The concept of indirect subsidiaries of a parent company under the Enterprise Law 2020
It is unclear whether indirect ownership or control is taken into account when determining a company is the parent company of another company. Under Article 195.1 of the Enterprise Law 2020, a company will be deemed to be a parent company of another company in one of the following circumstances:
the former owns more than 50% of the charter capital or the total number of ordinary shares of the latter;
the former has the right to directly or indirectly appoint “the majority or all directors of the Board, Director or the General Director” of the latter; or
the former has the right to amend the charter of the latter.
The above definition makes it unclear because indirect control is only clearly mentioned in the case of appointing Board directors and Director (General Director) (i.e. the second limb).
Article 196.1 of the Enterprise Law 2020 provides that “…, the parent company shall perform its rights and obligations as the member, owner or shareholder of the subsidiary in accordance with corresponding regulations of this Law and relevant laws”. This provision indicates that a parent company needs to have direct ownership of the subsidiary since only direct ownership could confer the rights of a member, owner or shareholder in the subsidiary.
However, if the concept of a parent company under the Enterprise Law 2020 does not include indirect subsidiary (e.g., a subsidiary of a subsidiary), then this interpretation is inconsistent with international practice and other provisions of the law. These include:
accounting regulations which clearly provide that (i) a company is considered as the parent company of other company if, among others, the former can control the latter; and (ii) a company can control another company if it holds directly or indirectly through other subsidiaries more than 50% of the voting rights in the latter; or
charters of various State-owned companies which have several indirect subsidiaries such as SCIC or PetroVietnam. The Charters of these companies are issued in the form of a Decree of the Government and can be considered as law.
Accordingly, to ensure consistency of the law, the first and third limp of the definition of a parent company under the Enterprise Law 2020 should also cover indirect ownership.
This post is written by Nguyen Thu Giang and edited by Nguyen Quang Vu.