IBA Guide on Shareholders Agreements. Vietnam. Nguyen Huu Hoai 1 RUSSIN & VECCHI

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1 IBA Guide on Shareholders Agreements Vietnam Nguyen Huu Hoai 1 RUSSIN & VECCHI 1. Are shareholders agreements frequent in Vietnam? The use of a shareholders agreement depends on the nature of the shareholders and the type of the company. For a domestic joint stock company ( JSC ) with no foreign owners, there is no mandatory requirement for a shareholders agreement. In fact, a shareholders agreement is rarely used by a domestic JSC. In the case of an incorporated joint venture 2 in which there are Vietnamese and foreign owners, the joint venture parties must execute a joint venture contract ( JVC ) in order to obtain a joint venture license. A license for an incorporated entity is an investment certificate ( IC ). In such case, the term shareholders agreement is not used. Amendments, which relate to objectives, scale, location, form of company, capital and investment duration, must be filed with the licensing authority and such amendments are reflected in the amended IC. Thus, an incorporated joint venture between Vietnamese and foreign owners needs to submit a copy of an amended JVC to the licensing authority in order to obtain an amended IC 3. A shareholders agreement need not be filed or approved by the licensing authority. In the case of a merger and acquisition involving foreign parties, it is common for shareholders (including both buyers and continuing shareholders) in a JSC with few shareholders to enter into a shareholders agreement in order to reflect their commercial arrangements. 2. What formalities must shareholders agreements comply with in Vietnam? It is legally possible to enter into a shareholders agreement (but not a JVC) in English only. A Vietnamese version is required if the shareholders agreement becomes the subject of litigation. A shareholders agreement can be made in both Vietnamese and a foreign 1 Mr Hoai is a partner of Russin & Vecchi. His address is: <nhhoai@russinvecchi.com.vn> 2 A joint venture can be incorporated either in the form of a JSC or in the form of a limited liability company with two or more members. 3 Article 52 of Decree 108/2006/ND-CP of the Government dated September 22, Page 1

2 language. In such case, it is customary to state which version will prevail. However, the reality is that state authorities or courts in Vietnam often look only at the Vietnamese version, no matter which version is said to be controlling. This means that extra care must be taken in the translation. There is no requirement to obtain the licensing authorities approval for a shareholders agreement. Unlike the shareholders agreement, the Investment Law provides that a JVC must be made in the Vietnamese language. A JVC may be made in both Vietnamese and in a foreign language (eg, English). In such case, the Vietnamese version is controlling in the case of a discrepancy. A JVC becomes effective only after the licensing authorities have approved it. Formalities for execution of both a shareholders agreement and a JVC are similar to formalities to execute other documents in Vietnam. That is, only the legal representative of a Vietnamese company or an authorized representative appointed by the legal representative of a Vietnamese company is authorized to execute a contract on behalf of the Vietnamese company. The company s seal is also required to be affixed along with the authorized signatories. The initials on each page of a JVC are mandatory. Although such mandatory requirement does not apply to a shareholders agreement, in practice the parties often initial every page of a shareholders agreement. The Vietnamese parties to a shareholders agreement may affix their seals on every two or three overlapping consecutive pages. There are no stamp duties, nor fees for either a JVC or a shareholders agreement. 3. Can shareholders agreements be brought to bear against third parties such as purchasers of shares or successors? A person/entity that is not a party to a shareholders agreement/jvc is not legally bound to such agreement/contract, unless it agrees to be bound. 4. Can a shareholders agreement regulate non-company contents? Shareholders/joint venture parties to a shareholders agreement/jvc are free to agree to incorporate non-company contents into a shareholders agreement/jvc provided that such contents are not contrary to the law of Vietnam. 5. Are there limits on the term of shareholders agreements under the law of Vietnam? There is no statutory limit on the term of a shareholders agreement. In the case of an incorporated joint venture in which there are Vietnamese and foreign owners, the term of the JVC must be consistent with the term of the license of the joint venture. The maximum term of a foreign invested project (including the incorporated joint Page 2

