Vietnamese laws provide for four principal forms of corporate/business organisations, including the following.
Compared to the other three forms, only a JSC can offer to sell shares to the public (public offering), after which such JSC must be registered as a public company and governed additionally by securities regulations.
A public company is also a JSC (i) whose shares are listed on a stock exchange (listed company); or (ii) having shares owned by at least 100 investors, excluding professional securities investors, and having paid-up charter capital of at least VND10 billion (USD425,000).
In Vietnam, the principal sources governing corporate governance requirements for companies are listed below.
Besides the CG Code, which acts as a set of recommendations and is voluntary for companies, public companies must comply with the corporate governance requirements stipulated in the LOE, LOS, their guiding documents and the companies’ constitutional documents and internal regulations (as mentioned in 1.2Sources of Corporate Governance Requirements).
As a matter of principle, public companies must ensure the following:
The detailed requirements of these principles will be addressed in the following sections.
In addition to the principal sources mentioned in 1.2Sources of Corporate Governance Requirements, companies must comply with the following guidelines.
CG Code
The most recent and important development in corporate governance in Vietnam is the issuance of the CG Code. The CG Code aims to raise the standards of corporate governance practices for public companies and listed companies in Vietnam to a higher level than the minimum requirements under current legislation. In particular, the CG Code provides ten Principles aiming to:
Law on Securities 2019
Another key recent development in relation to corporate governance in Vietnam is the adoption of the Law on Securities 2019, which is set to be effective from 1 January 2021.
Overall, the new LOS has legalised certain rules on corporate governance that are not present in the current LOS, such as the application of the company’s internal corporate governance regulations, avoidance of conflict of interests of directors and officers, as well as strengthening of rules on information disclosure, among others.
The Draft of the Law on Amending and Supplementing the LOE
Forthcoming developments in corporate governance can be seen from the latest draft of the Law on amending and supplementing the LOE dated 29 April 2020 (the Draft). One of the most significant changes that the Draft proposes is a decrease in the minimum percentage of shares and the elimination of the statutory period of holding a minimum percentage of shares in a JSC in order to be entitled to certain shareholder rights.
For example, instead of having to hold 10% or more of the total ordinary shares for six consecutive months or a lower ratio specified in the company’s constitutional document, a shareholder or group of shareholders will, according to the Draft, only need to hold 5% or more of the total ordinary shares or a lower ratio specified in the company’s constitutional document to call for an extraordinary GMS.
The Draft has also clarified the concept of audit committee (or “internal auditing board” as per the current LOE) in case a JSC opts not to establish a supervisory board (see 3.1 Bodies or Functions Involved in Governance and Management for more details). By supplementing Article 156a on an audit committee, the Draft has specified the committee’s structure, decision-making process, rights and obligations, which are notable developments from the current LOE.
Companies must prepare and submit certain reports on environmental and labour issues in accordance with specialised legislation on environment and labour matters.
In addition, under Circular 155, public companies are required to report on environmental, social and governance (ESG) issues in their annual report which they must disclose annually. The main ESG issues that must be reported include:
Listed companies and public companies with shareholders’ contributed capital of VND120 billion or more as recorded in the latest audited annual financial statement (large-scale public companies) must also make and disclose the biannual and annual corporate governance reports (See 6.2Disclosure of Corporate Governance Arrangements for more details).
Lastly, Principle 8.3 of the CG Code recommends public companies to ensure disclosure of key non-financial information, including environmental and social (E&S) reporting. Some significant recommended practices include the following.
To cope with the impact of COVID-19 on corporate governance, Vietnamese regulators have introduced several measures, as follows.
The Conduct of the 2020 Annual GMS
The SSC issued Official Letter No 1916/UBCK-GSDC on 20 March 2020 (OL 1916) to public companies on the organisation of the 2020 annual GMS. OL 1916 provided the following.
