Introduction

In June 2020, the National Assembly passed a new Law on Enterprises 2020 (Enterprise Law 2020) to replace the Enterprise Law 2014 from 1 January 2021. The Enterprise Law 2020 was issued just four years after the Enterprise Law 2014 came into effect. So, in just 20 years Vietnam already has four different versions of the Law on Enterprises. Such frequent changes could cause concerns to investors since they will not know for sure that their rights as a member or shareholder in a company in Vietnam will not be adversely affected by another set of changes in 2025. The fact that many of the changes introduced under Enterprise Law 2020 are just wording changes (but at the same time fail to clarify various unclear issues under the Enterprise Law 2014) also raises questions about the quality of the law-making process in Vietnam.

This post is written by Nguyen Quang Vu. Our comments are based on the version of the Enterprise Law 2020 supplied by Mr. Truong Trong Nghia, a member of the National Assembly and Vietnam Business Lawyers Club (VBLC). Since the official version of the Enterprise Law 2020 has not been released, our comments are subject to change. For easy reference, a compared version between the Enterprise Law 2020, and the Enterprise Law 2014 in Vietnamese can be downloaded here.

Less protection for companies’ owner and managers

The Enterprise Law 2020 offers less protection to companies’ owners and managers by making it easier for Government authorities to interfere or even suspend the operation of a company. For example,

The legal representative, Chairman of the Members’ Council of a limited liability company (LLC), the owner of a single-member LLC, the Chairman of the Board of Directors of a joint stock company (JSC), the representative of an institutional member in an LLC or an institutional shareholder in a JSC could lose his/her position in or rights to manage the company if he/or she has “difficulty in understanding or controlling his/her actions”. The law does not make clear (1) who will have the authority to determine that a company’s manager or owner has difficulty in understanding or controlling his/her actions, and (2) how such determination should be made The law also does not provide that the rights or position of the relevant manager or owner will be restored once he/she recovers from the difficulty in understanding or controlling his/her actions;
In addition to the court, any Governmental authority in a legal proceeding that a company is involved can now appoint a legal representative for the company. This means that if a company is involved in a criminal proceeding, the police can appoint a legal representative of such a company.
The Business Registration Authority can suspend or revoke an Enterprise Registration Certificate based on “request” by other authorities in accordance with law.

Pre-incorporation contracts

Under the Enterprise Law 2020, the founding members or shareholders of a company who has entered into contracts to incorporate the company to complete procedures to transfer such contracts to the company in accordance with the Civil Code once the company is incorporated. The new changes suggest that a pre-incorporation contract does not automatically bind a company until it is transferred to the company. The Enterprise Law 2020 also requires all founding members or shareholders of a company (instead of only the signatories) to be jointly liable for signed pre-incorporation contracts in case the relevant company is not established.

Less administrative procedures

The Enterprise Law 2010 no longer requires a company to notify the Business Registration Authority of the company's seal sample and the changes to managers of a company under Articles 44 and 12 of the Enterprise Law 2014. However, without a public database of seal samples, it is not clear how the public can know about a company’s seal.

Overlapping provisions with the Securities Law 2019

The Enterprise Law 2020 covers many issues that should have been regulated by the Securities Law 2019. This is unusual because the Securities Law 2019 has just been issued in November 2019 and such issues should have been included in the Securities Law 2019. It appears that the draftsman of the Securities Law 2019 forgot to cover such issues and now play catch-up by adding additional provisions in the Enterprise Law 2020. For example,

The Enterprise Law 2020 has more detailed provisions on the issuance of corporate bonds (e.g., a company now must have an audited report to issue bonds). Under the Enterprise Law 2020, an LLC can issue corporate bonds and a JSC can issue corporate bonds and “other securities”. This provision seems to suggest that an LLC cannot issue any securities other than bonds. The Enterprise Law 2020 also provides detailed procedures for issuance of bonds by a private JSC and an LLC via private placement. Many terms relating bond issuance process (e.g., strategic investor or professional securities investors) are not defined. Presumably, such terms will have the meaning as defined in the Securities Law 2019; and
The Enterprise Law 2020 provides for the basis for a JSC to issue depository receipts (chứng chỉ lưu ký) which should be regulated by the securities regulations instead.

