In July 2019, the Ministry of Planning and Investment proposed a draft law amending the 2014 Law on Enterprise (2014 LoE). Earlier this summer in June 2020, the National Assembly of Vietnam approved the amended Law on Enterprise No 59/2020/QH14 (2020 LoE), comprising of 10 chapters and 218 articles which shall enter into force on 1 January 2021.
Between 2014 and 2019, the number of newly-established enterprises in Vietnam almost doubled, and the amount of newly registered capital more than tripled. During this period, Vietnam gained 21 places in the World Bank’s start-up index,i and 28 places in its shareholder protection index.ii Keeping up with such developments, the 2020 LoE aims to create a favorable and fair business environment; promote the establishment and development of businesses, and reduce compliance costs and time for businesses.
This legal update provides an overview of the key changes in the 2020 LoE with regards to (i) State-owned enterprises (SOEs), (ii) capital contributions, (iii) the types of shares that may be issued by joint-stock companies (JSCs), (iv) minority shareholder rights and (v) non-voting depository receipts (NVDRs).
i. State-owned enterprises
The 2014 LoE defined a ‘State-owned enterprise’ as “any enterprise of which 100% charter capital is held by the State”,.iii and contained provisions regulating the existence and operations of SOEs.iv The 2020 LoE now reduces this threshold and provides a regulatory framework for SOEs where the State is not the sole owner.
Indeed, the State ownership threshold is now reduced to a minimum holding of 50% of the charter capital or voting rights in an enterprise.v Accordingly, the 2020 LoE now distinguishes the regulations applicable to wholly-owned SOEs from those applicable to SOEs where the State only owns 50% or more (but less than 100%) of the charter capital or aggerate shares with voting rights.vi The former are governed by Chapter IV of the 2020 LoE, while the latter is subject to the provisions of Chapter III (re. multi-member limited liability companies – LLC) or Chapter V (joint-stock companies – JSC) depending on the legal structure of each such SOE.
These amendments are in line with the Vietnamese government’s policy to improve the efficiency, governance, transparency, and competitiveness of SOEs.vii It also consistent with the economical reforms pursued by the Government to equitize, and divest from, SOEs. This is particularly relevant in the context of Vietnam’s commitments to reduce state ownership in SOEs under the recently ratified EU-Vietnam FTA and the CPTPP.
In this regard, the Prime Minister recently issued his Decision No. 908/QD-TTG which sets out a list of 124 SOEs to be equitized by the end of 2020, including a complete divestment from 96 enterprises. It also contains a list of 69 enterprises to be equitized between 2021 and 2025. Furthermore, the previously scheduled equitization of Agribank and Vinacomin has now been put on hold due to administrative complications encountered in the process.
ii. Capital Contributions
Under the 2014 LoE, the members/shareholders of LLCs/JSCs had to make their initial capital contribution within 90 days from the date of on which the company’s Enterprise Registration Certificate (ERC) was issued. The 2020 LoE now specifies that, when a member makes a capital contribution in the form of assets, the time for importing the assets and implementing the ownership transfer procedure is not subject to the 90 days’ time limit.viii
However, the 2020 LoE, like the 2014 LoE, does not set out a time limit for making contributions in the context of additional increases of charter capital. Some companies have taken advantage of this loophole to increase the capital stated in their ERC without making timely contributions.
The 2020 LoE, like the 2014 LoE provides for two categories of shares that may be issued by JSCs: ordinary shares and preference shares.ix It further classified preferred shares into the following categories: (i) voting preference shares, (ii) shares with preferred dividends, (iii) redeemable shares, and (iv) other preferred shares defined in the company charter.x
Regarding voting preference shares, the 2020 LoE now specifies that such shares may only be held by the JSC’s founding shareholders or “organizations authorized by the Government”.
The voting preference shares of founding shareholders may only be held for a period of 3 years from the issuance of the company’s ERC, after which they will have been converted into ordinary shares.xi
iv. Protection of minority shareholder
Another notable amendment introduced in the 2020 LoE concerns the increased protection offered to minority shareholders. Under the 2014 LoE, a shareholder (or group of shareholders) must hold at least 10% of the ordinary shares of a JSC for a minimum of 6 consecutive months to benefit from statutory protections.
Such protections include the right to nominate candidates on the Board of Directors (BOD) and Control Board (CB); examine copies of corporate documents (BOD minutes, financial statements, CB reports); request that General Meetings of Shareholders be held; request the CB to inspect issues related to the management of the company; and other rights under prescribed under the LoE or company charter.
The 2014 LoE also authorized minority shareholders a direct action against the company’s directors for breaches of fiduciary duty, subject to the condition that the shareholder held at least 1% of the shares for a minimum of 6 months.
The 2020 LoE offers the same protections to minority shareholders described above. However, it reduces the threshold to qualify as a minority shareholder to 5%.xii It further removes the 6-month minimum holding period for actions against directors.
The 2020 LoE thus affords greater legal protection to minority shareholders. Together with the amendments regarding SOEs discussed above, these changes aim to boost the confidence of foreign investors and their participation in the equitization of SOEs.
v. Non-Voting Depositary Receipts
Another key innovation of the 2020 LoE is the new provision on NVDRs which were not allowed under the 2014 LoE. NVDRs are financial instruments that are issued by a company to raise capital from foreign investors without exceeding foreign ownership restrictions.
Essentially, an NDVR grants a foreign investor with all the same benefits available to ordinary holders of the underlying security for which it was issued, except voting rights.
In other words, the holder of an NVDR issued for ordinary shares will have the same rights as ordinary shareholders, except voting rights. Such a mechanism is useful to raise foreign capital in business lines that are subject to foreign ownership restriction as they grant rights to foreign investors without involving them in the management and decision-making of the company.
Accordingly, the 2020 LoE now confirms that the holders of NVDRs issued by shareholders have all the benefits, rights, and obligations available to the underlying ordinary shares, except for voting right. Further regulations on this matter are to be issued by the Government.xiii
i Report No. 533 /TTR-CP 2020 LoE of the National Assembly of Vietnam. Vietnam is currently ranked 104th. In 2014, Vietnam was ranked 125th.
ii Id. Vietnam is currently ranked 89th. In 2014, Vietnam was ranked 117th.
iii Article 4(8) of the 2014 LoE
iv Chapter IV of the 2014 LoE
v Article 88 of the 2020 LoE
vi Article 4(11) of the 2020 LoE
viii Article 47 of the 2020 LoE
ix Art. 114(1) of the 2020 LoE
x Art. 114(2) of the 2020 LoE
xi Art. 114(3) of the 2020 LoE
xii Article 115(2) of the 2020 LoE
xiii Articles 114 (6) and (7) of the 2020 LoE