Labour Issues
The Ministry of Labour, War Invalids and Social Affairs issued Official Letter No 1064/LDTBXH-QHLDTL on 25 March 2020 (OL 1064) guiding payment of wages to employees who had been furloughed because of COVID-19. According to OL 1064, employees who are furloughed as a direct result of COVID-19, such as those falling under one of the following cases, may receive their wages at a rate negotiated with the employers, which must not be less than the regional minimum wage:
OL 1064 also provides guidance on cases where the employers (i) face difficulties due to the lack of materials or markets, leading to insufficient work for their employees, or (ii) cannot afford to pay wages due to prolonged suspension of work, or (iii) have to downsize their operation, thus not having sufficient work for their employees.
Depending on which situation applies, the employers may (i) temporarily assign other jobs to the employees which can be different from those prescribed under the labour contracts, (ii) temporarily suspend the performance of the labour contracts, or (iii) unilaterally terminate the labour contracts in compliance with a strict procedure.
Furthermore, Official Letter No 860/BHXH-BT dated 17 March 2020 of Vietnam Social Security also allows the postponement of certain social insurance payments by enterprises in the passenger transport, tourism, accommodation, restaurants and other special industries, which have to furlough at least 50% of their employees, or suffer losses valued at over 50% of their total asset value (not including land) due to COVID-19.
Financial Issues
The State Bank of Vietnam issued Circular No 01/2020/TT-NHNN dated 13 March 2020 on debt rescheduling, exemption and reduction of interest and fees for enterprises amidst the COVID-19 pandemic.
In addition, the Tax Department also issued Official Letter No 897/TCT-QLN dated 3 March 2020 on extending tax payment deadlines for taxpayers whose production or businesses have suffered direct and calculable losses due to COVID-19. Taxpayers may also apply for exemption from payment of interest for late payments for the same reasons.
The governance and management of a company, particularly a JSC, involve the following principal bodies or functions.
For (i), a supervisory board is not compulsory if the company has fewer than 11 shareholders and all shareholders being organisations hold fewer than 50% of the company’s total shares. The main function of the supervisory board is to supervise the BOM, director/general director in managing and running the company.
For (ii), at least 20% of the BOM must be independent members, who are responsible for supervising the governance of the company.
Decisions on the following matters are reserved for the GMS:
The BOM is entitled to make decisions on matters other than those reserved for the GMS.
The supervisory board/internal auditing board under the BOM is a specialised body for supervising the activities of the BOM and other managerial positions and thus does not make any typical decisions on behalf of the company.
The director/general director is entitled to make decisions on:
The GMS makes decisions by voting at the GMS meetings (see 5.3 Shareholder Meetings for more details) or collecting written opinions. Unless the company’s constitutional document provides otherwise, decisions on the following matters must be made by voting at the meetings:
In case of collecting written opinions, a decision is passed if approved by shareholders holding at least 51% of the total voting shares; the detailed ratio is to be specified in the company’s constitutional document.
The BOM makes decisions by voting at the meetings, collecting written opinions or by other methods provided for in the company’s constitutional document. Each BOM member has one vote. If the votes are equal, the chairperson of the BOM (chairperson) has the casting vote.
The BOM can have regular or extraordinary meetings at the head office or other locations, but the chairperson must convene at least one board meeting every quarter of a calendar year.
For JSC in general, the LOE generally requires that the BOM must have between three and 11 members; the specific number of members will be set out in the company’s constitutional document. Every BOM must have a chairperson; and JSC not having a supervisory board must have an internal auditing board under the BOM, on which at least 20% of the BOM must be independent members.
For public companies, the BOM are usually required to have the following members:
The BOM of public companies may also establish specialised committees (with the approval of the GMS) under the direction of the BOM, such as a human resources committee and remuneration committee, managed by one of the independent members of the BOM.
The detailed requirements of board composition are further clarified in 4.3Board Composition Requirements/Recommendations.
The BOM generally has broad rights and duties in managing the company’s matters that do not belong to the GMS’ authority. Every member of the BOM has the right to participate in the BOM meetings and has one vote to decide on these matters. The chairperson, however, is entitled to other rights and obligations with respect to convening and managing the meetings of the BOM and the GMS.