More time for making a capital contribution in kind

The Enterprise Law 2014 requires the founding members or shareholders of a company to contribute the initial charter capital of the company within 90 days from the date of incorporation without any exception. The Enterprise Law 2020 now allows the 90-day period to be extended for the time required for transportation, import, and completing legal procedures to transfer title to the company. During this period, the founding members/shareholders who make the initial capital contribution in kind are still entitled to the members/shareholder rights attached to the capital contribution. While this approach addresses one practical issue (i.e., making capital contribution in kind takes time), it raises several other issues:

It is not clear if the extended period only applies to the members/shareholders who make capital contributions in kind or also to members/shareholders who make a capital contribution in cash. If the extended period only applies to the members/shareholders who make a capital contribution in kind then the law seems to be unfair to those who make a capital contribution in cash.
The Enterprise Law 2020 does not put any limit on the time required for transportation, import or fulfilling legal procedures. Therefore, a member/shareholder who makes a capital contribution in kind may intentionally delay the contribution by not completing these steps promptly.

Meeting minutes

Under the Enterprise Law 2020, if the Chairman or secretary of a meeting of the Members’ Council, the shareholders meeting, or the Board of Directors refuse to sign on a meeting minute then other attending members or directors could sign on the minutes of meeting instead. This change could make it easier for the company to remove an uncooperative Chairman.

Members’ Council of a multiple-member LLC

To address the confusion about who is the member of a Members’ Council in a multiple LLC under the Enterprise Law 2014, the Enterprise Law 2020 provides that Members’ Council of a LLC includes (1) individual members of the LLC, and (2) the authorised representatives of institutional members of the LLC. However, in our view, this position is not a logical position and could give raise to several issues as follows:

In essence, for a multiple LLC, the Enterprise Law 2020 now creates two positions: (1) members of the LLC; and (2) members of the Members’ Council of the LLC. But in many places, the Enterprise Law 2020 does not distinguish between the two positions. For example, the quorum of a meeting of the Members’ Council requires a number of members owning at least 65% of the charter capital of the LLC to be present. However, in the case of the institutional members of an LLC, the members of the Members’ Council, who are authorised representatives of the institutional members of the LLC, do not directly own charter capital of the LLC. Therefore, technically, the present of the authorised representatives of the institutional members of the LLC do not satisfy the quorum requirement;
The Enterprise Law 2020 does not make clear that actions of the authorised representatives of institutional members of the LLC in the capacity of members of the Members’ Council are binding on the institutional members; and
The Enterprise Law 2020 only provides for the rights of members of the Members’ Council but not the rights of the members of the LLC. And many rights of the members of the Members’ Council should be the rights of the members of the LLC such as rights to subscribe for new capital increase or to receive dividends paid by the LLC.

Related party transactions

Under the Enterprise Law 2014, a related party transaction between a LLC or a JSC and its related persons, which is not properly authorised, will be invalid if such transaction causes damages to the company. The Enterprise Law 2020 now invalidates any related party transaction which is not authorised in accordance with the procedures under the Enterprise Law 2020 (i.e., there is no damages requirement). The Enterprise Law 2020 essentially returns to the position provided in the Enterprise Law 2005. It is not clear what causes the changes.
When a related party transaction is submitted for approval, the Enterprise Law 2020 excludes the votes of the member, shareholder, or Board directors “related to the parties to” the transaction. The law should have referred to “counterparties” of the company to the transaction instead of parties to the transaction since the company is obviously a party to the transaction.
Under the Enterprise Law 2020, a loan contract or a sale of assets with a value of more than 10% total assets of the JSC between the JSC and a majority shareholder owning 51% or more of the company or its related person must be approved by the Shareholders Meeting of the JSC.
The inspection committee of a JSC now has express rights to review related party transactions entered into by the company and to recommend related party transactions which should be approved by the Board or the Shareholders Meeting.

No inspector for non-SOE single-member LLC

The Enterprise Law 2020 no longer requires a single-member LLC who is not a State-owned enterprise to have an inspector. This is a welcome change since the role of an inspector in a non-SOE single member LLC is not important.

State-owned enterprises

Under the Enterprise Law 2020, a State-owned enterprise is a company of which the State owns more than 50% of the charter capital or the voting interest. Again, the Enterprise Law 2020 returns to the definition of State-owned enterprises provided in the Enterprise Law 2005. Perhaps, the Government now realises that the definition of SOEs under the Enterprise Law 2014 does not actually work with other law regulating SOEs.

