The parent company signs that contract with a third party. For example, the parent company sells products to the subsidiary at a high price without proving the reasonableness of that price, or vice versa, the parent company buys products and services from the subsidiary below the market price or even below the cost price of the product or service, or buys goods and services from the subsidiary but the payment period is long, or even late payment without being penalized so that it can appropriate the subsidiary's capital...
- The parent company directs the subsidiary's managers in decisions of the subsidiary that are not under the parent company's authority according to the company's charter. For example, the parent company directs the subsidiary to appoint personnel who are related to the parent company to hold key positions in the executive apparatus or middle management positions, thereby indirectly strengthening the parent company's actual control over the subsidiary's operations.
- The parent company requires the subsidiary to distribute profits without taking into account the need for reinvestment in production and business activities or other financial obligations of the company.
It can be said that from the principles and conditions that US judges have set before applying the “corporate veil” mechanism, it is possible to draw out a number of contents that can be practically applied in Vietnam to clarify the cases where the corporate veil needs to be broken and the parent company must be responsible for the actions of its subsidiaries. However, in order to be applicable, these contents must first be institutionalized into written regulations.
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3.1.3. Need for a precedent on “unveiling the corporate veil”
The contents recommended for institutionalization in Vietnamese law in section 3.1.2 above are derived from the fact that Vietnam is a country with a civil law system, where the main source of law is legal documents. However, since 2017 when the 2015 Civil Code came into effect, in Vietnam, case law has also been considered an official source of law alongside legal documents, customs, and basic principles of civil law 57 . To become a precedent that can be applied, a judgment must go through a process of selection and publication.
57 Clause 2 Article 6 of the 2015 Civil Code on application of analogy of law
precedent. However, this procedure is still relatively simpler and faster than adjusting, supplementing or issuing a new legal document. Therefore, when positive law needs a lot of time to study, absorb and cannot be adjusted promptly according to practical requirements, it is necessary to consider turning a judgment of the nature of "lifting the corporate veil" into a precedent so that it can be applied generally in domestic judicial agencies. From there, the new law can truly enter life, contributing to effectively protecting the legitimate interests of social components, ensuring social order in the context of economic integration and development.
3.2. Recommendations on perfecting the system of legal regulations to prevent acts of taking advantage of the corporate cover and the parent company - subsidiary model to commit illegal acts.
Obviously, the consequences of organizations and individuals taking advantage of the corporate cover and corporate group model to commit illegal acts are not small for society. However, the existence of these acts does not only stem from the laxity in legal regulations on the responsibility of parent companies for the actions of their subsidiaries, but also from legal loopholes in many other areas, such as in tax management; in the issue of preventing and combating corruption and money laundering; in the severity of legal sanctions...
Therefore, in addition to learning from the experiences of other countries to perfect the parent company's liability regime for the actions of its subsidiaries, Vietnam also needs to continuously learn from practice and refer to other legal systems to perfect legal regulations to prevent crimes of exploiting the corporate cover for various purposes. This issue is related to many different legal institutions, the scope is wide and the complexity is high, moreover, this is a content beyond the scope of this thesis, so the author will not mention it in detail but only stop at the level of raising the issue.
3.3. Recommendations for businesses in corporate groups
The liability of the parent company for the actions of its subsidiary in certain cases where the corporate veil is abused is something that creditors and lawmakers themselves have been trying to prove. But let us return to the origin of the mechanism.
limited liability and the great value it brings to socio-economic development. Investors who bring their assets into business activities, in addition to enriching themselves, also contribute to promoting the general development of the economy. Therefore, if the purpose of investors is pure, they also need to be protected by law against risks that they may not foresee in business activities. Therefore, this section 3 will provide some recommendations for businesses to ensure that the limited liability regime is implemented, avoiding cases where companies inadvertently put themselves in a situation where they have to take responsibility with their assets for the obligations of other companies.