While executive members of the BOM (such as the director/general director) has specific roles provided under the laws, there is lack of regulations on the roles of non-executive members.
For public companies, independent members of the BOM are responsible for making an annual assessment report on the operation of the BOM, which is to be published at the annual GMS. In addition, independent members can be assigned to assist the BOM in managing the specialised committees as mentioned in 4.1Board Structure.
For JSC applying the internal auditing board model, at least 20% of the BOM must be independent members.
In addition, public companies are also subject to the following requirements and recommendations for board composition.
A shareholder or a group of shareholders holding 10% or more of the total ordinary shares for six consecutive months, or holding a smaller ratio as stipulated in the company’s constitutional document, has the right to nominate candidates for the BOM or supervisory board.
Unless otherwise stipulated in the company’s constitutional document, the election of the BOM or supervisory board members must be conducted by cumulative voting, in which the following rules apply.
The chairperson is elected and dismissed by the BOM, while BOM members are dismissed by the GMS.
For every BOM member dismissed, a new BOM member will be elected at the earliest annual GMS. However, the BOM must convene an extraordinary GMS to elect new BOM members if (i) the number of BOM members is reduced by more than a third of the total BOM members stipulated in the company’s constitutional document; or (ii) in the event the company is applying the internal auditing board model, less than 20% of existing BOM members are independent members.
The director/general director is appointed or hired, dismissed or has his or her contract terminated by the BOM. The director/general director can be a BOM member or not.
Other managers or executive officers will be appointed, hired, dismissed or have their contracts terminated by either the BOM or the director/general director, subject to the company’s constitutional document.
Independence
An independent member of the BOM is one who:
See 4.3Board Composition Requirements/Recommendations for more details on the requirements relating to independent members.
Conflicts of Interest
Vietnamese laws introduced basic regulations to prevent conflicts of interest among BOM members, director/general director, supervisory board members and other managers (directors/officers), which are likely to occur due to (i) the transactions made with the company and (ii) the unlawful disclosure of information.
With respect to (i), unless the company’s constitutional document provide otherwise, the company must make a list of related persons and their related interests, which includes the transactions made between the company and the directors/officers or their related persons. Directors/officers must disclose information on enterprises that they or their related persons own or have controlling rights over, and must update this information in a timely manner.
The list of related persons must be submitted to the GMS at the annual meeting and filed at the head office. Shareholders and directors/officers can request access to and copies of the list.
Contracts or transactions between the company and the directors/officers and their related persons must be approved by either the BOM or the GMS, depending on the value of such contracts or transactions. The BOM members or shareholders related to the contracts or transactions in question are not allowed to vote for approval.
For public companies, contracts or transactions made between the directors/officers and their related persons and the public company’s subsidiaries or other companies that the public company holds over 50% of the charter capital must also bear the same scrutiny as above-mentioned. Moreover, the public company must disclose the resolutions approving such contracts or transactions.
Unless approved by the GMS, a public company is not allowed to issue a loan or financial guarantee to the directors/officers and their related persons or enterprises.
With respect to (ii), directors/officers are not allowed to misuse information, know-how or business opportunities of the company, abuse their positions and powers, or use the company’s assets to gain personal advantages or serve the interests of other persons or organisations.
For public companies, directors/officers and their related persons are not allowed to misuse any information whose disclosure has not been permitted by the company or disclose information to someone else to conduct relevant trading.
Directors/officers bear the following principal duties:
The BOM owes their duties to the GMS, while the director/general director owes theirs to the BOM.
The BOM of a public company is also required to respect the interests of other stakeholders, such as employees, creditors, clients, suppliers and the local communities, in decision making. Public companies in general, which should include directors/officers in particular, are required to implement corporate social responsibility in accordance with the laws and the company’s constitutional document, as well as comply with the regulations on labour and E&S.