Limited flexibility for preference shares in a JSC

In addition to voting preference share, redeemable preference shares, and dividend preference shares, three earlier versions of Enterprises Law always allow a JSC to issue “other types of preference shares” as provided in the charter. This gives a JSC the flexibility to issue preference shares to an investor with the terms agreed by the parties. The Enterprise Law 2020 now seems to remove such flexibility by requiring the issuance of “other types of preference shares” to be in accordance with securities regulations. But the securities regulations do not have any provision on the issuance of preference shares.

Rights of 5% and 10% shareholders

The Enterprise Law 2020 allows a shareholder or a group of shareholders holding 5% voting rights or more to have certain information rights and to have the right to convene the shareholders meeting to review actions of the Board or other managers of the Company. The Enterprise Law 2020 allows a shareholder or a group of shareholders holding 10% voting rights or more to have the right to nominate candidates for the Board or the Inspection Committee.

Also, the Enterprise Law 2020 removes the requirement that a 10% shareholder must hold the shares for six months or more to exercise its nomination rights. This is a positive change since it allows the new owner of a JSC to take control of the company as soon as it achieves the required shareholding instead of having to wait for six months.

Confidentiality obligations for shareholders

A shareholder in a JSC now has an express obligation to keep information provided by the company confidential and can use such information to implement and protect its rights and interests. A shareholder must not provide such information to a third party. It is not clear if this restriction could prevent a shareholder in a company from providing company’s information to a prospective buyer of its shares in the company.

Offering of shares

The Enterprise Law 2020 revises the definition of “offering” from “the increase of the number of authorised shares and sell such shares to increase the charter capital” to “the increase the number and classes of shares to increase the charter capital”. Unfortunately, the revised definition is as confusing as the original definition. Under the revised definition, the mere act of approving an increase of authorised capital could be considered as an offering of shares.

Private offering of shares

Under the Enterprise Law 2020, the requirement of notifying the Business Registration Authority of a private offering of a JSC is removed. This means a JSC will no longer have to carry out such procedure, and the time for conducting a private offering will be shorten.

The Enterprise Law 2020 clarifies that existing shareholders of a JSC will have pre-emptive rights over the shares issued by way of private placement, except in case of merger or consolidation. Under previous versions of the Enterprise Law, this issue was unclear. This implies that a waiver of pre-emptive rights by existing shareholders should be obtained upon a JSC’s private placement.

In addition, after that, the General Meeting of Shareholders of a JSC will need to pass a resolution, in case such JSC wants to issue to its investors shares with offering terms that are more favourable than those of its existing shareholders.

Transfer of shares

The Enterprise Law 2020 now requires a JSC to update its shareholder register to record a share transfer within 24 hours after a request by the relevant parties. This new requirement is a welcome change since it offers better “exit” rights to a shareholder.

Voting thresholds

The Enterprise Law 2020 lowers the simple majority voting threshold from 51% to 50% which is a logical thing to do. The Enterprise Law 2020 also allows the charter of a JSC to adjust either upwards or downwards the value threshold of major transactions (e.g., loans or sale of assets) which require shareholder approval. Under the Enterprise Law 2014, the charter of a JSC can only adjust downwards the value threshold of major transactions (i.e., 35% or less of the total assets of the company).

For the first time, the Enterprise Law 2020 allows preference shareholders to have the right to vote on proposed changes to the rights or obligations of preference shareholders. In particular, “adverse” changes to the rights or obligations of preference shareholders must be approved by a number of preference shareholders holding at least 75% of such shares. However, the issue is who and how to determine a change is an “adverse” change to the preference shareholder.

Independent director and General Director

An independent director of the Board of a JSC can only be appointed for up to two consecutive terms only. A General Director of a public JSC must not be a family-related person with a manager or inspector of (1) the public JSC, or (2) the parent company of the public JSC, or (3) authorised representatives of the parent company in the public JSC.

Director duties

Under the Enterprise Law 2020, a 1% shareholder of a JSC could now require a director who breaches his/her duties to compendate the JSC or the shareholder itself. This issue is not clear under the Enterprise Law 2014.

Restructuring

The Enterprise Law 2020 simplifies the definition of “company split” (chia công ty), “company spin-off” (tách công ty) by removing the methods of splitting or dividing a company.

The Enterprise Law 2020 makes clear that new companies established by way of company split, company spin-off, company merger, or company consolidation will automatically inherit rights, obligations, and legitimate interests allocated to them under the relevant restructuring plan.

Update 15 July: The post is updated to reflect the changes in private offering of shares procedures.