{"id":416,"date":"2016-11-18T10:50:54","date_gmt":"2016-11-18T03:50:54","guid":{"rendered":"http:\/\/blogs.duanemorris.com\/vietnam\/?p=416"},"modified":"2016-11-18T10:53:05","modified_gmt":"2016-11-18T03:53:05","slug":"416","status":"publish","type":"post","link":"https:\/\/blogs.duanemorris.com\/vietnam\/2016\/11\/18\/416\/","title":{"rendered":"Corporate Governance – Issues and Solutions"},"content":{"rendered":"\n\n\n
X.1 OVERVIEW<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Corporate governance is \u201cthe system through which those involved in the company\u2019s management are held accountable for their performance, with the aim of ensuring that they adhere to the company\u2019s proper objectives.\u201d[1]<\/a> 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.<\/p>\n

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. –\u00a0 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<\/em><\/strong>).<\/p>\n

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.<\/p>\n

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.<\/p>\n\n\n\n
X.2 Unclear about how owner of a single-member limited liability company (SMLLC) exercises its power<\/p>\n

Relevant Ministries: Ministry of Planning and Investment<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/strong>Issue description<\/strong><\/p>\n

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.<\/p>\n

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\u2019s business affairs, appointment of key officers, restructuring of the entity, etc.<\/p>\n

From a legal perspective, it is implied that the EL does not allow the owner to directly<\/u> exercise these rights. Instead, it must act through either the members\u2019 council (Article 79) or the company\u2019s 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 \u2018ratify\u2019 company related decisions already approved by either the members\u2019 council or the company\u2019s president without directly deciding or approving them.<\/p>\n

Potential gains\/ concerns for Vietnam<\/strong><\/p>\n

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<\/em><\/strong>) still requires decision of the owner on, for example, the change of the legal representative of the relevant SMLLC.<\/p>\n

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<\/em><\/strong>)\/joint stock company (JSC<\/em><\/strong>) because the latter\u2019s owners may exercise via its authorised representative sitting in either the general meeting of shareholders (in case of a JSC) or members\u2019 council (in case of MMLLC)<\/p>\n

\u00a0<\/strong>Recommendations<\/strong><\/p>\n

The EL should be more specific on only decisions of the members\u2019 council or the company\u2019s president are legally sufficient for approving most important issues of an SMLLC. Guiding regulations such as Decree 78 should be changed accordingly.<\/p>\n\n\n\n
X.2 Scope of authorisation of the Members’ Council in an SMLLC<\/p>\n

Relevant Ministries: Ministry of Planning and Investment<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/em><\/strong>Issue description <\/strong><\/p>\n

Article 79.1 of the EL provides that the members\u2019 council may act on behalf of an SMLLC to implement rights and obligations of that SMLLC other those granted to the general director.<\/p>\n

This provision may not be consistent with the Civil Code of Vietnam (both 2005 and 2014 versions \u2013 collectively the \u2018Civil Code<\/strong>\u2019). Specifically, the Civil Code only allows an individual<\/u> or a legal entity<\/u> 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\u2019 council cannot be treated as any of the above concept and therefore cannot act on behalf of the company.<\/p>\n

\u00a0<\/strong>Potential gains\/ concerns for Vietnam<\/strong><\/p>\n

From a legal making\u2019s perspective, the Civil Code serves as the \u2018parent\u2019 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\u2019 transactions to the risk of being challenged in terms of their legal validity.<\/p>\n

\u00a0<\/strong>Recommendations<\/strong><\/p>\n

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.<\/p>\n\n\n\n
X.3 Authorisation Authority of an SMLLC\u2019s (general) director<\/p>\n

Relevant Ministries: Ministry of Planning and Investment<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/strong>Issue description<\/strong><\/p>\n

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\u2019s president will be the natural legal representative of that SMLLC.<\/p>\n

Nevertheless, Articles 64.2e and 81.2.e of the EL allows the (general) director (GD<\/em><\/strong>) of an SMLLC to enter into contract in the name of that company.<\/p>\n

\u00a0<\/strong>Potential gains\/ concerns for Vietnam<\/strong><\/p>\n

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\u2019s 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\u2019s charter and provisions of the Civil Code.<\/p>\n

Foreign owners, who pour their money into Vietnam, are always concerned about the \u2018principal \u2013 agency dilemma\u2019. This explains why they are given the ultimate power to shape the company\u2019s 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.<\/p>\n