A shareholder or group of shareholders holding at least 1% of the ordinary shares for six consecutive months is entitled to file a civil lawsuit, either on their own or on behalf of the company, against the BOM members and director/general director for breaches of directors’ duties. See 5.4Shareholder Claims for more details.
As a general rule, a director/general director who breaches their duties and causes losses to the company must bear legal responsibilities and compensate the company.
The LOE provides other bases on which Directors/ Officers can be held liable for their breaches and to compensate for any losses incurred by the company as listed below.
Generally, the company is entitled to remunerate BOM members, the director/general director and other managers in accordance with its business results and efficiency. The payment of, approvals or restrictions on remuneration, fees or benefits payableto the above positions are usually provided in the company’s constitutional document.
Unless the company’s constitutional document provides otherwise, the total remuneration payable to the BOM members must be approved at the annual GMS. The BOM members are entitled to receive other fees and reasonable expenses while undertaking their delegated works; however, the LOE is silent on whether these benefits must be approved by the GMS.
The remuneration of director/general director must be approved by the BOM. Director/general director is also entitled to receive bonuses; yet again, the LOE is silent on whether the bonuses and other benefits of the director/general director must be approved in advance.
The GMS must approve the remuneration and other benefits of the supervisory board members, as well as the annual operation budget of the supervisory board. Supervisory board members are entitled to receive other fees while undertaking their delegated works, including service fees for independent consultancy. The total remuneration and the above-mentioned fees must not exceed the annual operation budget approved by the GMS, unless decided otherwise by the GMS.
For JSC in general, the remuneration of directors/officers must be recorded as the company’s business expenses in tax documents; recorded as a separate item in the annual financial statements of the company; and reported to the GMS at the annual meeting.
For public companies, this means that the remuneration would be disclosed to the public, as they are required to disclose the audited annual financial statements. Moreover, the remuneration, rewards and other benefits of directors/officers, regardless of being calculable or not, must be reported in detail in the annual report and disclosed to the public. See 6.1Financial Reporting for more details.
The relationship between a company and a shareholder is bilateral, connected by the shareholder’s act of contributing capital to the company and becoming one of its owners together with other shareholders. Consequently, shareholders are granted rights for owning and developing the company and are liable for the company’s debts and other liabilities to the extent of the capital they have contributed.
Generally, shareholders have the right to participate in the GMS, vote at the GMS, receive dividends from the company, and nominate candidates for the BOM and supervisory board, and other rights in accordance with the laws and companies’ constitutional documents.
However, shareholders are also obliged to comply with the company’s constitutional document and internal management rules, the resolutions of the GMS and BOM and other requirements set out by laws.
The relationship between companies and shareholders is mainly governed by the LOE, LOS (for public companies), the companies’ constitutional documents and internal corporate governance regulations.
Shareholders have minor roles in the company’s direct management compared to the BOM or director/general director (see 3.1Bodies or Functions Involved in Governance and Management for more details).
Most notably, a shareholder continuously holding shares in the company for at least one year is entitled to request the BOM to refrain from implementing the BOM resolutions that have been passed against the law or the company’s constitutional document.
Other less direct roles of shareholders in a company’s management are, for a shareholder or group of shareholders holding 10% or more of the ordinary shares for six consecutive months, as follows:
Nevertheless, those shareholders must clearly express in writing the reasons for such requests and provide evidence of the decisions that were made ultra vires.
A company must hold an annual GMS within four months of the end of its financial year. Upon the BOM’s request, this timeline can be extended by the company's registry, but must not exceed six months from the end of its financial year.
Besides the compulsory annual GMS, extraordinary GMS can be convened under certain circumstances specified under the laws and the company’s constitutional document, such as upon the request of a shareholder or a group of shareholders holding 10% or more of the ordinary shares for six consecutive months or the supervisory board.
