the Board of Directors (BOD) who voted for a BOD resolution, which is contrary to the law or the Company charter causing the Company to suffer losses, should be jointly liable for such resolution and must compensate the Company for losses; and

· Similarly, Article 157.4 of the Enterprise Law 2014 provides that the General Director (GD) who failed to run the company in accordance with the law, the Company charter, the contract signed with the Company or the BOD resolution causing the Company to suffer loss(es) must compensate the Company for losses.

The following arguments support the view that the 1% Shareholder can claim for reflective loss:

· The wording of the rules on non-contractual compensation in the Civil Code 2015 is broad and general. Depending on the specific situation, even if the Company bears the direct loss, the Shareholder may claim for reflective loss if he/she can prove that the reflective loss is compensable as non-contractual damages under the Civil Code 2015; and

· As the Shareholder can bring the suit against the director on behalf of the Company, he/she may argue that: as the Company is entitled to the compensation, he/she can act on behalf of the Company to arrange with the director to compensate the Shareholder proportionally instead of compensating the Company.

It appears that the view against claims for reflective losses is reasonable with more supporting legal grounds. This post is written by Le Thanh Nhat and Nguyen Quang Vu.

Vietnam Business Law