LEGAL UPDATE
In June 2019, the Government published a draft of the law amending and supplementing several articles of the Law on Investment (LoI) and the Law on Enterprises (LoE) (3rd Draft). As proposed, the Government split the 3rd Draft into 2 separate drafts which were both approved on 17 June 2020 by the National Assembly with 90.68% and 92.34% of the votes respectively and will come into effect on 1 January 2021.
In general, the amendments in the new Law on Enterprises (LoE 2020) are similar to the proposed changes under the 3rd Draft. In this legal update, we will only set out the most remarkable changes which are new, or which have changed in comparison with the 3rd Draft. [1]
The changes on the new Law on Investment (LoI 2020) will be discussed in a separate legal update.[2]
1. Digital Signature as Corporate Seal
The LoE 2020 now recognises that a digital signature as stipulated in the Law on Electronic Transactions can be used as a corporate seal and will have equal legal validity as the well-known red seal. The experience of the Covid-19 pandemic, when many enterprises had to implement the home-working policy as their business continuity solution, or people were not able to travel and sign documents in person has shown that this is an important and necessary step in supporting doing business on-line. As a result, enterprises will be confident in entering into electronic transactions. Furthermore, this is likely to help foster the development of electronic transactions, eliminate barriers of administrative procedures, and facilitate the flexibility and efficiency in executing documents as well.
2. Capital Transfer by Foreign Investor
Currently, any payment for purchase, sale or transfer of shares and capital contribution and receipt of dividends by foreign investors must be made via a capital account opened at a bank in Vietnam, except if a payment is done in the form of an asset. Meanwhile, pursuant to the current forex regulations, particularly Circular 06/2019/TT-NHNN of the State Bank of Vietnam dated 26 June 2019 capital transfer between 2 investors being non‑residents or between 2 investors being residents shall not be made via a direct investment capital accounts. [3]
The LoE 2020 no longer mentions the type of payment account, but refers to Vietnam’s forex regulations which stipulate that “Any payment for purchase, sale or transfer of shares and capital contribution and receipt of dividends as well as transfer of profits abroad by foreign investors shall be made via a bank account in accordance with the forex regulations, except for payments by assets or other non-cash payments”. This will resolve the conflict between the current law and forex regulations.
3. Capital Contribution Time Limit
3.1 Excluded from 90 Days Term
In term of capital contribution, the LoE 2020 retains the requirement that charter capital must be contributed in full and in the types of assets as undertaken within 90 days from the date of issuance of the Enterprise Registration Certificate. This applies to 3 types of enterprises being the single member limited liability company (SMLLC), multiple member limited liability company (MMLLC) and joint stock company (JSC). If a member or shareholder contributes capital in assets, the time for transport, import and other administrative procedures for the transfer of ownership of asset shall not be included in the term of 90 days. However, compared to the 3rd Draft, this provision now applies to all types while before it only applied to the MMLLC and the JSC.
3.2 Term to Register Adjustment of MMLLC’s Charter Capital
Furthermore, if a member of an MMLLC fails to contribute or does not contribute in full the amount of capital as undertaken, the MMLLC shall register the adjustment of its charter capital, capital contribution ratios of members equal to the amount of contributed capital within 30 days from the last date on which the capital contribution is required to be fully paid. In comparison with the current law, the time-limit for carrying out the adjustment procedure is reduced from 60 days to 30 days. This is likely to make it consistent with the time-limit applicable to an SMLLC and a JSC. MMLLCs and their owners or members should take the necessary steps to hold themselves harmless from monetary penalties and other liabilities arising out of any breach of the aforesaid regulation.
4. Minority Shareholders of JSCs
Similar to the 3rd Draft, the LoE 2020 abrogates the requirement to own shares for a certain period before certain rights in relation to corporate governance can be exercised. This change applies to both individual shareholder and a group of shareholders.
To exercise such rights, the LoE 2020 also reduces the minimum ratio of shares owned by the shareholder or group of shareholders from 10% to 5% of the total ordinary shares (unless the charter stipulates a smaller percentage). This was 1% in the 3rd Draft. It now will be consistent with the Law on Securities and relevant regulations as well as with the current development in Vietnam to protect the rights and benefits of minority shareholders better.
However, the requirement of the share ownership ratio of at least 10% (unless the charter stipulates a smaller percentage) for a shareholder or group of shareholders to exercise their right to nominate candidates to the Board of Management (BOM) and the Inspection Committee (IC) does not change. Under the 3rd Draft, this minimum ratio was 1% or smaller if stipulated by the charter. It is assumed that this has finally not been changed to assure the stability and balance in corporate governance as the BOM and IC play a key role in corporate governance of an enterprise.
5. JSC’s Corporate Governance
The LoE 2020 amends and adds some notable provisions on corporate governance for JSCs which we will set out below.
5.1 Resolution of General Meeting of Shareholders
A resolution of the General Meeting of Shareholders (GMS) shall be passed if approved by the shareholders holding more than 50% of the total number of voting shares. [4] This ratio is now 51% and was also maintained in the 3rd Draft. This adjustment aims to comply with the spirit of the simple-majority principle.
5.2 Preferred Dividends and Redeemable Preferred Shares
Currently, shareholders who hold shares with preferred dividends and redeemable preferred shares do not have the right to attend or vote in a meeting of the GMS. However, under the LoE 2020, they will have the right to attend and vote in GMS meetings with respect to the resolutions that cause adverse changes to their rights and obligations. Such resolutions shall only be passed if approved by shareholders holding at least 75 % of the total number of that type of preferred shares. This provision is new in comparison with the current law and was not proposed under the 3rd Draft. It is expected to better ensure the rights and benefits of the shareholders who hold such types of preferred s hares.
6. Definition of State-owned Enterprise
Whereas the current law defines the term state-owned enterprise as an enterprise in which the State holds 100% of the charter capital, the LoE 2020 amends it to the extent that a state-owned enterprise is an enterprise in which the State holds more than 50% of the charter capital or voting shares. The purpose of this amendment is to restructure and renovate management organisation as well as strengthen the operational efficiency of state-owned enterprises, thus enhancing the effectiveness of their governance and transparency.
Contact Information
Should you have any questions, please feel free to contact our lawyers at the below email addresses.
Mark Oakley / Managing Partner
mark.oakley@acsvlegal.com
Phuong Huynh / Senior Associate
phuong.huynh@acsvlegal.com
© 2020 ACS Legal Vietnam Company Limited – All rights reserved
This legal update is not an advice and should not be treated as such.
Download pdf: Law on Enterprises 2020 Approved
[1] Please read our update Proposed Changes to Improve Investment Climate in Vietnam for more information.
[2] Please see the legal update on the approved new Law on Investment 2020 for more information.
[3] This Circular provides guidelines on foreign exchange control related to foreign direct investment in Vietnam.
[4] This does not apply to resolutions on special and/or important matters stipulated by law.
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