A new Law on Enterprises, aimed at making it easier to do business in Vietnam, implements key changes to the regulation of all companies operating in Vietnam, and will allow companies greater freedom in the activities they may conduct. Partners Linh Bui and Robert Fish, Senior Associate Chi Ha and Associate Ngoc Nguyen report on the main changes brought in by the Law, which will also have implications for foreign investors.
How does it affect you?
- A new principle of 'freedom to do business' has been introduced to provide Vietnamese companies with greater flexibility in their permitted activities. Companies may now also have multiple legal representatives and multiple corporate seals to ease day-to-day administration.
- The registration process for all companies is expected to be standardised, with the regulatory focus being shifted to more onerous post-registration reporting and disclosure obligations.
- The Law on Enterprises (the New LOE) consolidates existing regulations on corporate governance and seeks to provide a governance framework consistent with international practice.
- The rules on capital contribution, cross-ownership in corporate groups and related party transactions will also be revised to address current issues.
- The New LOE becomes effective on 1 July 2015. We have separately prepared summaries of the key changes specific to the three popular corporate forms in Vietnam (single member limited liability companies, multiple member limited liability companies and shareholding companies).
A major objective of the New LOE was to streamline existing rules on the registration and operation of Vietnamese companies to make it easier to do business. Various new provisions have been introduced to this end, though it remains to be seen whether the changes will be effective and much will depend on the way the licensing authorities apply these new measures in practice.
One of the most significant changes under the New LOE is to allow companies a much greater freedom in which activities they may conduct. Currently, a company in Vietnam can only conduct activities within the specific business lines recorded in their business registration certificate (to be called an enterprise registration certificate (ERC) under the New LOE), which limits their ability to conduct new activities without going through another licensing process.
Under the New LOE, the ERC will no longer include information on business lines and companies will, in effect, be able to carry out any business activity (registered or not) as long as it is not prohibited under the law. The standardised process to obtain an ERC is also expected to be simpler and quicker, with a statutory turnaround time of three working days.
However, it is unclear how this 'freedom of business' principle will apply to newly established foreign invested companies, who are still required to set out their business lines in an investment registration certificate, which they must have in addition to their ERC under the new Law on Investment.
The New LOE also gives all Vietnamese companies more flexibility in their internal administration. Companies can have multiple corporate seals and choose their form and content. The law also officially recognises that electronic facilities can be used to ease participation in, and voting at, management and shareholders' meetings and minutes can be kept in digital form.
Importantly, instead of only one legal representative as at present, companies can now have multiple legal representatives who are authorised by law to represent the company. The New LOE, for the first time, sets out the role of legal representatives and clearly defines their duties and obligations. This will reduce the difficulties that a party may face in negotiating and concluding contracts in Vietnam due to the unavailability of a legal representative. However, the new LOE does not clarify the formalities for execution of contracts where there is more than one legal representative. Thus, it will be important for investors to clearly set out these formalities in the company's charter to ensure proper authorisation and avoid potential conflicts between legal representatives. A counterparty should also take care to check execution requirements in constitutional documents when entering into contracts with a Vietnamese company.
Increased reporting and disclosure requirements will increase transparency and facilitate parties undertaking due diligence on Vietnamese companies. They will also give the Vietnamese regulators a more comprehensive tool to monitor and control compliance with foreign ownership caps imposed on Vietnamese unlisted public companies.
Under the New LOE, Vietnamese licensing authorities will put a greater emphasis on the ongoing monitoring of Vietnamese companies' activities through reporting and disclosure requirements, of which the following are of particular significance.
First, all companies will have to notify the relevant business registration office of changes in personal information of people in managerial positions, including members of the board of management (BOM) and the inspection committee, within five days of the change. This will be in addition to the existing obligation to notify changes in the content of their ERC that generally covers information about their legal representative, partners (for partnership companies) and members (for limited liability companies (LLCs)).
Second, for shareholding companies (SCs), the New LOE will remove the requirement to register major shareholders owning five per cent or more of total shares. However, new onerous provisions require non-listed companies with foreign shareholders to notify the relevant business registration office of any change in share ownership of foreign investors, as recorded in the company shareholders' register, within 10 days of the change. Non-listed SCs will also have to notify the authorities of any change in the details of their foreign shareholders, including the name, corporate registration number, head office and personal details of the authorised representative of foreign corporate shareholders.
Lastly, following the issuance of their ERC, all companies are obliged to make their general corporate information (such as the contents of their ERC, their intended business lines, and the list of founding and foreign shareholders) publicly available in a unified online information system (the National Enterprise Registration Information Portal). SCs are also required to make public disclosure on the company's website (if they have one) of their charter, management team profiles and CVs, annual reports and BOM reports.
