Regulatory Development of Internal Protection Mechanisms for Minority Shareholder Protection

Board of Directors approved . Previously, Article 120 of the 2005 Enterprise Law stipulated that “Contracts and transactions between the company and shareholders, authorized representatives of shareholders owning more than 35% of the total common shares of the company and their related persons must be approved by the General Meeting of Shareholders or the Board of Directors”. The above reduction in the ratio has helped to ensure the rights of minority shareholders much better.

In addition, Clause 1, Article 159 of the 2014 Enterprise Law also stipulates the content "The company must collect and update the list of related persons of the company..." and more specific regulations on the implementation of public disclosure, review, excerpt, and copy of the List of related persons and related interests.

* Right to request cancellation of resolution of General Meeting of Shareholders

According to Article 147 of the 2014 Law on Enterprises, the subject with the right to request the cancellation of the resolution of the General Meeting of Shareholders has been limited to "shareholders or groups of shareholders owning 10% or more of the total number of common shares for a continuous period of at least 06 months or another smaller percentage as prescribed in the Company Charter". Previously, Article 79 of the 1999 Law on Enterprises and Article 107 of the 2005 Law on Enterprises granted this right to all shareholders. Although it is more beneficial for small shareholders, it cannot avoid the possibility of abuse due to violations in the process of convening and making decisions of the General Meeting of Shareholders which are very common. This is a strict provision of the 2014 Law on Enterprises because the protection of minority shareholders is necessary but must be on a reasonable basis, and the provisions of the law must still avoid causing disadvantages to major shareholders.

* Right to sue members of the Board of Directors, Director/General Director

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This right has just been directly regulated in the 2014 Law on Enterprises. Accordingly, shareholders and groups of shareholders owning at least 1% of common shares continuously for 06 months have the right to initiate a civil lawsuit against members of the Board of Directors, Director/General Director on their own or on behalf of the company in certain cases prescribed by law. Previously, the 2005 Law on Enterprises did not have direct regulations on this issue. The lawsuit against members of the Board of Directors, Director/General Director is regulated in Article 25.

Decree 102/2010/ND-CP guiding the implementation of the Law on Enterprises 2005: “Shareholders and groups of shareholders owning at least 1% of common shares continuously for 06 months have the right to request the Board of Supervisors to initiate a civil lawsuit against members of the Board of Directors, Director/General Director” in some cases prescribed by law. According to the decree guiding the implementation of the Law on Enterprises 2005, the above shareholders and groups of shareholders cannot directly initiate a lawsuit from the beginning but must go through the Board of Supervisors. Only after 15 days from the date the Board of Supervisors receives the request without initiating a lawsuit, can the shareholder or group of shareholders have the right to directly initiate a lawsuit. The practical application of this mechanism reveals a number of problems such as: (i) The lawsuit procedure is relatively complicated; (ii) The rate of the Board of Supervisors implementing the lawsuit request is not high because the members of the Board of Supervisors are not the ones who need to initiate a lawsuit. Or if the Supervisory Board initiates a lawsuit, they will not carry out the shareholders' lawsuit requests as enthusiastically as the shareholders themselves. The outstanding new point of the 2014 Law on Enterprises is to give shareholders and groups of shareholders the right to directly sue management positions from the beginning without having to go through the Supervisory Board. This provision will reduce the complexity of the procedure for suing management positions of the company. Moreover, not only having the right to sue themselves, the 2014 Law on Enterprises also gives shareholders the right to sue individual managers of the company (derivative lawsuit mechanism) on behalf of the company when discovering that the managers have committed violations, causing damage to the company and indirectly to the shareholders, to claim compensation for damages. The lawsuit costs in the case of shareholders and groups of shareholders suing on behalf of the company will be included in the company's expenses, except in the case where the member initiating the lawsuit has his/her lawsuit request rejected (Clause 2, Article 161). In addition, regarding cases of suing company managers compared to Decree 102/2010/ND-CP, LDN 2014 has added cases of suing when managers violate their obligations to manage the company.

2.2. Regulatory development of internal protection mechanisms for minority shareholder protection

2.2.1. Internal protection mechanism under the Companies Act 1990

According to the 1990 Law on Companies, the management structure of a JSC includes: General Meeting of Shareholders, Board of Directors, Board of Supervisors (including 02 Supervisors) and Director/General Director.

2.2.1.1. General meeting of shareholders

The General Meeting of Shareholders is the highest decision-making body of the company, including the founding general meeting, extraordinary general meeting and regular general meeting with different functions and tasks.

According to Clause 3, Article 37 of the 1990 Law on Enterprises, the General Meeting of Shareholders has the following rights:

- Decide on the company's development direction and tasks and annual business plan;

- Discuss and approve the financial year summary;

- Elect and dismiss members of the board of directors and supervisors;

- Decide on the amount of profit to set aside for the company's funds, the amount of profit to be distributed to shareholders, and the division of responsibility for damages incurred by the company in business operations;

- Review and decide on solutions to overcome major financial fluctuations of the company;

- Consider violations of the board of directors that cause damage to the company [17, Article 37].

