Corporate governance is “the system through which those involved in the company’s management are held accountable for their performance, with the aim of ensuring that they adhere to the company’s proper objectives.”[1] In its strict sense, it is a set of regimes, policies and regulations in order to regulate, organize, manage and supervise operation of a company. The broadest meaning of this concept even expands to how the company interacts with suppliers, customers, creditors or the government agencies. In both senses, effective corporate governance and a sound legal framework on the same are critical for development of not only companies but also the business community in a relevant jurisdiction.

The Law on Enterprises of Vietnam in 2005 can be considered the first ever comprehensive set of legal framework that addresses corporate governance in Vietnam. Over time, the law has been tailored for specific targets (e.g. – Circular No. 121/2012/TT-BTC dated 26 July 2012 of the Ministry of Finance on corporate governance of public companies) or totally replaced with a more detailed and comprehensive law (e.g. – the Law on Enterprises dated 26 November 2014 (EL).

Despite such efforts, problems, always, still exist when it comes down to a better and workable legal framework for corporate governance, especially in light of well-established international standards. This poses investors and their management to a high level of risks which may cost them an ill business, possible claims for compensation and even criminal charges.

We consider some key, not an exhaustive list of, points that need to be addressed for a better legal framework on corporate governance in Vietnam.

X.2 Unclear about how owner of a single-member limited liability company (SMLLC) exercises its power

Relevant Ministries: Ministry of Planning and Investment

Issue description

Most of foreign investors in Vietnam choose the corporate form of SMLLC thanks to obvious advantages of this vehicle. The improvement of corporate governance of this corporate form would definitively add values to their investment in particular and the investment environment of Vietnam generally.

Article 75 of the EL gives owner (analogous to the single shareholder) of an SMLLC supreme power to manage its company. Key examples would be the right to make the most importance decisions of the company’s business affairs, appointment of key officers, restructuring of the entity, etc.

From a legal perspective, it is implied that the EL does not allow the owner to directly exercise these rights. Instead, it must act through either the members’ council (Article 79) or the company’s president (Article 80), depending on how many persons the owner wishes to authorize, to act on its behalf. In other words, though the owner is given the ultimate power, it has no option but to authorize other persons to exercise such power. In fact, what the owner can do is to ‘ratify’ company related decisions already approved by either the members’ council or the company’s president without directly deciding or approving them.

Potential gains/ concerns for Vietnam

Unfortunately, the language of the EL is not that clear and causes confusion for the investors, the management and even the licensing authority. This is even more critical because some guiding regulations of the EL, especially Decree 78 dated 14 September 2015 on enterprise registration (Decree 78) still requires decision of the owner on, for example, the change of the legal representative of the relevant SMLLC.

From a pure business perspective, this status quo may somewhat affect normal operations of an SMLLC in that decisions of offshore owners, which may not be easy to obtain, are always required for a number of decisions of the SMLLC. This also fails to create a level playing field between an SMLLC and a multi-member limited liability company (MMLLC)/joint stock company (JSC) because the latter’s owners may exercise via its authorised representative sitting in either the general meeting of shareholders (in case of a JSC) or members’ council (in case of MMLLC)

Recommendations

The EL should be more specific on only decisions of the members’ council or the company’s president are legally sufficient for approving most important issues of an SMLLC. Guiding regulations such as Decree 78 should be changed accordingly.

X.2 Scope of authorisation of the Members’ Council in an SMLLC

Relevant Ministries: Ministry of Planning and Investment

Issue description

Article 79.1 of the EL provides that the members’ council may act on behalf of an SMLLC to implement rights and obligations of that SMLLC other those granted to the general director.

This provision may not be consistent with the Civil Code of Vietnam (both 2005 and 2014 versions – collectively the ‘Civil Code’). Specifically, the Civil Code only allows an individual or a legal entity to act on behalf of their counterparts with respect to implementing civil transactions, which arguably include the aforementioned rights and obligations. These person/entity can be either the legal or authorised representative (via power of attorney or authorisation contract). It is obvious that the members’ council cannot be treated as any of the above concept and therefore cannot act on behalf of the company.

Potential gains/ concerns for Vietnam

From a legal making’s perspective, the Civil Code serves as the ‘parent’ law the spectrum of which covers other laws including the EL. The above inconsistency indicates shortfalls in law making process in Vietnam which is always among the biggest concern with foreign investors. More critically, such consistency may expose companies’ transactions to the risk of being challenged in terms of their legal validity.

Recommendations

Article 79.1 of the EL and any other similar provisions which grant the authorisation to bodies which are neither individuals nor corporate entities must be changed to reflect provisions of the Civil Code.

X.3 Authorisation Authority of an SMLLC’s (general) director

Relevant Ministries: Ministry of Planning and Investment

Issue description

Pursuant to the Civil Code, only legal representative or authorised representative can act in the name of a legal entity including a corporate entity. Regarding legal representative of an SMLLC owned by an organisational owner, its charter will clearly state who is/are the legal representative(s) of a company. Without such statement, either the chairman of an MC or the company’s president will be the natural legal representative of that SMLLC.

Nevertheless, Articles 64.2e and 81.2.e of the EL allows the (general) director (GD) of an SMLLC to enter into contract in the name of that company.

Potential gains/ concerns for Vietnam

There should be no challenge to this right if the GD is also the legal representative of the company. However, there can be a situation that the charter is totally silent on who is the legal representative of a company or refers person other than the GD of an SMLLC to this position. In such case, the GD’s execution of contracts on behalf of the company may trigger a possible challenge on legal validity of such contract on the ground that the GD should not have such representation authority under both the company’s charter and provisions of the Civil Code.

Foreign owners, who pour their money into Vietnam, are always concerned about the ‘principal – agency dilemma’. This explains why they are given the ultimate power to shape the company’s management by deciding who should be the one to act on behalf of their domestic business. As such, the above power of the GD not only violates principles of Vietnamese law on representation but also affect the freedom to manage its venture.

Recommendations

Articles 64.2(e) and 81.2(e) must be removed to ensure their consistency with the Civil Code of Vietnam.

X.4 Liabilities of Shadow Director(s) or De-factor Directors

Relevant Ministries: Ministry of Planning and Investment

Issue description

Shadow directors (SD) are generally understood as those (possibly shareholders) whose instructions or directions are often followed by the management personnel of the company. A de-facto director (DD) who actually acts as a director of the company without formally being appointed to this position. The reason why laws of many jurisdictions identify SDs and DDs is that they should be held liable for loss and damage caused to the company and third parties due to their influence. Vietnam is not an exception where many current disputes and criminal cases involve with the influence of, very often, SDs and, to a lower extent, DDs. Unfortunately, the EL does not tackle this issue in a clear and comprehensive manner.

Potential gains/ concerns for Vietnam

This lack of clear and comprehensive set of rules on who will be SDs and DDs and their respective liabilities would distort the good practice of transparent corporate governance on one hand. On the other hand, this fact would prompt an unexpected and improper conducts of people whose acts would negatively affect the company. This is critical because these people know that such acts will not be severely punished by the laws. Meanwhile, other duly-appointed directors who do not have actual authority to decide company’s matters may be at the risk of being challenged in terms of liability due to their failure to, among others, exercise their fiduciary duties.

Recommendations

The EL should (i) define who will be considered SDs and DDs and (ii) how they should be held liable on loss caused to the company and third parties.

ABBREVIATIONS

EL Enterprise Law
SMLLC Single Member Limited Liability Company
MMLLC Multi-Member Limited Liability Company
JSC Joint Stock Company
GD General Director
SD Shadow Director
DD De facto Director