Landscape to shift through draft proposals for Law on Enterprises

Yee Chung Seck - Partner, Baker McKenzie

Under the current Law on Enterprises, all payments for capital transfer transactions as well as the receipt of dividends by foreign investors must be made through capital accounts opened by the investors at banks in Vietnam, except for payment by assets. As it stands, this regulation is not aligned with the latest foreign exchange regulations issued by the State Bank of Vietnam in June 2019, which allow for direct payments between two offshore investors.

The draft Law on Enterprises only requires that payments for capital transfer transactions must be made in accordance with the foreign exchange control regulations. This change, if adopted, would help to clear the current misalignment with such regulations. Under the draft, a company seal is no longer mandatory. Furthermore, if an enterprise decides to have a seal, it can freely decide the seal’s number, form, and content. The management and use of the seal will be provided for in the company’s charter or other internal policies.

The draft Law on Enterprises retains the requirement that charter capital must be contributed within 90 days from the date of establishment. However, in case of capital contribution in-kind, the time for transportation, import (meaning customs clearance) and other administrative procedures for the transfer of ownership of assets will not be included in the 90-day limit.

Furthermore, the draft amends and supplements several regulations on corporate governance of joint-stock companies:

First, any shareholder or group of shareholders (together) holding 10 per cent or more of total common shares (charter can provide for a smaller percentage) will have the right to nominate candidates for election of members to the board of management and/or the supervisory board. This means that shareholders will not be required to hold shares for at least six months before exercising this right.

Second, any shareholder or group of shareholders (together) holding 5 per cent or more of total common shares (charter can provide for a smaller percentage) will have additional rights including access to more corporate documents of the company; the right to request a shareholders meeting in certain circumstances; and the right to request that the supervisory board examines a specific matter.

Currently, these rights only belong to a shareholder or group of shareholders (together) holding 10 per cent or more of total common shares.

Third, shareholders must keep information and documents acquired from the company confidential and must not distribute the same to other entities.

Lastly, the head of the supervisory board will only be required to possess a university degree in finance, banking, accounting, auditing, or other relevant professions (in contrast to the current Law on Enterprises, which requires that the head must be a professional auditor or accountant).

According to the current regulations in Decree No.163/2018/ND-CP, the “private bond placement” means corporate bonds issued to less than 100 investors (excluding professional securities investors). In other words, the current regulations allow professional investors and non-professional investors to hold bonds issued under the private bond placement.

However, in an attempt to tighten the regulations on private placement of bonds by non-public companies the draft law provides that the private placement of bonds means the issuance of bonds in which the bondholders must be professional securities investors.

Under the draft, the private placement of bonds by a non-public company must not be made via mass media and has to meet three conditions.

First, the company has paid all principal and interest of the previously-issued bonds or has fully paid all due debts for a period of three consecutive years prior to the company’s decision on private bond placement (if any), unless the private bond placement is made by an innovative startup enterprise or otherwise provided by relevant laws. Second, the financial statements of the year preceding the year of the bond issuance have been audited by a qualified auditor, if the company has been established and operating for more than one year. Thirdly, financial stability for business operations must be ensured.

For a limited liability company (LLC), the members’ council (of multi-member LLC) or the owner (of single-member LLC) will have power to decide on the private bond placement. For a non-public joint-stock company, the companies’ general shareholders meeting will have the power to decide the total number, value, and timing of the issuance of convertible bonds and warrant-linked bond; and the management board will have power to decide the total number, value, and timing of the issuance of other bonds unless otherwise stipulated in the company’s charter.

Under the current law, a state-owned enterprise (SOE) is defined as one in which 100 per cent of the charter capital is held by the state. However, under the draft law, an SOE is defined as an enterprise with more than 50 per cent of its charter capital or voting shares held by the state.

SOEs wholly-owned by the state will follow separate regulations set out in Chapter IV of the draft law, which are generally stricter than those applicable to a single member LLC with no state capital. SOEs with more than 50 per cent but less than 100 per cent of charter capital or voting shares held by the state will still be required to comply with a corporate governance regime that is similar to the applicable regime for non-state enterprises.