3.3.1. Correctly and fully implement regulations on company management and operation.
As mentioned in section 2.3.2, one of the factors that courts will consider when considering the application of the “corporate veil” measure is whether or not the company does not comply with regulations in corporate management and operation. In fact, although economic corporations or economic groups may have a very large overall scale, within the group of companies there may exist small or very small companies. Typically, in small-scale companies, the workforce is often thin and each employee often has to take on many different jobs (this is often seen in start-up companies). Meanwhile, business activities require businesses to react quickly and be very flexible in their operating mechanisms to ensure timely response to market requirements. For that reason, cumbersome internal procedures are sometimes overlooked or not given due attention. For example, a requirement for a joint stock company is that the general meeting of shareholders must meet at least once a year and the board of directors must meet at least once every three months to decide on company matters. The law also stipulates the order and procedures for organizing meetings as well as the format and content of meeting minutes or the mechanism for passing resolutions and decisions of the company's management levels. If a company fails to properly and fully comply with these requirements, from the perspective of the courts, it may be considered as non-compliance with regulations on company management and operation. In particular, if the decisions issued in violation of such regulations are in sensitive and important areas that have a great impact on the company's operations, such as the appointment of a management personnel, the approval of a
Transactions with the parent company or other related persons of company 58 are likely to become a "fulcrum" for the court to consider bypassing the corporate veil. At that time, the parent company, whether it wants to or not intentionally, will be forced to take responsibility for the consequences caused by the subsidiary. Therefore, the first recommendation for business owners or parent companies is to always ensure that the subsidiaries they establish must be managed and operated in accordance with the provisions of the law on enterprises. No matter how cumbersome the internal procedures are, no matter whether the enterprise actually implements them correctly and fully or not, at least the enterprise must prove with documents that it has complied with those regulations.
3.3.2. Limiting the lack of separation in operations between parent companies and subsidiaries
The fact that a parent company uses the assets of a subsidiary for its own purposes or to serve the operations of the parent company without going through a legal civil agreement is a basis for the court to conclude that there is no separation in the operations of the parent company and the subsidiary, leading to the court being able to decide to "lift the veil on the company". In reality, the shared use of assets or resources between companies in a group of companies is not uncommon. Usually, in order to optimize the operating costs of the group of companies and fully exploit the assets of the companies in the group, companies will tend to share each other's assets and resources to organize production and business. For example, a company may invest in infrastructure and factories to anticipate future expansion needs, leading to excess compared to current usage needs. Therefore, in order to save costs for other companies and to avoid wasteful wear and tear on its factory, this company can let other companies use that infrastructure. Or another common example is a newly established company that does not have enough staff for the necessary positions, so it "temporarily uses" the staff of other companies in the group of companies to operate its work. Although the initial purpose is completely legitimate, if the shared use of assets and people between companies is not based on a fair agreement for the parties (like a property lease agreement where the leasing company will have revenue
58 The concept of “related person” is understood according to the definition in the Law on Enterprises 2020.
income from leasing activities) will inadvertently be a weakness for creditors to exploit, forcing the courts to require companies that operate without separation to be jointly responsible for each other's property obligations to third parties. Therefore, the second note for groups of companies is to always ensure that there is separation of people and assets between the parent company and the subsidiary so that it cannot be attributed to non-independent operations between the companies.
3.3.3. Properly fulfill capital contribution commitments
Section 2.3.2 of Chapter 2 also stated that the failure of a subsidiary to contribute sufficient capital to conduct business activities may be a factor for courts to consider when applying the “corporate veil” mechanism. However, as with the issues raised in Sections 3.3.1 and 3.3.2 above, this phenomenon is not uncommon in the practical operations of today’s businesses. There may be many reasons behind the parent company’s failure to contribute sufficient capital as committed to the subsidiary. This does not refer to the case where the parent company intentionally registers a high capital level but in reality does not contribute the correct amount of capital, the purpose of which is to give the subsidiary an initial financial capacity that “looks good on paper” in order to create peace of mind and trust from other investors or partners and customers; Or the case where the parent company intentionally contributes a symbolic amount of capital to the subsidiary and forces the subsidiary to arrange capital for its own operations, the purpose is to limit the risk level to the lowest level for the parent company. There are other cases of not contributing enough capital as committed such as: the parent company does not anticipate the movement of cash flow in the business, leading to not being able to arrange capital in time, or intentionally delays capital contribution to take advantage of capital turnover, appropriating capital for another business activity without being aware of the legal responsibilities of not contributing capital as committed. Parent companies in these cases need to be aware that during the time prescribed by law for the parent company to complete the capital contribution, if the parent company has not completed it, it will still be responsible for the financial obligations of the subsidiary within the scope of the capital that should have been contributed. This is a provision that already exists in the Enterprise Law. Therefore, parent companies should not ignore this issue.