Within 30 days of receipt of the request of such shareholders or the supervisory board, or if the number of the remaining BOM members falls below the required threshold, the BOM must convene a GMS, unless provided otherwise by the company’s constitutional document. If the BOM fails to convene the meeting, the supervisory board must convene the meeting within the next 30 days. If the supervisory board fails to do so, the shareholder or group of shareholders holding 10% or more of the ordinary shares for six consecutive months can convene the GMS on behalf of the company.
The convening party must, among other things, establish a list of shareholders entitled to participate in the meeting, prepare the meeting agenda, prepare documents for the meeting and send invitations at least ten days before the meeting (unless the company’s constitutional document provides for a longer timeline) to all shareholders entitled to participate in the meeting.
The shareholder or group of shareholders holding 10% or more of the ordinary shares for six consecutive months is entitled to propose in writing additional issues to be added to the meeting agenda. The proposal must be sent to the company at least three days before the meeting, unless the company’s constitutional document provides otherwise.
The meeting must be held in Vietnam, though shareholders may participate in the meeting in person, via electronic means or by proxy.
A meeting can be conducted if the shareholders present at the meeting represent at least 51% of the company’s total votes. The precise ratio can be specified in the company’s constitutional document. If the number of attendees falls short, the meeting can be convened again within 30 days of the initial meeting date, unless the company’s constitutional document provides otherwise. The minimum ratio required to conduct the meeting this time is 33%; the detailed ratio can be specified in the company’s constitutional document.
If the number of attendees falls short of the required threshold again, the meeting can be convened for the third time within 20 days of the second-attempted meeting date, unless the company’s constitutional document provides otherwise. The meeting can be conducted this time irrespective of the number of total votes represented by the shareholders at the meeting.
A shareholder or group of shareholders holding at least 1% of the ordinary shares for six consecutive months is entitled to file a civil lawsuit, either on their own or on behalf of the company, against members of the BOM and director/general director if they have:
The procedural cost for filing a lawsuit on behalf of the company will be recorded at the company’s expense, unless the lawsuit is rejected.
A shareholder becoming or ceasing to be a major shareholder by reaching or falling below 5% of the circulating voting shares of a public company must disclose and report this to the company, the SSC and the stock exchange within seven days of the date the changes occurred.
The disclosure obligation also applies to a major shareholder whose shares exceed or fall below every 1% threshold thereafter. However, the obligation does not apply to all of the above changes if they occurred because the public company had issued new shares.
Founding shareholders, whose shares are restricted from being transferred within three years of the establishment date of the company, must report to the public company, the SSC, the stock exchange and Vietnam Securities Depository (VSD) the intended transaction of the restricted shares at least three working days in advance, and report the results of such transaction within three working days after the transaction is completed.
The company must then publish all changes above on the company’s website within three working days of the date they are reported by the shareholders.
Shareholders conducting tender offers and the companies who receive offers must also disclose information in accordance with the LOS and other guiding documents.
Public companies must disclose certain information regularly, extraordinarily and on-request in accordance with the LOS and Circular 155.
On a regular basis, public companies must disclose the following information.
The annual report must contain all detailed information as required by the laws, though the main contents should include: the results of business operations in the year, major investment, major financial benchmarks, shareholders structure, E&S reporting (see 2.3 Environmental, Social and Governance (ESG) Considerations) and corporate governance (see 6.2Disclosure of Corporate Governance Arrangements).
With respect to extraordinary disclosures, public companies must disclose any crucial or sudden event as prescribed in Circular 155, such as dissolution of the company, amendments of the company’s constitutional document, dividend payment, etc.
In certain circumstances, the SSC and stock exchange may request a public company to disclose information when there is an event that may have a material effect on the shareholders’ benefits or the company’s stock price. In such case, the company must disclose the information requested together with the reasons, assessment and solutions (if any) within 24 hours of the receipt of the request.
In addition to the above-mentioned disclosure requirements, listed companies and large-scale public companies must also make regular disclosures on:
Corporate governance arrangements are required to be addressed in the annual report of public companies as well as in the annual and biannual reports on corporate governance (for listed companies and large-scale public companies).