\u00a0<\/strong>Recommendations<\/strong><\/p>\n

Articles 64.2(e) and 81.2(e) must be removed to ensure their consistency with the Civil Code of Vietnam.<\/p>\n\n\n\n
X.4 Liabilities of Shadow Director(s) or De-factor Directors<\/p>\n

Relevant Ministries: Ministry of Planning and Investment<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n


\nIssue description<\/strong><\/p>\n

Shadow directors (SD<\/em><\/strong>) 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<\/em><\/strong>) 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.\u00a0 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.<\/p>\n

Potential gains\/ concerns for Vietnam<\/strong><\/p>\n

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\u2019s matters may be at the risk of being challenged in terms of liability due to their failure to, among others, exercise their fiduciary duties.<\/p>\n

Recommendations <\/strong><\/p>\n

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.<\/p>\n

Please do contact the author Oliver Massmann under omassmann@duanemorris.com<\/a> if you have any questions on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.<\/p>\n

 <\/p>\n


\n<\/strong><\/p>\n

\u00a0<\/strong><\/p>\n

ABBREVIATIONS<\/strong><\/p>\n

\u00a0<\/strong><\/p>\n\n\n\n\n\n\n\n\n\n
EL<\/td>\nEnterprise Law<\/td>\n<\/tr>\n
SMLLC<\/td>\nSingle Member Limited Liability Company<\/td>\n<\/tr>\n
MMLLC<\/td>\nMulti-Member Limited Liability Company<\/td>\n<\/tr>\n
JSC<\/td>\nJoint Stock Company<\/td>\n<\/tr>\n
GD<\/td>\nGeneral Director<\/td>\n<\/tr>\n
SD<\/td>\nShadow Director<\/td>\n<\/tr>\n
DD<\/td>\nDe facto<\/em> Director<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n

 <\/p>\n

 <\/p>\n

 <\/p>\n

 <\/p>\n

[1]<\/a> Parkinson JE, \u201cCompany law and stakeholder governance<\/em><\/a>\u201d. in E Kelly, D Kelly & A Gamble (eds),\u00a0Stakeholder Capitalism,<\/em>\u00a01997, <\/em>Macmillan Publishers Limited, pp. 142 – 154.<\/p>\n","protected":false},"excerpt":{"rendered":"

X.1 OVERVIEW Corporate governance is \u201cthe system through which those involved in the company\u2019s management are held accountable for their performance, with the aim of ensuring that they adhere to the company\u2019s proper objectives.\u201d[1] In its strict sense, it is a set of regimes, policies and regulations in order to regulate, organize, manage and supervise … <\/p>\n

Continue reading “Corporate Governance – Issues and Solutions”<\/span><\/a><\/p>\n","protected":false},"author":24,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[509,510,190,202,201,26],"ppma_author":[1007],"class_list":["post-416","post","type-post","status-publish","format-standard","hentry","category-vietnam-general","tag-crporate","tag-governance","tag-lawyer","tag-massmann","tag-oliver","tag-vietnam"],"authors":[{"term_id":1007,"user_id":24,"is_guest":0,"slug":"omassmann","display_name":"Dr. Oliver Massmann","avatar_url":"https:\/\/blogs.duanemorris.com\/vietnam\/wp-content\/uploads\/sites\/19\/2014\/08\/massmannoliver-125x150.jpg","author_category":"1","last_name":"Massmann","first_name":"Dr. Oliver","job_title":"","user_url":"http:\/\/www.duanemorris.com\/attorneys\/olivermassmann.html","description":"Read Oliver's bio.<\/a>"}],"_links":{"self":[{"href":"https:\/\/blogs.duanemorris.com\/vietnam\/wp-json\/wp\/v2\/posts\/416","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.duanemorris.com\/vietnam\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.duanemorris.com\/vietnam\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/vietnam\/wp-json\/wp\/v2\/users\/24"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/vietnam\/wp-json\/wp\/v2\/comments?post=416"}],"version-history":[{"count":0,"href":"https:\/\/blogs.duanemorris.com\/vietnam\/wp-json\/wp\/v2\/posts\/416\/revisions"}],"wp:attachment":[{"href":"https:\/\/blogs.duanemorris.com\/vietnam\/wp-json\/wp\/v2\/media?parent=416"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/vietnam\/wp-json\/wp\/v2\/categories?post=416"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/vietnam\/wp-json\/wp\/v2\/tags?post=416"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/vietnam\/wp-json\/wp\/v2\/ppma_author?post=416"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}