New Vietnamese law on enterprises
Willing to better business environment, the Vietnam Government has undertaken a significant reform program to attract more foreign investment to the country that might change the investment and business landscape. Indeed,a new investment law and a new enterprise law has been adopted on the 26th of November of 2014 and will take effect from the 1th of July 2015 on. Until then, the Law on investment and enterprise of 2005 (will be referred in this report as the “former law”) stay applicable.
In this report, we will focus on the Law on enterprise. The previous system, which used to distinguish between domestic and foreign firms, was replaced by the Enterprise Law, which created a unified legal framework for investment. This Law replaces the old Law on Foreign Investment in Vietnam and the Law on Encouragement in Domestic Investment and is commonly applicable to both foreign and domestic investors.
The Law on Enterprises addresses the types of companies and business establishments permitted to operate in Vietnam, their governance, liability, and rules on conduct of operations. The new law provides various business structures amongst which both foreign and domestic investors can choose. Besides, the Law on Enterprises also provides special forms of business structures which are available for foreign investors. Thus, the law is best understood as a broad law that covers all business structures, whether foreign-owned or domestically-owned.
How will this law affect economic attractiveness of Vietnam ?
On the one hand, we need to focus on the different types of corporate entities available for foreigners (A). On the other hand, new rules about corporate formation (B) and corporate governance (C) must be detailed and commented in the light of the economic environment.
A) Presentation of the different types of corporate entities available for foreigners investment in Vietnam
Concerning the company forms available for foreign investors, there isn’t any specific change in the New Enterprise law, compared to the current Enterprise law. Indeed, foreign investors can still, as well as domestic investors, choose, amongst the following forms of company, the structure that fit the best to their project. Thus, there are many legal structures available for foreign investors, tailored to different needs.
Basically, there are 5 types of corporate structures than can be used as vehicles for foreign investment in Vietnam:
-Limited Liability Companies (LLCs) with Two or More Members, also know as multiple member limited liability company( Chapter III, section I of the previous law and of the current law)
-One Member/ single member Limited Liability Companies (Chapter III section II in both laws)
-Shareholding Companies, or what used to be known as Joint Stock Company. These may or may not be capable of being listed on the public stock exchange in Vietnam. It depends if they pass the additional criteria of the security legislation.Shareholders liability is limited only to the value of the shares(Chapter IV in the 2005 law, Chapter V in the new law)
-Partnerships, whose main form is the Business Cooperation Contract (BCC), which are mainly only used by major corporations. The liability of each partner is unlimited if it is not specified in the agreement.(Chapter V in the former law and Chapter VI in the new law)
-Private enterprises (Unlimited Liability Company) : is an enterprise owned by only one individual who shall be liable for all activities of the enterprise to the extent of all his or her assets.
Investors can also invest indirectly in the public sector enterprises, more accurately, in State owned enterprises, which have been redefined :
Article 4 of the former Law on Enterprises :
« State-owned enterprise means an enterprise of which 50% of total capital owned by the state. »
Article 4 of the new Law on Enterprises :
« State owned enterprise means an enterprise in which the State holds one hundred (100) per cent of the charter capital. »
This change will reduce the number of entities classified as SOEs and potentially contribute to a more equal ground for all other companies.
B) Corporate formation
- Right to freely conduct business :
According to the terms of the article 21 of the current Law on Enterprises that deals with the contents of enterprise registration certificate, an enterprise may only conduct the business activities registered in its enterprise registration certificate.
Indeed, it’s necessary for the company to clearly define the lines of business in this document, according to the article 21.3. An investor can only conduct business as specifically defined in his business registration certificate. Thus, if the company wants, after its registration, change the nature of its business, the company has to make such a change in its certificate of registration, and go through all the registration procedure once again to get the amended version of its certificate. So an investor will think twice before extending its business lines, and that clearly narrows his freedom of trading.
With the new law, according to its article 29, the necessity to define business lines in the enterprise registration certificate is no longer mentioned, and thus, we can deduce from this missing that the business lines do no longer have to be stated on the business registration certificate.
As a result, companies will no longer be required to amend their business registration certificates when there is a change in their business activities. Rather, the change will simply be reported to the licensing authority. It’s a good change, because it’s a step toward the simplification of the registration of companies.
Indeed, one of the changes in the 2014th Law on Enterprises is that this new law will provide for a new principle of business which means that companies can carry out all business activities not restricted or prohibited by law.
« Enterprises are entitled to conduct any business activity that is not prohibited by laws » (art 7 of the new Enterprise Law).
Thus, the new Law on Enterprises represents a major step forward in liberalisation of the business environment in Vietnam by establishing, for the first time, the principle of freedom of business, in accordance with the new principles consecrated by the new Law on Investment.
- New period for capital contribution:
The new Law on Enterprises consistently applies the 90-day period for capital contribution for both limited liability companies and shareholding companies. Meanwhile, under the former Law on Enterprises, this time limit is quite longer for both types of companies (36 months).
This is a stricter rule. Maybe it will have an impacts investment in large projects like, infrastructure or construction projects.
