Transactions between a joint stock company and related persons

Introduction. In the context of corporate governance, transactions between a joint stock company (“JSC”) and related persons (“Related Persons”) are subject to stringent regulatory oversight. Given their inherent nature – transactions entered into between parties connected by ownership, management, or control – transactions with Related Persons always present risks of conflicts of interest, asset diversion, or abuse of managerial authority. To safeguard the interests of the company and minority shareholders, the Law on Enterprises 2020 (“LOE 2020”) and its implementing regulations establish a system of controls to ensure that such transactions are conducted transparently, within the proper authority, and in a manner consistent with the company’s best interests. This article provides an analysis of the regulatory framework and practical application concerning transactions between a JSC and Related Persons under current Vietnamese law. 

1. Definition of Related Persons and Related-Party Transactions 

1.1. Definition of Related Persons 

Under Article 4.23 of the LOE 2020, a Related Person of a JSC is an individual or organisation having a direct or indirect relationship with the company through ownership, management, family ties, or control, including: 

  1. The parent company1; the managers and the legal representative of the parent company; and persons having authority to appoint managers of the parent company;
  2. The subsidiary company; the managers and the legal representative of the subsidiary; 
  3. Any individual, organisation or group of individuals/organisations capable of controlling the JSC through ownership, acquisition of shares, or decision-making power; 
  4. Managers of the enterprise2, the legal representative, and the Supervisors; 
  5. The spouses, biological parents, adoptive parents, parents-in-law, biological children, adopted children, children-in-law, biological siblings, and siblings-in-law of the company’s managers, legal representative, Supervisors, or shareholders holding a controlling shareholding; 
  6. Individuals authorised to act on behalf of the company or organisations specified under points (a), (b), and (c) above; 
  7. Any enterprise in which the individuals, companies, or organisations specified in points (a), (b), (c), (d), (đ) and (e) above hold ownership to the extent of controlling decision-making of that enterprise. 

1.2. Related-party transactions in a joint stock company 

Pursuant to Article 167.1 of the LOE 2020, related-party transactions include any transactions between a JSC and: 

  1. Shareholders, or authorised representatives of institutional shareholders, owning more than 10% of the total ordinary shares of the company, and their Related Persons; 
  2. Members of the Board of Directors (“BOD”), the Director or General Director, and their Related Persons; 
  3. Enterprises in which BOD members, Supervisors, the Director or General Director, and other managers of the company are required to declare their related interests under Article 164.2 of the LOE 2020, including: (i) enterprises owned by them or in which they hold capital contributions or shares; and (ii) enterprises owned jointly or individually by their Related Persons holding more than 10% of the charter capital. 

It is therefore clear that the concept of “related-party transactions” under Article 167 of the LOE 2020 is broader in scope than the definition of “Related Persons” under Article 4.23. The category of related-party transactions in Article 167 not only covers transactions between the JSC and persons who qualify as Related Persons under Article 4.23 but also includes a wider range of situations – for example, transactions between a JSC and a company in which the JSC’s director owns capital, regardless of the percentage of ownership.  

2. Approval authority for related-party transactions 

The approval authority for transactions between a JSC and Related Persons is governed by Articles 167.2 and 167.3 of the LOE 2020. The authority is divided between the BOD and the General Meeting of Shareholders (“GMS”) depending on the value and nature of the transaction. 

2.1. Transactions subject to BOD approval 

The BOD shall approve related-party transactions with a value of less than 35% of the total asset value recorded in the most recent financial statements, or another lower threshold stipulated in the company’s Charter. 

Any BOD member having a related interest in the parties to the contract or transaction shall not have the right to vote on such matter. 

2.2. Transactions subject to GMS approval 

2.2.1. The following transactions must be approved by the GMS: 

  1. Contracts or transactions with a value of 35% or more (or another lower threshold stipulated in the Charter) of the total asset value shown in the most recent financial statements;
  2. Loan, borrowing, or asset-sale transactions with a value exceeding 10% of the total asset value recorded in the most recent financial statements, conducted between the JSC and a shareholder holding 51% or more of the total voting shares, or such shareholder’s Related Persons. 

2.2.2. Shareholders having a related interest in the parties to the contract or transaction shall not have the right to vote. 

