In a shareholder agreement (or joint venture agreement) between members of a multiple member limited liability companies (Multiple LLC), the members often agree on various transfer restrictions such as right of first offer (ROFO), right of first refusal (ROFR), tag along or drag along rights. These transfer restrictions are intended for the parties to control the ownership structure of the Multiple LLC and their exit from the Multiple LLC. However, implementing such agreements on transfer restriction may be inconsistent with the statutory transfer restrictions provided in Article 52 of the Enterprise Law 2020. Therefore, a shareholder agreement relating to a Multiple LLC should have specific provision to resolve such inconsistencies.

The table below sets out the potential inconsistencies between agreements on ROFO, ROFR, Tag Along and Drag Along and the transfer procedures under Article 52 of the Enterprise Law 2020.

This post is written by Nguyen Quang Vu with research assistance by Le Minh Thuy.

Article 52 of the Enterprise Law 2020

Potential inconsistencies

If a member of a Multiple LLC wishes to transfer its capital contribution (the selling member) then such member must offer to sell its capital contribution portion to all other members in proportion to their respective capital contribution portions in the company on equal terms of offer.

In case of an agreed ROFR, the selling member must have an offer to purchase its capital contribution from a third party before approaching the non-selling member. This would mean that the selling member may have to approach and offer to sell its capital contribution to a third party before offering to the non-selling members. This could be viewed as contrary to Article 52 of the Enterprise Law 2020.

In case of an agreed ROFO, the selling member could ask the non-selling member to submit an offer to purchase the selling member s capital contribution instead of offering to sell to the non-selling members. This could also be viewed as being contrary to Article 52 of the Enterprise Law 2020.

The selling member may transfer its capital contribution to a non-member on the same conditions as the offer applicable to other members when the other members of the company do not purchase or do not purchase in full within thirty days from the date of the offer.

In case of an agreed ROFR and ROFO, the parties usually agree that a non-selling member could offer to purchase from the selling member more capital contribution than the non-selling member s pro-rata portion if other non-selling members do not purchase their pro-rata portion. However, Article 52 only contemplates that the selling member could transfer to non-members.

Article 52 provides that the offer to non-members must be on the same terms as the offer to non-selling members. This could be inconsistent with an agreed ROFR and ROFO which allow the selling member to make an offer to non-member which is no more favourable than the offer to non-selling member.

In some case, the time limit of 30 days provided in Article 52 is not sufficient for (1) the non-selling members to respond to the offer provided by the selling members and (2) the parties to obtain necessary approval (e.g., M&A Approval or merger filing) to complete the transfer.

In case of a tag along or drag along, the non-selling member could join the sale to the third party purchaser either voluntarily (in case of a tag along) or involuntarily (in case of a drag along). This may be inconsistent with Article 52 since technically, the tag along member or drag along member will have to offer to sell their capital contribution to the selling member first before selling to the third party purchaser.

Vietnam Business Law