However, in the past, the Vietnamese authorities often measure the capacity of a company by its “charter capital”. Understanding this misconception, many companies have been established with a very high declared charter capital which never been paid up (found on internet).
To counter this problem, the new Law on Enterprises now provides that charter capital must be the paid up capital, and must be fully contributed within 90 days from its establishment. Apart from paid up capital, there may be authorized capital but this would not be considered as charter capital.
- Seal of enterprise :
Current regulations require companies to apply for the seal with the competent public security authority (art 36 of the former Law on Enterprises). Although companies are currently allowed to have more than one seal, in practice, obtaining a second seal is very difficult and rare.
Now, the enterprise will be free to choose the use of seal. In case that the enterprise uses the seal, its’ form and content shall be decided by the enterprise but it is required to register with the licensing authority.
- Business registration certificates → required for all corporate entities (foreign and domestic):
Under the 2005 Law on Enterprises, an investment certificate issued to a foreign-invested corporate entity in accordance with the Law on Investment functions concurrently as its business registration certificate.
Under the 2014 Law on Enterprises, all Vietnamese corporate entities will require a business registration certificate. Foreign investors wishing to incorporate a company in Vietnam must first obtain an investment certificate, which will be included in the incorporation application dossier.
- Structure of the Shareholding company's capital :
The new Law on Enterprises provides clear definitions of terminology related to the capital structure of Shareholding companies which were never properly defined under current law, thereby resulting in confusion. :
« Paid-up shares » : authorised shares which have been fully paid-up.
« Authorised shares » : shares which may be offered for sale.
« Unsubscribed shares » : authorised shares which have not been fully paid-up.
C) Corporate governance
- Multiple legal representative :
Limited liability companies and shareholdings companies may have more than one legal representatives depending on the need of the companies. The company’s charter will specify the number, management title, rights and obligations of the legal representatives.
If the enterprise has only one legal representative, this person must still authorize another person to perform his or her rights and obligations when he or she is out of Vietnam, irrespective of the absence duration.
This may streamline the need for legal representatives of larger Vietnamese companies to issue multiple powers of attorney to functional directors and managers, and may facilitate the ability of counterparties to commercial contracts to confirm the authority of a signatory.
- Reducing quorums for LLCs and Shareholding Companies :
With respect to LLCs, the quorum for convening a members’ council’s meeting is reduced from 75 percent to 65 percent under the 2014 Law on Enterprises.
With respect to shareholding companies, the quorum for convening a general meeting of shareholders (GMS) for the first and second attempts is reduced from 65 percent and 51 percent to 51 percent and 33 percent respectively.
This should facilitate the ability to hold meetings of the relevant corporate bodies without long delays resulting from failure to meet the quorum requirements.
- Reducing voting threshold for LLCs and Shareholding Companies :
Lower thresholds will reduce dead-lock in the corporate approval process and bring Vietnam’s corporate governance thresholds more in sync with those of other jurisdictions.
However, the lower thresholds may also result in reduced protections for minority shareholders. Investors, in particular foreign investors, that obtain minority stakes in Vietnamese corporate entities may therefore need to more carefully consider clauses in shareholder agreements related to “reserved matters” that would require affirmative investor approval.
One other way to address this is by drafting or amending the corporate charter in a manner that requires a higher threshold than provided under law.
Reducing vote thresholds conduces to minimize intuitu personae and affectio societatis characters of LLCs.
- Right to reduce a LLC's capital:
A single limited liability company is now allowed to reduced its charter capital, which is prohibited under the 2005 Enterprise Law.
- New parent-subsidiary companies: (new art 189 of the EL)
The 2014 Law on Enterprises clearly defines parent-subsidiary companies. A company is called a parent company of another company if it owns more than 50% of the charter capital or the total normal shares of that company, has the right to directly or indirectly appoint the majority or all of the members of the Board of Management, Director, General Director of that company, or has the right to amend or supplement the charter of that company.
A subsidiary is not permitted to contribute capital or buy shares in its parent company. All subsidies of the same parent company cannot together contribute capital or buy shares to own each other. Further, subsidiaries of the same company with at least 65% state ownership may not together contribute capital to establish a company.
The former Law on Enterprises enunciate the Parent-susbsidiary companies (art 147 to 149 of the former Law on Enterprises), however, the new version is clearer about the definition of these companies.
- Opening of M&A procedure:
Currently, a merger or an acquisition is possible only among corporate entities of the same nature (among either LLCs or JSCs themselves). This means that if an LLC were to acquire or merge with a JSC, it must be first converted into a JSC or vice versa (art 153 of the former Law on Enterprises). The new Law on Investment removes this requirement and allows M&A activity between distinct types of legal entities.
This is a positive change that should reduce red-tape related to M&A in Vietnam.
Even though thanks to its strategic location near China, abundant natural and human resources, including 3,200km longcoastline port with numerous seaports, and cheap operating costs, Vietnam is ranked as one of Asia’s most attractive destinations for foreign investors, investors regularly complain about licensing hassle. Thus, this law will brought some positive changes, as it’s not only aimed to facilitate licensing , but also bring the corporate governance of Vietnamese companies to be in line with the international standards ( as it has been seen for voting rules and rules about the representation of the company).