3 venture) is fifty (50) years. In special cases, the term of a foreign invested project may be up to seventy (70) years. 6. Are shareholders agreements related to actions by directors valid in Vietnam? A JSC has a board of directors. Under the Enterprise Law, which governs the formation and operation of enterprises, the board of directors manages the company. The board of directors has full authority to make decisions in the name of the company, to exercise the company s rights, and to perform the company s obligations provided that these obligations do not fall within the authority of the general meeting of shareholders. If shareholders want to reserve the right to determine important matters, the authority of the board of directors and of the general meeting of shareholders should be clearly defined in the Articles of Association and/or in a shareholders agreement. Under the Enterprise Law, if the board of directors passes a resolution which is contrary to the law or contrary to the Articles of Association, thereby causing damage to the company, the directors who voted in favor of such resolution are personally and jointly liable for such damage and they must compensate the company. In such case, a shareholder which holds shares in a company for a consecutive period of at least one year has the right to request the board of directors to suspend implementation of a resolution which is contrary to law or contrary to the Articles of Association. Beyond these statutory obligations, the terms of a shareholders agreement that relates to actions by directors bind only the shareholders themselves (not the directors) even though the directors have been appointed by the shareholders. A limited liability company with two or more members ( LLC ) has a members council (not a board of directors). It is comprised of authorized representatives appointed by each member. Under the Enterprise Law, an authorized representative is entitled to exercise rights and to perform obligations in the name of the member s/he represents. An authorized representative is responsible to perform honestly, diligently and in the best interest of the company and the member. The Enterprise Law further provides that any restriction which a member places on its authorized representative in respect of the exercise of its rights via the members council has no legal effect on third parties. 7. Does the law of Vietnam permit restrictions on transfer of shares? The Enterprise Law allows shareholders of a JSC to transfer their shares freely. There are some exceptions: (i) preference voting shareholders are not allowed to transfer shares to other persons; (ii) within a period of three years from the date of issuance of the business registration certificate, ordinary shares of founding shareholders may be transferred to other persons who are not founding shareholders only after the general meeting of shareholders has approved the transfer; (iii) the transfer of shares may not exceed the cap/limit on foreign ownership in companies/sectors involving restricted foreign ownership. Page 3

4 In case of an LLC, a member which wants to transfer its capital contribution to a third party must first offer its capital to other members in proportion to such other members share of capital contribution. The terms and conditions of transfer must be the same. Capital transfer to non-members is permitted only when existing members do not buy or do not buy in full after 30 days from the date of offer. 8. What mechanisms does the law of Vietnam permit for regulating share transfers? The statutory right to transfer shares/capital contribution varies, depending on the type of company. Right of first refusal: This mandatory requirement applies only to an LLC. It does not apply to a JSC. Redemption of capital contribution/shares: The Enterprise Law gives members of an LLC or shareholders of a JSC the right to request the company to buy their capital contribution back or to redeem shares in certain circumstances (eg, a member/shareholder votes against a resolution that is adopted and that relates to re-organization of the company or amendments or additions to the company s Articles of Association in relation to the rights and obligations of members/shareholders) at a market price or at a pre-determined price set out in the company s Articles of Association. Buy-back rights: In addition to the rights stated above, the Enterprise Law permits a JSC to redeem no more than 30 per cent of the total number of ordinary shares sold, and part or all of the dividend preference shares sold, subject to approval of the board of directors or the general meeting of shareholders, as the case may be. 9. In Vietnam do bylaws tend to be tailor-drafted, or do they tend to use standard formats? The standard format of bylaws (Articles of Association) is required only for listed companies. There is a limited capability for a listed company to revise the standard format. Other companies may add/amend their Articles of Association pursuant to their needs, but, of course in accordance with law. In this connection, the Enterprise Law sets out only main clauses to be included in the Articles of Association. Shareholders/members are free to agree to incorporate other contents. 10. What are the motives in Vietnam for executing shareholders agreements? Although the law does not require shareholders to execute a shareholders agreement, shareholders often do so in order to reflect their commercial arrangements. Again, the execution of a shareholders agreement by domestic shareholders is not common. Page 4