3. Disclosure Obligations Concerning Related Interests and Related Persons in a Joint Stock Company 

One of the key statutory mechanisms designed to regulate related-party transactions under Vietnamese corporate law is the obligation to disclose interests and related persons, as provided in Article 164 of the LOE 2020. Accordingly: 

3.1. Obligations of the JSC 

3.1.1. A JSC must compile and update a list of its Related Persons in accordance with Article 4.23 of the LOE 2020, together with records of the corresponding contracts and transactions between such persons and the company.3

3.1.2. The JSC must notify the General Meeting of Shareholders (“GMS”) of the list of Related Persons and related interests at each annual meeting.4

3.1.3. The JSC must maintain the list of Related Persons and related interests at its head office; where necessary, a portion or the entirety of such list may also be kept at its branches.5

3.1.4. The company must facilitate the fastest and most convenient access for shareholders, their authorized representatives, members of the Board of Directors (“BOD”), the Supervisory Board, the Director or General Director, and other managers to inspect, review, extract, and copy the list of Related Persons and related interests. The company must not obstruct or create difficulties for these persons in exercising such rights. The procedures for inspection and extraction shall be implemented in accordance with the company’s Charter.6

3.2. Obligations of managers of the Company

3.2.1. Members of the BOD, Supervisors, the Director or General Director, and other managers must disclose to the company their related interests within seven (07) working days from the date such interests arise, including: 

  1. The name, enterprise code, head office address, and business lines of any enterprise that they own or in which they hold capital contributions or shares, as well as the percentage and timing of such ownership;
  2. The name, enterprise code, head office address, and business lines of any enterprise that their Related Persons own jointly or separately, or in which their Related Persons hold more than 10% of charter capital.7

3.2.2. Any BOD member or the Director/General Director who performs work in the company’s business sector in their own name or on behalf of another person must fully disclose the nature and details of such work to the BOD and the Supervisory Board, and may only proceed upon approval by a majority of the remaining BOD members. If they carry out such work without disclosure or without approval, all income derived from such activity shall belong to the company.8

3.2.3. Obligations of the Company’s Representative in Connection with Transactions with Related Persons 

a. For contracts or transactions requiring approval by the BOD: 

The company’s representative signing the contract or transaction must notify BOD members and Supervisors of the related parties and provide a draft contract or summary of principal terms. 
The BOD must approve the contract or transaction within 15 days from receipt of the notification, unless the Charter provides otherwise. BOD members who have related interests in the parties to the transaction are not entitled to vote.9

b. For contracts or transactions requiring approval by the GMS: 

The company’s representative signing the contract or transaction must notify the BOD and Supervisors of the related parties and provide a draft contract or summary of principal terms. 

The BOD shall present the draft contract or transaction, or an explanation thereof, at the GMS meeting or through written shareholder consultation. In this case, shareholders who have related interests in the contract or transaction are not entitled to vote.10

4. Legal Consequences of Non-Compliance with Approval Procedures for Transactions with Related Persons

Article 167 of the LOE 2020 sets out consequences where contracts or transactions between a JSC and its Related Persons are executed in violation of statutory procedures—for example: (i) lack of proper approval authority; (ii) participation of interested shareholders in voting; and/or (iii) failure by the company to provide adequate information on Related Persons. In such circumstances: 

  1. The contract or transaction may be declared void by a court.11 In this case, the JSC and the counterparty must restore the original status and return to each other all benefits received. The party at fault must compensate for any resulting damage.12
  2. The individual signing the contract or transaction, and any shareholder, BOD member, Director or General Director who has related interests therein, shall be jointly liable for damages and must return to the company any profits obtained from the execution of such contract or transaction.13

(1) Pursuant to Article 195.1 of the LOE 2020, a company is considered the parent company of another company if it falls under any of the following circumstances: (i) It owns more than 50% of the charter capital or total ordinary shares of that company; or (ii) It has the direct or indirect right to decide the appointment of a majority or all members of the Board of Directors, the Director or the General Director of that company; or (iii) It has the right to decide amendments or supplements to the charter of that company.

(2) Under Article 4.24 of the LOE 2020, managers of JSC include the Chairperson of the Board of Directors, members of the Board of Directors, the Director or General Director, and any individual holding other managerial positions as stipulated in the company’s Charter.

(3) Article 164.1 of the LOE 2020.

(4) Article 164.4(a) of the LOE 2020.

(5) Article 164.4(b) of the LOE 2020.

(6) Articles 164.4(c) and 164.4(d) of the LOE 2020.

(7) Articles 164.2 and 164.3 of the LOE 2020.

(8) Article 164.5 of the LOE 2020. 

(9) Article 167.2 of the LOE 2020.

(10) Article 167.4 of the LOE 2020.

(11) Article 167.5 of the LOE 2020.

(12) Article 131 of the Civil Code 2015. 

(13) Article 167.5 of the LOE 2020.

Disclaimers:

This article is for general information purposes only and is not intended to provide any legal advice for any particular case. The legal provisions referenced in the content are in effect at the time of publication but may have expired at the time you read the content. We therefore advise that you always consult a professional consultant before applying any content.

For issues related to the content or intellectual property rights of the article, please email cs@apolatlegal.vn.

Apolat Legal is a law firm in Vietnam with experience and capacity to provide consulting services related to Business and Investment and contact our team of lawyers in Vietnam via email info@apolatlegal.com.



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