Another welcome change introduced by the New LOE is the incorporation of corporate governance rules aimed at raising the quality of Vietnamese companies' management in line with international standards. New measures seek to enhance shareholders' participation and supervision of the company's activities, give clearly defined roles and responsibilities to the company's management and provide greater remedies for minority shareholders.
In particular, for SCs, the New LOE has reduced meeting quorums so that a general meeting of shareholders (GMS) can be convened more easily by shareholders representing at least 51 per cent of voting shares (instead of 65 per cent under the current law) for the first meeting and 33 per cent (previously 51 per cent) for the adjourned second meeting if a quorum was not present at the first meeting.
The voting thresholds for a GMS to pass shareholders' resolutions will also be reduced to 51 per cent for general matters (from the current 65 per cent) and to 65 per cent for certain important matters (from 75 per cent), while circular resolutions may now be passed with 51 per cent majority votes (reduced from 75 per cent). In addition, the threshold has been reduced so that the GMS will have to decide on all investments of the company whose values may exceed 35 per cent of the company's total assets (previously 50 per cent).
However, it should be noted that the charter of the company may specify higher voting thresholds for both GMS and BOM resolutions and these lower thresholds will not apply automatically to existing SCs, which will need to amend their charter if they wish to apply these reduced thresholds. Nevertheless, such reforms are likely to increase shareholders' participation at GMS and give them a stronger voice in matters that are significant to the company's business.
At BOM meetings, under the current law, resolutions may only be passed by a simple majority of members and it is not possible to deviate from this. However, under the New LOE, the company's charter can specify a higher threshold for BOM resolutions (though the chairman's statutory casting vote has been retained).
SCs may also replace the Inspection Committee with an Internal Audit Committee, sitting under the BOM, which must, in this case, have at least 20 per cent of its members being 'independent members'.
BOM members will now be required to have management qualifications and experience, even if they have significant shareholdings in the company.
Further, instead of the complicated statutory cumulative voting mechanism to elect BOM members, SCs are now free to adopt another method as specified in their charter. Similar provisions are also introduced for LLCs.
It is also important to note that the scope of managerial personnel being subject to a statutory code of conduct is generally broader under the New LOE and includes legal representatives, inspectors and persons authorised to enter into transactions in the name of the company under its charter.
Rights of minority shareholders owning more than one per cent of total ordinary shares to initiate legal proceedings against BOM members and directors of SCs for breaches of their obligations, for failure to perform their duties in accordance with directions and for using their powers for improper purposes, are also consolidated in the new law.
The Government has introduced a number of provisions in the New LOE to deal with certain legal issues that have been causing difficulties in the corporate sector in Vietnam.
One of the 'hot issues' that has undermined the strength of the Vietnamese economy in recent years is the web of cross-ownership between entities, which is particularly prevalent in the banking sector. Consequently, new restrictions on cross-ownership and tighter regulations on related party transactions are provided under the New LOE. Subsidiaries are no longer allowed to contribute capital or purchase shares in their holding company or in other subsidiaries of the holding company.
Companies without any state capital who have a cross-ownership structure established before 1 July 2015 are not required to unwind it under transitional provisions but they must not increase the cross-ownership ratio after this date.
The scope of related party transactions for SCs has also been widened to capture transactions of shareholders holding 10 per cent or more of the total ordinary shares (reduced from 35 per cent under the 2005 LOE). Previously, the BOM would have the power to approve related party transactions if their value is less than 50 per cent of the company’s total assets but, under the new LOE, the threshold has been decreased to 35 per cent, giving the GMS a broader power to decide on these transaction.
In addition, during the consultation process for the New LOE, significant concerns were expressed by the regulators about the existence of 'ghost companies' in Vietnam. These companies are generally LLCs whose investors registered the entity with a high amount of charter capital but then did not contribute such capital within the 36 months required under the current law, and failed to perform their contractual obligations due to the lack of capital.
As a result, under the new LOE, the time limit for payment of capital contribution in a LLC has reduced significantly to 90 days. Companies will have to reduce their charter capital if the contributions are not made in full after the relevant due date (ie 60 days for multiple member LLCs and 30 days for single member LLCs). It is not entirely clear whether the 90-day deadline applies only to the initial charter capital contribution at the time of establishment or also to subsequent capital increases. Thus, although such measures will likely curtail the problem of 'inflated charter capital' of Vietnamese companies, this will significantly present a new problem for foreign investors investing in large-scale, capital-intensive projects such as infrastructure or in the resources industry, and they may have to consider registering a small amount of charter capital initially with a schedule for increasing it in the future.
The Government is preparing implementing regulations which will hopefully be issued before the law becomes effective on 1 July 2015 and clarify a number of ambiguities, as discussed above.
Under the transitional provisions, generally speaking, existing companies can continue to operate under their existing ERC or investment certificates and there is no requirement for re-registration under the New LOE. As noted above, companies may seek to amend their charter if they wish to adopt some of the new measures under the New LOE.