5 There is language in the Articles of Association that is obligatory but the language is general. Language in a shareholders agreement can be much more specific and detailed. Language in a shareholders agreement is usually easier to amend than language in the Articles of Association. Care must be taken to be sure the Articles of Association and shareholders agreement are consistent. In case of inconsistency, the shareholders agreement will often prevail. To repeat our comments in Question 1, to obtain an IC to operate a joint venture with foreign and domestic investors, the law requires the parties to execute a JVC. The main terms and conditions of a JVC, as set out in the Investment Law include: (i) name, address of joint venture parties; (ii) type of company; (iii) business scope of the joint venture; (iv) charter capital, capital contribution by each party, schedule and mode of capital contribution; (v) schedule to implement the project; (vi) term of the project; (vii) location of the project; (viii) rights and obligations of joint venture parties; (ix) financial regime, distribution of dividends, settlement of losses; (x) procedures to amend/terminate the JVC, assignment, termination, dissolution of the joint venture; (xi) liabilities in the event of default, and (xii) settlement of disputes. Other contents, not contrary to law, may also be included. 11. What contents tend to be included in shareholders agreements in Vietnam? There are no mandatory requirements on the contents of a shareholders agreement. Even so, the contents are what one might expect. See our answers to Question 13 below. 12. What determines the content included in shareholders agreements in Vietnam? Where the Enterprise Law indicates that shareholders may include matters/rights/obligations/restrictions which are not mentioned in the Enterprise Law in the Articles of Association, such additional matters/rights/obligations/restrictions must be consistently reflected in both the Articles of Association and the shareholders agreement. There is another factor to consider. Amendments to a shareholders agreement require the consent of all contracting parties whereas amendments to the company s Articles of Association do not require the consent of all parties. Depending on specific circumstances, certain matters may be incorporated only in the shareholders agreement or only in the Articles of Association. It is common that commercial matters/arrangements appear in the shareholders agreement whereas matters that relate to corporate governance and the operation of the company are reflected in the Articles of Association. Page 5

6 13. What are the most common types of clauses in shareholders agreements in Vietnam? A shareholders agreement typically includes: (i) definition of important terms; (ii) capital and shareholding structure; (iii) warranties and covenants; (iv) obligations of shareholders; (v) matters related to the board of directors and key management personnel; (vi) finance of the company and distribution of dividends; (vii) information rights 4 ; (viii) pre-emptive rights; (ix) transfer of shares; (x) put/call options; (xi) termination and consequences of termination; (xii) conflicts and non-competition; (xiii) corrupt practices; (xiv) governing law and dispute resolution; and (xv) standard clauses. 14. What mechanisms does the law of Vietnam permit to ensure participation of minorities on the board of directors and its control? Under the Enterprise Law, a shareholder or a group of shareholders which hold more than 10 per cent of the total ordinary shares for a consecutive period of six months or more, or which holds a smaller percentage as set out in the company s Articles of Association is entitled to (i) nominate its candidates to the board of directors and to the control committee; (ii) review and make an extract of the book of minutes and resolutions of the board of directors, financial statements, and reports of the control committee; (iii) call a general meeting of shareholders in certain cases; (iv) request the control committee to inspect particular issues in relation to administration and management of the company (if necessary); and (v) other rights contemplated in the company s Articles of Association. 15. Is it possible in Vietnam to ensure minority shareholder control by means of a shareholders agreement? Generally, rights of minority shareholders are limited. There is a scenario in which a minority shareholder may be able to control a company. In particular, the Enterprise Law provides that dividend preference shareholders and redeemable preference shareholders do not have the right to vote, to attend the general meeting of shareholders, or to nominate candidates to the board of directors and to the control committee. As such, a minority shareholder with ordinary shares may control a company if a majority of all shareholders holds dividend preference shares or redeemable preference shares. Preference voting shareholders can have more votes than shareholders holding ordinary shares. However, only founding shareholders have the right to hold preference voting shares and the right ceases three years from the date of incorporation at which point the shares must be converted into ordinary shares. 4 The right to receive financial statements/management reports and other periodic/irregular reports. Page 6

