Introduction
In addition to the amended Law on Investment which sets out various changes in the legal framework on foreign investment, on 17 June 2020, the National Assembly of Vietnam passed the amended Law on Enterprises (Amended LOE) which will replace the current Law on Enterprises (Current LOE) from 1 January 2021. The Amended LOE introduces various welcome changes and clarifies a number of issues under the Current LOE with the aim of creating a more transparent environment and streamlined process for operation of enterprises in Vietnam.
We look at the 10 key changes under the Amended LOE and their implications.
Contents
- Corporate bonds of non-public companies
- Non-voting depository receipts
- Private placement of shares by non-public companies
- Changes of voting thresholds in a shareholding company
- Expanded minority shareholders' rights
- Related-party transactions of a shareholding company
- Changes in the management structure of limited liability companies
- New requirements on legal representatives
- Amended definition of 'Stated-owned Enterprise' (SOE)
- Removal of certain licensing procedures and changes in regulations on corporate seal
1 - Corporate bonds of non-public companies
Currently there is no restriction on who can purchase bonds issued by non-public companies (bond private placement of public companies is regulated and implemented by the regulations on securities). The Amended LOE now limits the purchasers to:
- strategic investors, in respect of private convertible bonds and warrant-linked bonds; and
- professional securities investors, in respect of private convertible bonds, warrant-linked bonds and other types of private bonds.
According to the lawmakers, the purpose of this restriction is to prevent non-public companies from raising funds by way of issuing bonds to individual or non-professional investors who may have limited information about the company's performance and associated risks with the bonds.
The Amended LOE does not define the concept of 'strategic investor'. In the absence of such definition under the Amended LOE, it is likely the relevant definition under the new Law on Securities (which will also take effect from 1 January 2021) will apply. Accordingly, a strategic investor means an investor selected by the General Meeting of Shareholders (GMS) based on its financial and technology capability and having commitment of cooperation with the company for at least three years. Note that under the Law on Securities, a company may have more than one strategic investor.
2 - Non-voting depository receipts
The Amended LOE introduces, for the first time, the concept of a 'non-voting depository receipt' (NVDR), which shall have all economic interests and obligations similar to ordinary shares, except for voting rights.
NVDRs will allow companies to raise funding from foreign investors without breaching the applicable foreign ownership limit as these NVDRs will not be counted towards the foreign ownership in the company. This will create an additional avenue for Vietnamese companies to attract foreign investment. The Government is tasked to issue further guidance on requirements and procedures for issuance of these NVDRs.
3 - Private placement of shares by non-public companies
Similar to the Current LOE, the Amended LOE contemplates three methods of offering shares in order to increase charter capital of a shareholding company:
- offering shares to existing shareholders (ie rights issue);
- private placement; and
- offering shares to the public.
Under the Current LOE, existing shareholders of the company have pre-emption rights in respect of a rights issue. However, it is not clear whether such pre-emption rights apply in respect of a private placement of shares which has been approved by the GMS.
The Amended LOE now clarifies that existing shareholders will also have pre-emption rights in respect of new shares issued under a private placement, except in case of merger or consolidation. Accordingly, it seems that waivers of pre-emption rights from all existing shareholders will be required in order to issue new shares by way of a private placement to a new shareholder without first offering them to the existing shareholders.
4 - Changes of voting thresholds in a shareholding company
The Current LOE provides for 51% voting rule for passing resolutions in respect of ordinary matters by the GMS of a shareholding company. The Amended LOE reduces this voting threshold to more than 50%. This change is consistent with the change of the threshold of foreign ownership in order to determine whether a foreign-invested enterprise is treated as a foreign investor under the amended Law on Investment.
In addition, the Amended LOE, for the first time, provides for the voting rights of shareholders holding redeemable preference shares and dividend preference shares (which by default do not have voting rights) in respect of any GMS resolution which causes adverse changes to their rights and obligations. In particular, such resolution requires approval from shareholders holding at least 75% of the total number of preference shares of the affected share class. With this change, preference shareholders will have a clearer statutory mechanism to protect their rights, rather than having to rely on contractual agreements with the company and other shareholders. However, it remains unclear as to which changes would be considered as 'adverse' and who would have the authority to decide this issue.
