On 17 June 2020, the National Assembly of Vietnam passed the new Law on Enterprises (“LOE 2020”), which takes effect on 1 January 2021 and replaces the current Law on Enterprises 2014 (“LOE 2014”).
The introduction of the LOE 2020 reflects substantial efforts directed under the Vietnamese Government’s Resolution 02/NQ-CP dated 1 January 2020 on Improving Business Environment and Enhancing National Competitiveness in 2020 and, as remarked by Mr Phan Duc Hieu, Vice President of the Central Institute for Economic Management of Vietnam (CIEM), will boost Vietnam’s standing in the World Bank’s Ease of Doing Business (EoDB) rankings by at least 30 points.[1] Besides, the LOE 2020 also aims at improving Vietnamese companies’ corporate governance capacity, protecting minority investors, creating a more transparent and simplified licensing process and permits a more efficient operational structure for certain entities.
In this briefing, we highlight major changes that may enthuse companies and investors particularly from the perspective of modernizing the licensing procedure and improving internal corporate governance.
Once the LOE 2020 comes into effect, the following procedures shall be removed:
• Notification on usage, change or cancellation of seal specimen
Under the LOE 2020, companies are no longer required to notify the licensing authorities on the usage, change or cancellation of seal specimen. It is also regulated that seals can be made in the form of physical seal or a digital signature in accordance with regulations on e-transactions.[2] Under the new law, enterprises will also be given the liberty to decide on the number, forms and contents of seals without the interference of the competent authorities. [3]
• Notification on changes of information of the enterprise’s managers
Under the LOE 2020, enterprises are no longer required to notify the licensing authorities upon any changes to members of the Board of Managers, members of the Inspection Committee (“IC”), Inspectors, Directors or General Directors.
• Notification on private placement of joint stock companies
Effectively, the removal of this notification requirement will help shorten the timeline for share issuance and simplify private placement procedure as joint stock companies will no longer be required to notify the licensing authority and wait through the notification period to ensure that there is no objection from the licensing authority before progressing their private placement plans.
• Voting threshold
Under the current LOE 2014, the threshold for passing resolutions of the General Meeting of Shareholders (“GMS”) in respect of general matters and for matters approved in the form of collection of written opinions is “at least 51%” affirmative votes of the attending shareholders.
Under the LOE 2020, this threshold is reduced to “more than 50%” affirmative votes of the attending shareholders.
This change is noteworthy in terms of the consistency with the change under the LOI 2020 which states that an enterprise shall be treated as a foreign investor when “more than 50%” of its charter capital is held by foreign investor(s).[4] Under the current LOI 2014, this ratio is “at least 51%”.
From the new thresholds specified in the LOE 2020 and LOI 2020 above, it can be interpreted that the two laws continue to set out a trade-off relationship between (i) the controlling right of the foreign investor in an enterprise and (ii) the legal status of that enterprise when making later investments itself. In other words, if the foreign investor would like to obtain a controlling position in an enterprise by simply holding more than 50% of its charter capital, such enterprise shall be treated as a foreign investor under the LOI 2020 and be subject to investment conditions applicable to foreign investors when making investments in other enterprises. For further analysis on the impacts of changes in foreign investment thresholds under the LOI 2020, please refer to our previous publication “Law on Investment 2020 - Clearer But Stricter Conditions For Foreign Investors”. [5]
• Voting rights of preference shareholders
Under the LOE 2020, a GMS resolution which results in adverse changes to the preference shareholders’ rights and obligations requires the approval from the preference shareholders holding at least 75% of the total number of preference shares of the affected share type. [6]
Previously, under the current LOE 2014, there is no specific provision governing the procedure to pass a GMS resolution related to rights and obligations of preference shareholders.
Practically, the LOE 2020 has recognized for the first time the voting right of redeemable preference shareholders and dividend preference shareholders who, in principle, do not have the right to vote, although this voting right is limited to the extent of their rights and obligations.
Protecting minority shareholders, which is an important objective of corporate governance, has been long regulated in the laws on enterprises. In particular, minority shareholders would have certain rights to protect them against being subordinated by majority shareholders, such as:
(i) The right to nominate candidates to the Board of Management and the Inspection Committee (“IC”);
(ii) The right to request to convene a GMS meeting;
(iii) The right to sight and make extracts of the company’s records;
(iv) The right to request the IC to inspect issues relating to the management and operation of the company.
Under the current LOE 2014, minority shareholders or group of minority shareholders are defined as the shareholders holding at least 10% of the total ordinary shares (or a smaller percentage set out in the charter of the company) for a consecutive period of six months or more. [7]
Under the new LOE 2020, minority shareholders or group of minority shareholders also include the shareholders holding at least 5% of the total ordinary shares (or a smaller percentage set out in the charter of the company), without any requirement on the duration of holding such shares. [8] This change has enlarged the scope of entities/shareholders who are protected under the regulations relating to minority shareholders.
It should be noted, however, that the right to nominate candidates to the Board of Management and the IC is still subject to the possession of at least 10% of the total ordinary shares (or a smaller percentage set out in the charter of the company), without any requirement on the duration of holding such shares. [9]
• Person to hold the position of President in a single-member limited liability company owned by an individual
The corporate management structure of a single-member limited liability company owned by an individual includes the President and the Director (or General Director).
Under the current LOE 2014, it is unclear on whether the individual owner will himself act as the President of the Company, or he can appoint another person to act in this position. This has resulted in different interpretations of the licensing authority in practice.
This ambiguity has now been addressed under the LOE 2020 that the individual owner shall himself act as the President of the Company. [10]
• Requirement to set up an IC or appoint an Inspector
Currently, under the LOE 2014, a multiple-member limited liability company having more than eleven (11) members must have an IC. [11] Also, in respect of a single-member limited liability company owned by an organization, the appointment of an Inspector is required. [12]
Under the LOE 2020, the requirement to appoint an IC/Inspector is removed from the corporate management structure of both multiple-member and single-member limited liability company. Under the new law, the appointment of an IC/Inspector is only required if the limited liability company is a State-owned enterprise or the subsidiary of a State-owned enterprise. [13]
In practice, many companies set up an IC or appoint an Inspector only for compliance rather than for corporate governance purpose. Thus, from our view, this is a positive change of the LOE 2020 which gives enterprises the freedom and flexibility to organize their own corporate management structure.
[1]https://baodautu.vn/luat-doanh-nghiep-2020-se-giai-bai-toan-doanh-nghiep-kho-lon-d125689.html.
[2] Article 43, LOE 2020.
[3] Article 43.2, LOE 2020.
[4] Article 23.1, LOI 2020.
[5]https://lntpartners.com/legal-briefing/law-on-investment-2020-clearer-but-stricter-conditions-for-foreign-investors.
[6] Article 148.6, LOE 2020.
[7] Article 114.2, LOE 2014.
[8] Article 115.2, LOE 2020.
[9] Article 115.5, LOE 2020.
[10] Article 85.2, LOE 2020.
[11] Article 55 LOE 2014.
[12] Article 78 LOE 2014.
[13] Article 54 and Article 79, LOE 2020.
This briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For legal advice, please contact our Partners.
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