3.4. Recommendations for organizations and individuals when dealing with members of a group of companies
If a group of companies deliberately uses the corporate veil to limit their own risks and shift the risks to other organizations and individuals, the organizations and individuals who have transactions with these groups of companies are the ones whose legitimate rights are most likely to be violated. Therefore, these are also the ones that need to be advised on important points to consider before deciding to enter into a contract with a business belonging to a group of companies.
First of all, these subjects need to improve their awareness and understanding of the law in the business field and some basic issues in the civil field, while learning from practice and learning from the lessons of those who have suffered losses before. This note may sound theoretical and a bit dogmatic, but it is always the key to the problem because only knowledge and experience can help a person anticipate the risks of what they intend to do.
Let's temporarily call the above entities A and the companies in the group of companies with which they intend to enter into contracts B. Some basic key points that A needs to learn and understand about B to ensure its rights include:
Firstly, the issues affecting the legal validity of the agreement between Party A and Party B are the legality of the subject, purpose and object of the contract. Because the civil agreement between the parties is the law established by the parties themselves, in order to ensure their rights, the contract between the parties needs to be recognized and guaranteed by law. Many organizations and individuals either do not have knowledge or are not careful in the process of concluding a contract, which can lead to the contract being invalid, while Party A has paid Party B and Party B intentionally does not return it. Meanwhile, if Party A is an individual, they often have a fear of litigation procedures, leading to giving up and accepting losses.
Second, when the transaction value between Party A and Party B is large, it is necessary to grasp information about the financial situation and payment ability as well as the reputation of Party B through history.
activities. This can be relatively difficult because Party B is not always willing to provide information for Party A to assess the situation, especially when Party B deliberately wants to conceal it. Especially when Party B is a subsidiary of a large corporation, using the name and reputation of the parent company to confuse Party A. However, in a relatively open business environment and in today's information society, information can be collected from many different sources without having to be provided by the owner himself, for example through partners, old customers of B, through relationships with managers, employees of B, through projects that B has previously implemented, the information can be made public in the media... Party A only needs to be sober enough to assess and filter the information it collects to make a decision.
Third, it is necessary to find out who the actual and ultimate beneficiaries of Party B's transactions are and whether there is any ulterior motive in using Party B to enter into contracts with Party A, to avoid the case where Party B is actually just a front company, and the money that Party B puts into transactions with Party A may have an illegal origin, leading to Party A unwittingly becoming an accomplice to Party B's illegal actions.
Once Party A has the ability to recognize the risks and still decides to enter into a contract with Party B, Party A needs to carefully consider the contents that the parties will sign. Normally, in a transaction where Party B is a business providing consumer products and services and Party A is an individual consumer, the disadvantage in contract negotiations always belongs to Party A. Although the law is on the side of the consumer in most cases and requires Party B to register a model contract or general transaction conditions with the management agency before using it to sign with consumers, in reality, Party B always has a team to help thoroughly research contract issues or can hire consulting lawyers to build model contracts in which there are clauses that are cleverly inserted to protect Party B even though Party A may be put in risky situations. Meanwhile, the management agency may not be an expert in every field to be able to understand all the hidden corners that Party B hides in each contract, leading to the possibility of still approving and ignoring contracts that are disadvantageous to consumers of this type. Therefore
Party A needs to be very careful when reviewing the contract, and at the same time determine its own risk tolerance, including whether it can spend time, effort and cost on litigation if a dispute arises.
3.5. Summary of Chapter 3
In conclusion, from the current widespread abuse of the corporate veil and the imperfections in the legal system on legal entity liability, it can be seen that from management agencies to serious businesses and consumers, all need to raise awareness to perform their functions in the best way when participating in economic activities. Managers can learn from the experience of law-making from the practices of previous countries, while other economic sectors can learn and gain experience from the actual consequences that have happened to others. Above all, regardless of their position, organizations and individuals must have an understanding of the law, at least the law on enterprises, to be aware of the risks they may face when dealing with a company with a limited liability regime. The recommendations in Chapter 3 are aimed at three subjects: the State, groups of companies and other subjects that have transactions with companies in the groups of companies. Among the recommendations mentioned, only the group of recommendations on perfecting the legal system is academic in nature based on the comparative legal method between Vietnamese law and the law of some countries. Other recommendations are of legal application and are based on an economic perspective rather than a legal perspective. However, within the framework of a thesis of an applied master's program, the author hopes that the recommendations mentioned will be of practical value to organizations and individuals participating in daily economic activities.