Annexes 4 and 5 to Circular 155 provide templates of both of these reports, which should include the following main contents.
Moreover, a JSC is required to disclose the company’s constitutional document, which usually contains corporate governance arrangements, on its website (if it has one). A public company is required to have a website within six months of becoming a public company, and to have the company’s constitutional document, internal governance rules (if any) and prospectus (if any), among others, disclosed on its website.
A company must register as and when there are changes to the enterprise registration contents, such as the company’s name, address, charter capital, business lines, etc at the provincial Department of Planning and Investment (DPI). The DPI will then publish these changes on the National Business Registration Portal.
Public companies and foreign-owned capital enterprises are among the companies required to have their annual financial statements audited by an external auditor. Listed companies and large-scale public companies must also have their biannual financial statements reviewed by an external auditor, but may choose whether or not to have their quarterly financial statements reviewed by an external auditor.
The external auditor conducting the audit for public companies must be an audit company approved by the Ministry of Finance to conduct auditing on entities with public interests.
The external auditor must be appointed by the GMS at the recommendation of the supervisory board. However, the law is silent on other relationships between the company and the auditor, especially where a public company decides to adopt the internal auditing board model instead of the supervisory board model.
The CG Code recommends that the BOM should set up an audit committee (or “internal auditing board” as phrased under the current LOE) who is responsible for recommending the appointment, remuneration and terms of engagement of the external auditor for the BOM’s review and approval (before submission to the annual GMS for final approval). The audit committee should also be responsible for monitoring and reviewing the external auditors’ independence and objectivity and the effectiveness of the audit process. The company should disclose all fees payable to external auditor including both assurance and non-assurance services.
There are almost no mandatory and specific requirements for the BOM of public companies, except for financial institutions, to ensure the integration of strategy, risk and control, as well as to oversee the effectiveness of company’s internal control system.
Pursuant to Decree 05/2019/ND-CP, which came into effect on 1 April 2019, listed companies are required to, among others, have an independent internal audit functionwithin 24 months from the effective date of the decree, as a measure for risk management and internal control.
The CG Code has recommended several practices in relation to the matters in question, including the following:
Background
Vietnam has been seeking to improve corporate governance for enterprises by instigating reforms. A recent effort is the adoption of the Law on Securities 2019 No 54/2019/QH14 on 26 November 2019 (the New LOS). The New LOS has, among other things, placed more focus on corporate governance of public companies and specified stricter conditions for public offering, all in an endeavour to propel the standards and corporate governance of public companies closer to international practices.
Introduction
“Everybody has to start somewhere.” Haruki Murakami
Vietnam does not have a developed framework on corporate governance yet, but it has taken significant steps to aspire to its international peers. One of the big changes is the adoption of the New LOS, which will take effect from 1 January 2021, replacing the Law on Securities 2006 No 70/2006/QH11, as amended and supplemented in 2010 (Current LOS).
This article will introduce and analyse two key aspects of the New LOS that provide positive changes to corporate governance of public companies in Vietnam, namely the corporate governance framework and the conditions to conduct public offering.
More Focus on Corporate Governance
The New LOS has paid more attention to corporate governance of public companies. In terms of structure, the New LOS has split Chapter III – Public companies into two separate sections: grouping all general provisions on public companies into the first section (Section I) and leaving the principal provisions on corporate governance in the newly established second section (Section II).
While the current LOS directs public companies to build their corporate governance in accordance with the relevant laws and simply lists four general principles, the New LOS, particularly Section II of Chapter III, develops the principles from the current LOS and additionally specifies the contents of corporate governance applicable to public companies.
The Revised Principles
The New LOS revises the principles in alignment with the G20/OECD Principles of Corporate Governance 2015. In particular, the New LOS requires public companies to ensure appropriate and, more importantly, effective corporate governance. In addition, public companies must not only ensure the efficiency of the Board of Management (BOM) and the supervisory board, but also boost the BOM’s responsibilities towards the companies and shareholders, whose rights must be safeguarded and who must be treated equally.
