Introduction

A put option is a common feature in many transactions, providing investors with a secure exit strategy in specific events. Depending on the specific transaction, the put option can be exercised by the investor against the company where they hold shares or against another third party, such as other shareholders of the company. While the put option between one shareholder with another shareholder is mostly contractual arrangements and should generally not be subject to severe limitations (except for some transfer restrictions set out by laws – which can still be managed with proper transaction planning), put options with the company (hereinafter referred to as “company put option”) are not only governed by contract law, but are also significantly affected by enterprise law as they deal directly with the affairs of the company.

This poses a concern regarding the enforceability of the put option against the company, where the put option holder (e.g. investor) seeks to compel the company to repurchase its shares at a predetermined price upon occurrence of specific trigger event.

This article delves into the legal and practical considerations of enforcing a put option against a non-public company in Vietnam.

What are the possible ways to enforce a company put option under enterprise law?

Since the company put option primarily involves the possibility of the company redeeming or recalling shares from its shareholders, it is worth revisiting the ways in which shares can be redeemed or recalled under the Law on Enterprises (LOE). Generally, under the LOE, the recall or redemption of shares can be implemented in the following ways:

A. The company returns part of its capital contribution to all existing shareholders on a pro-rata basis according to their shareholding in the company;

B. For redeemable preference shares, the company redeems the redeemable preference shares from the shareholder in accordance with its terms;  

C. The company redeems the shares from the shareholder pursuant to the shareholder’s demand in specific events;  

D. The company redeems the shares pursuant to the company’s decision.  

For (A) and (B), it is generally not possible to customize them into a company put option. This is because:

(i) For (A): exercising this method may only help return the capital contribution without any premium from the company to the investor. That means, investors will receive nothing more than their injected capital. Furthermore, this method applies only to company’s recall of shares from all existing shareholders on a pro-rata basis, not to any particular shareholder.

(ii) For (B): this method is limited only to preference shareholders holding redeemable preference shares (RPS). Furthermore, the redemption of the RPS, similar to (A), also results in the return of capital contribution, without providing any premium on RPS being redeemed.

So, technically, only Methods (C) and (D) are viable for structuring the company put option. Our analysis for (C) and (D) is detailed below.

Dive Deep into Method (C) – Share Redemption Pursuant to Shareholder’s Demand

Generally, the exercise of this Method (C) is subject to certain statutory conditions and limitations, including:

(i) Trigger event: A shareholder’s demand for share redemption can only be made if the shareholder voted against a resolution in relation to either (X) the company’s reorganization; or (Y) amendment to the shareholder’s rights and obligations set forth in the company’s charter;  and

(ii) Pricing: The price of redemption shall be subject to the market price or the price otherwise set forth in the company’s charter.  

As mentioned above, the trigger events for method (C) are very limited and generally do not include the common triggers that investors typically seek through a put option agreement. The LOE generally does not permit deviations from its provisions unless explicitly stated with qualifiers such as “except as otherwise agreed” or “except as provided in the charter.” Since there are no such qualifiers related to the statutory triggers for share redemption, it may not be possible for parties to agree on alternative trigger events for exercising share redemption upon a shareholder’s demand.

So, in short, unless any of the statutory triggers occur, exercising the company put option by way of shareholder’s demand may not be practically feasible.

Dive Deep into Method (D) – Share Redemption Pursuant to Company’s Decision

Share redemption can be performed based on the company's decision without requiring any specific trigger event. However, there are several limitations associated with this method of redemption:

(i) Pro-rata basis requirement: Practically, share redemption based on the company’s decision should be conducted through an offer extended to all existing shareholders on a pro-rata basis, in accordance with their respective shareholdings, and not to any selected individual shareholder.

(ii) Maximum cap: The maximum number of ordinary shares that can be redeemed is limited to 30% of the company’s total issued shares; and

Regarding limb (i), while the relevant provision of the LOE suggests that share redemption could be offered either (X) to all existing shareholders on a pro-rata basis or (Y) to any selected shareholder (or group of shareholders), the law provides detailed provisions only for offers made to all existing shareholders. It does not specify terms for private placement offers to selected shareholders or groups of shareholders. Thus, if such private placement offer is conducted, the company may face challenges from the Department of Planning and Investment (DPI) during the procedures for charter capital decrease, since this share redemption process is not explicitly defined by law.  

That said, since shareholders have the right to reject the redemption offer from the company, through proper contractual arrangements, the redemption option can be effectively exercised by a selective option holder rather than all shareholders.

Regarding limb (ii), since offers in this share redemption method should be made only to all existing shareholders on a pro-rata basis, each investor can be offered for share redemption equivalent to their shareholding multiplied by the 30% cap.

For example: Company Z has three shareholders, A, B, and C, with shareholdings of 30%, 40%, and 30% respectively. If A has a put option with Company Z, for each buyback, Company Z may only redeem up to 30% x 30% = 9% of A’s shares in Company Z. This means Company Z cannot redeem all of A’s shares in one go.

However, with proper transaction planning, along with the utilization of offer rejection as mentioned above, A’s shares in Company Z may be fully redeemed through a series of transactions.

As to option pricing, Method (D) should provide more flexibility to the option holder than Method (C). This is because, unlike Method (C), Method (D) does not impose specific pricing requirements for offers made to all existing shareholders on a pro-rata basis. Legally speaking, the redemption or put option price under Method (D) can be determined by the agreement between the parties, and it can be set to be lower than, equal to, or higher than the market price of the option shares.  

To conclude, implementing the company put option via Method (D) is legally feasible to the extent that the shares subject to the put option do not exceed 30% of the company's total issued shares.

Payment of Option Consideration – Beware of Company’s Financial Status

Under the LOE, the payment of consideration for redemption is only permissible if, after making the payment, the company is still able to pay its debts and liabilities in full.  

This condition requires the option holder to verify the financial status of the company, so as to minimize the risk of the option exercise being challenged after the company makes the option payment.

Addressing the Limitations of Company Put Option – Back-up plan

In light of the limitations of exercising the company put option, one possible back-up plan is to require other shareholders (most often the promoters) to separately enter into a put option agreement with the investor. This agreement obligates the founders to acquire the shares from the investors if the company is unable to do so for any reason, including cases where legal barriers prevent the redemption transaction.

Conclusion

While put options provide a valuable exit strategy for investors, their enforceability under Vietnamese law requires careful consideration and alignment with the legal frameworks governing share redemption. By understanding these legal and practical aspects, investors and companies can better navigate the complexities of enforcing put options in Vietnam.

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Disclaimer: This Legal Update is intended to provide updates on the Laws for information purposes only, and should not be used or interpreted as our advice for business purposes. LNT & Partners shall not be liable for any use or application of the information for any business purpose. For further clarification or advice from the Legal Update, please consult our lawyers: Mr Nguyen Quoc Bao at quocbao.nguyen@lntpartners.com