5 - Expanded minority shareholders' rights
One of the key objectives of the Amended LOE is to provide for a greater protection for minority shareholders in shareholding companies and to create more favourable conditions for minority shareholders to exercise their rights. To this end, the Amended LOE introduces the following changes:
- a shareholder or group of shareholders holding 10% or more of the total ordinary shares in the company will now have the right to appoint nominees to the Board of Management (BOM) and the Inspection Committee (IC) without the requirement of holding the shares for at least six consecutive months under the Current LOE;
- a shareholder or group of shareholders holding 5% or more of the total ordinary shares in the company (instead of 10% for at least six consecutive months under the current LOE) will now have the right to request convening a meeting of the GMS, to sight the company's records or to request the IC to inspect issues in relation to management and operation of the company;
- any shareholder (without the requirement of holding the shares for at least one year under the Current LOE) will have the right to request the court suspends or cancels BOM's resolutions in certain circumstances; and
- a shareholder or group of shareholders holding 1% or more of the total ordinary shares in the company (instead of 10% for at least six consecutive months under the Current LOE) will now have the right to take a derivative action against BOM members or the general director of the company.
6 - Related-party transactions of a shareholding company
Under the Current LOE, a related-party transaction of a shareholding company would be invalid if it is entered into or carried out without the required approval by the BOM or the GMS. In practice, this wording has led to an interpretation that such related-party transaction cannot be ratified by the BOM or the GMS afterwards.
The revised wording in the Amended LOE now seems to suggest that a related-party transaction can be ratified after it has been first entered into without proper corporate approvals and such ratified transaction would not be invalid.
The Amended LOE has also extended the scope of related-party transactions being subject to a GMS approval to further include any related-party transactions having the value of more than 10% of the total asset value of the company between the company and a shareholder holding 51% or more of the voting shares of the company or a related person of such shareholder.
7 - Changes in the management structure of limited liability companies
Under the Amended LOE, a limited liability company is no longer required to have an inspection committee (in respect of a multi-member limited liability company) or an inspector (in respect of a single-member limited liability company). Such inspection committee or inspector is now only required in respect of a limited liability company being a State-owned enterprise or its subsidiary. This is a welcome change as, in practice, companies often have an inspection committee and inspector only to comply with the Current LOE and these bodies do not have a real function.
8 - New requirements on legal representatives
Similar to the Current LOE, under the Amended LOE, a limited liability company or a joint stock company can have more than one legal representative. The Amended LOE now further requires that rights and obligations of each legal representative must be specified under the charter of the company. If the charter of the company is silent on this point, each legal representative will have full authority to represent the company and must be jointly liable for any damage caused to the company.
In addition, the Amended LOE further clarifies that if a limited liability company has more than one legal representative, at least one of the legal representative must be either (i) the general director or (ii) the chairman of the members' council or the chairman of the company (in respect of a single-member limited liability company which does not have members' council).
9 - Amended definition of 'Stated-owned Enterprise' (SOE)
Under the Amended LOE, SOEs will include enterprises in which (i) the State holds 100% of the charter capital (which is the definition under the Current LOE) and (ii) the State holds more than 50% of the charter capital or voting shares.
It seems this definition has expanded to reflect the Government's policy to enhance the State's control over companies in which the State has a controlling stake, and also to be consistent with Vietnam's international commitments (eg CPTPP, EVFTA).
10 - Removal of certain licensing procedures and changes in regulations on corporate seal
In an effort to streamline the licensing procedures in relation to establishment and operation of enterprises in Vietnam, the Amended LOE has removed the following licensing procedures:
- notification on changes of the company's management personnel (eg BOM members, general director);
- notification on use, change or cancellation of seal specimen; and
- notification on private placement of shares before issuance of shares.
In addition, the Amended LOE provides that the seal of a company can be made in the form of both 'physical' seal (ie a rubber stamp) and a digital signature in accordance with the regulations on e-transactions. Further guidance is expected to be issued in respect of digital seals of companies.