A newly added principle of corporate governance under the New LOS is to safeguard the roles of investors, the securities market and intermediary organisations who assist with the companies’ corporate governance activities, as well as the legitimate interests of third parties whose benefits are affected by the companies’ corporate governance. This is in accordance with international practice where stakeholders’ interests should be taken into account, alongside the main focus on the interests of shareholders and the companies.
Lastly, public companies must disclose information timely, adequately and accurately and keep their activities transparent. Shareholders must be assured of their equal right to information.
Five Main Corporate Governance Issues
The new LOS sets forth five main corporate governance issues applicable to public companies, namely the rights and obligations of shareholders; convening and conducting the annual general meeting of shareholders (AGM); the BOM and BOM members; avoiding conflicts of interest; and ensuring information transparency. Some of the most notable provisions of these categories will be presented below.
First, major shareholders, that is, those who own 5% or more of voting shares of a company, are required not to take advantage of their positions to interfere with the rights and benefits of the company and other shareholders. This provision spells out the above-mentioned principle that is usually undermined by major shareholders, namely all shareholders deserve equitable treatment. This rule helps to protect many shareholders whose shares are minor and dispersed.
Secondly, the New LOS requires a company to stipulate in their internal regulations on corporate governance, among others, the application of modern information technology for shareholders to participate in a virtual AGM, share their opinions and vote at a virtual AGM in accordance with the Law on Enterprises and the company’s constitutional document.
This will facilitate the conduct of an AGM in the high-tech era, which is especially beneficial in situations like the COVID-19 pandemic. Also, it is the first time a public company’s internal regulation on corporate governance is recognised in a primary source of legislation, which reiterates the significance and obligation of having an internal regulation on corporate governance that has only been mentioned in a guiding document such as Decree 71/2017/ND-CP.
Thirdly, a public company must invite a representative from the approved audit entity which audited its annual financial statement to the AGM if that statement contains an auditor’s qualified opinion that the financials are fairly presented except for certain specified areas.
With respect to the nomination and election of BOM members, once the candidates for BOM members have been identified, a public company must disclose on its website information relating to the candidates at least ten days before the day of the AGM for shareholders to consider before voting. If there are fewer candidates than required under the Law on Enterprises, the current BOM is entitled to introduce or elect more candidates in accordance with the company’s constitutional documents and internal regulations on corporate governance.
Lastly, to avoid conflicts of interest, a public company must implement necessary measures to prevent members of the BOM and the supervisory board, (general) director, shareholders and their related persons from intervening in the company’s operation and harming the company’s interests. Moreover, a public company must comply with the information disclosure obligations that have been generalised and updated by the New LOS based on the course of application of these rules under the current LOS and other guiding documents.
In general, the New LOS shows a great effort to form a more solid legal basis requiring public companies to implement rules on corporate governance specifically designed for them, in addition to those that are regulated by supplementary legal documents, such as Decree 71/2017/ND-CP and Circular 155/2015/TT-BTC, or those generally applicable to a normal joint stock company (JSC) under the Law on Enterprises.
Stricter Conditions for Public Offering
While the current LOS sets out four conditions for public offering without separating the applicability to initial public offering (IPO) or secondary offering, the New LOS differentiates these two categories, specifying stricter conditions for a JSC to go public by IPO, and makes it even more difficult for a public company to conduct a secondary offering. While many tend to focus on the surface or direct impact of these changes, there are several benefits the changes could bring to the corporate governance of public companies that should be noted.
IPO
The New LOS strengthens three out of four conditions provided under the current LOS, and supplements five new conditions in relation to conducting an IPO. Some of the most significant changes are as follows.
First, a JSC must have a paid-up charter capital of at least VND30 billion (approximately USD1.27 million) recorded in the accounting book at the time of IPO registration, which is triple the minimum capital required under the current LOS. The change is said to be appropriate to the scale of public companies in Vietnam at present where over 81% of a total of 1,940 public companies each have a charter capital of at least VND30 billion (according to the Explanatory report on the New LOS issued by the Vietnamese government on 9 May 2019).