7 16. What are the usual valuation mechanisms in connection with rights of first refusal or share transfer regulations? There is no mandatory valuation requirement or mechanism in connection with rights of first refusal. In the case where shares held by a state-owned enterprise are transferred to other persons, the shares must be valued in a bidding process at the appropriate stock exchange 5 if the par value of shares is more than VND10,000,000, If the par value of shares is less than VND10,000,000,000, the bidding can be performed either by securities companies or by the company or at the appropriate stock exchange Is it admissible for a shareholders agreement clause to refer dispute resolution to the courts other than those of Vietnam and/or under a law other than that of Vietnam? Forum: A dispute involving only domestic parties arising from their investment in Vietnam can be settled either by a Vietnamese court or by Vietnamese arbitration. A dispute involving a foreign investor or a foreign invested enterprise or foreign investors can be settled by any one of the following methods: (i) Vietnamese courts; (ii) Vietnamese arbitration; (iii) foreign arbitration; (iv) international arbitration; or (v) an arbitration panel selected by the parties. Of note, a dispute involving real estate can be settled only by a Vietnamese court. There is virtually no mechanism to enforce a civil judgment obtained in a foreign court. The Civil Procedure Code stipulates that Vietnam may recognize and enforce the civil judgment of a foreign court in the following circumstances: (i) (ii) The civil judgment of a court of a country which, together with Vietnam, has signed or acceded to an international treaty on the recognition and enforcement of civil judgments of a foreign court; The civil judgment of a foreign court is recognizable and enforceable under Vietnamese law; or 5 There are two systems on the stock exchange: one for listed companies, and one for unlisted public companies. 6 US$1=VND21,000 7 Article 6 of Circular 117/2010/TT-BTC of the Ministry of Finance ( Circular 117 ). Circular 117 is silent on the circumstance where the par value of share is VND10,000,000,000. Page 7

8 (iii) The government of the jurisdiction has not signed such a treaty, but Vietnamese law otherwise recognizes and enforces such judgment on a reciprocal basis. 8 Only a limited number of countries, which are either socialist or former socialist countries, have signed such a treaty with Vietnam. As for the third genre, there is no legislation which clarifies the meaning. This situation has not changed, either legislatively or practically, since Applicable law: The Investment Law provides that investment activities in Vietnam must comply with the Investment Law and other relevant laws. The concept of investment activities as defined in the Investment Law has a broad and unclear meaning. We believe that transactions contemplated in a shareholders agreement can be considered to be investment activities. Even so, some cautions should be taken into account. The application of international agreements to which Vietnam is a signatory is permitted pursuant to the Investment Law. The parties may apply foreign law and international custom to certain matters where Vietnamese law is silent, provided that the application or the effect of the application must not be contrary to the main principles of Vietnamese law (ie, not contrary to public interest/order). Except for mandatory requirements and circumstances described below, the parties to a shareholders agreement which includes a foreign party may choose a foreign law as the applicable law. Of course, the application or the effect of the application of foreign law must not be contrary to principles of Vietnamese law (ie, not contrary to public interest/order). The Civil Code provides a number of circumstances in which only Vietnamese law or only the law of another jurisdiction may apply: (i) (ii) (iii) The ownership of moveable assets that are in transit is determined under the law of the country to which the assets are destined, unless otherwise agreed. The distinction between moveable and immovable assets is determined under the law of the country where the assets are located; The issue of ownership of civilian airplanes/ships in Vietnam must comply with Vietnamese law; 8 There is a 2008 precedent which involved a Korean company and a Vietnamese entity. The Vietnamese court recognized and enforced a civil judgment issued by a Korean court against the Vietnamese entity. Vietnam and Korea have not signed a treaty on recognition and enforcement of civil judgments. The Vietnamese court s decision was issued on the basis of reciprocity. Page 8

9 (iv) (v) (vi) A contract which is signed in, and which is to be wholly implemented in Vietnam, must comply with Vietnamese law; A contract that relates to immovable assets in Vietnam must comply with Vietnamese law; The format of contracts for construction or for the transfer of ownership of work, buildings and immovable assets in Vietnam, must comply with Vietnamese law. 18. Is it admissible for a shareholders agreement to include an arbitration clause with seat outside Vietnam and/or under a law other than that of Vietnam? A shareholders agreement/jvc which includes a foreign party may include an arbitration clause with the seat of arbitration outside of Vietnam. In this connection the Civil Procedure Code provides that a Vietnamese court may consider, recognize and enforce in Vietnam a foreign arbitral award if such award is declared in a country or by arbitrators of a country which has, together with Vietnam, signed or acceded to an international treaty on recognition and enforcement of foreign arbitral awards. Vietnam has signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and has a legal mechanism to recognize and enforce an arbitral award obtained abroad. Vietnam is just becoming familiar with the practice of using foreign law to resolve local issues. There have been situations where the enforcement of foreign arbitral awards was denied because the foreign law was said to be contrary to the main principles of Vietnamese law. This is changing, but at the moment and to be conservative, one should anticipate the existence of problems in explaining awards or judgments obtained under a foreign law. Page 9

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