The increase in the minimum paid-up charter capital encourages a JSC to be financially ready to perform their obligations on the securities market once they go public, including the obligations on corporate governance. For example, a public company must invest in their website, information technology system and specialised personnel to conduct compulsory information disclosures. Recruiting independent BOM members and other qualified personnel, as well as having the annual financial statements audited, are among other corporate governance obligations that can be considerably costly to public companies.
Secondly, the New LOS also requires a public company to list their shares on a stock exchange or register for shares trading on the unlisted public company market (UPCOM) system, once the public offering is completed. The current LOS only requires companies to make a commitment, but fails to emphasise the obligation to list shares on a stock exchange or register for shares trading on UPCOM. This has led many public companies to delay doing so in practice, causing risks to not only the investors but also the securities market.
The change under the New LOS helps protect the investors from uncontrollable securities transactions or fraudulent transactions that are likely to happen on the over-the-counter market. Moreover, listing shares on a centralised market can boost the market liquidity of a public company, prevent shares from being accumulated and the consequences thereof to the shareholders, such as not being able to transfer their shares when the stock price decreases.
Thirdly, prior to the IPO, major shareholders of a JSC must commit to jointly hold at least 20% of the company’s charter capital for at least one year after the IPO is completed. This new condition under the New LOS aims to enhance the commitment between the company and the major shareholders, who together not only own a considerable amount of capital, but can also hold managerial positions or play important roles in the operation and development of the company. Accordingly, this new condition provides a good measure to prevent sudden changes in the company’s strategy and corporate governance after IPO.
Secondary Offering
To conduct a secondary offering, meaning additional offering of a public company to the public after it has successfully conducted the IPO, a public company must satisfy nearly 70% of the conditions for IPO, including but not limited to the above-mentioned minimum paid-up charter capital of VND30 billion and the obligation to list shares or register for shares trading on a centralised market, and other additional conditions.
Most notably, if the purpose of the offering is to mobilise capital for a project of the public company, the offering is only regarded as successful if the company achieves at least 70% of the total amount of shares they expect to receive from the offering. The company must also have a plan for compensating the shortage of capital that has not been achieved from the mobilisation.
These are expected to prevent a public company from issuing excessive shares compared to the company’s need and scale, which may result in the company not being able to use the proceeds effectively and creating underlying risks for both existing shareholders and stock market investors, namely the potential shareholders of the company.
In sum, the New LOS imposes many stricter conditions for both IPO and secondary offering, which should raise the quality of shares of a public company and the securities market in general. More importantly, the rights and legitimate interests of both shareholders and investors are better protected under the New LOS, which reflect the amended principles of corporate governance as discussed above.
On the one hand, the changes back minority shareholders and avoid mass dilution of shares for existing shareholders as it will be harder for a JSC to go public and a public company to conduct secondary offering. On the other hand, satisfying these adversities will assure shareholders and investors that the company is in good shape and indeed ready to become public by IPO or receive more funds from secondary offering for appropriate purposes.
Conclusion
The New LOS has introduced significant reforms to corporate governance of public companies in Vietnam, hopefully to suit the new scale of companies, the complexity of the securities market, and the increased needs of shareholder protection.
These changes bring about a more comprehensive corporate governance framework for public companies, and several stricter conditions for an IPO and secondary public offering. These improvements are in accordance with the corporate governance principles endorsed by the OECD and G20 Leaders' Summit and other international practices of developed countries.
The greater focus of the New LOS on corporate governance is expected to raise the standards, stability and transparency of governance in public companies in Vietnam. As a result, public companies should be more attractive to investors and be able to utilise this long-term source of funds for sustainable growth. Lastly, it is also worth mentioning that, as the regulations are new, a shareholder should seek to get their interest set out clearly in the company’s by-laws, for the best protection possible.
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