Thus, the 1990 Law on Companies stipulates that the authority of the General Meeting of Shareholders lacks the following basic rights:

- Decision to reorganize and dissolve the company

- Decide on the type of shares and the total number of shares of each type that can be offered for sale;

- Decisions on the execution of major transactions;

In the legal relationship on protecting minority shareholders, the provisions on the General Meeting of Shareholders in the Enterprise Law 1990 are considered not to protect minority shareholders. The Enterprise Law 1990 does not have any specific provisions on the form, order and procedures for convening meetings and passing decisions of the General Meeting of Shareholders. Therefore, at this time, the General Meeting of Shareholders is considered valid if there is participation of shareholders holding 51% or more of the Charter capital and the decision of the General Meeting of Shareholders is passed when the number of shareholders representing more than half of the attending shareholders approves.

The fact that the Law does not have specific guidelines related to the organization of the General Meeting of Shareholders; does not stipulate the authority and procedures for convening the General Meeting of Shareholders as mentioned above makes the General Meeting of Shareholders completely meaningless in protecting minority shareholders. The role of the General Meeting of Shareholders is entirely decided by the majority shareholders, thus only ensuring the interests of the majority shareholders. The Law stipulates that minority shareholders can, through the General Meeting of Shareholders, exercise their rights to participate in the management and operation of a joint stock company, but in reality, it is meaningless. Majority shareholders, with all their tricks, arbitrarily organize the General Meeting of Shareholders as they wish.

2.2.1.2. Board of Directors:

According to Article 38 of the 1990 Law on Companies, the Board of Directors is the company's management body, consisting of three to twelve members, with the right to decide on all matters related to the company's purposes and interests, except for those under the authority of the General Meeting of Shareholders. Thus, the authority of the Board of Directors is very large, with the right to decide all matters, except for five matters under the authority of the General Meeting of Shareholders according to the 1990 Law on Companies. In fact, the role of the Board of Directors in a joint stock company is much larger. The decision of the Board of Directors is usually the decision of the majority shareholder group. During the period when the 1990 Law on Companies came into effect, the Board of Directors did not contribute to protecting minority shareholders but instead mainly served the interests of the majority shareholder group.

2.2.1.3. Director/ General Director

According to Article 40 of the 1990 Law on Companies, the Chairman of the Board of Directors may concurrently hold the position of Director/General Director. In case the Chairman of the Board of Directors does not concurrently hold the position of Director/General Director, the Board of Directors shall appoint one of them or hire another person to be the Director/General Director. The Director/General Director is the person who runs the daily business operations of the company and is responsible to the Board of Directors for the performance of assigned duties and powers.

With the above characteristics, in reality, during this period, the CEO/Director was largely dependent on the Board of Directors. There was no division of authority between the Board of Directors and the CEO/Director, and the CEO/Director did not have his own voice. The relationship between the Board of Directors and the CEO/Director was mainly cooperation for the common goal of the company's major shareholders.

2.2.1.4. Board of Control

According to Article 41 of the 1990 Law on Companies, a joint stock company must have two controllers elected by the general meeting, of which at least one controller must have accounting expertise. The controllers have the following rights:

- Check the company's accounting books, assets, and annual reports and convene a general meeting when deemed necessary;

- Submit to the General Assembly a report on the audit of the company's financial statements;

- Report on unusual financial events that occur; on the advantages and disadvantages in financial management of the board of directors [17, Article 41].

Although it was also assigned some basic rights to protect the interests of shareholders, especially minority shareholders, the Supervisory Board during the period when the 1990 Company Law came into effect did not have a role in protecting minority shareholders. According to the general assessment, the Supervisory Board often played a passive role. They received reports prepared by the Board of Directors, reviewed and evaluated those reports and then submitted their opinions.

On the other hand, the Supervisory Board is elected by the General Meeting of Shareholders, which is essentially the major shareholders, and receives remuneration also decided by the General Meeting of Shareholders, which is essentially the major shareholders, so the Supervisory Board cannot avoid being "on the same side" with the major shareholders.

In summary, the internal protection mechanism under the 1990 Law on Companies is assessed as being very simple and having many limitations. The Law has not yet specifically defined the authority and responsibility of the General Meeting of Shareholders, the Board of Directors, the Director/General Director and the Board of Supervisors. In fact, these agencies seem to have no role in protecting shareholders. Important contents related to the activities of these agencies, such as regulations on the responsibilities of company managers as well as regulations on supervision, management and operation of the company, have not been regulated at all. The implementation of the 1990 Law on Companies shows that there have been quite a few self-interested transactions by company managers.

2.2.2. Internal protection mechanism under the Enterprise Law 1999

According to Article 69 of the 1999 Law on Enterprises, the organizational structure of a joint stock company must include a General Meeting of Shareholders, a Board of Directors and a Director/General Director; for a joint stock company with more than eleven shareholders, there must be a Board of Supervisors. There is a change here when the 1990 Law on Enterprises requires a joint stock company to have at least 02 Supervisors, regardless of the number of shareholders in the company.

2.2.2.1. General meeting of shareholders

According to Article 70 of the 1999 Enterprise Law, the General Meeting of Shareholders, consisting of all shareholders with voting rights, is the highest decision-making body of a joint stock company. Therefore, shareholders with voting rights can also exercise the rights of the General Meeting of Shareholders through the General Meeting of Shareholders as follows:

- Decide on the type of shares and the total number of shares that can be offered for each type; decide on the annual dividend rate for each type of shares;

- Elect, dismiss, remove members of the Board of Directors, members of the Board of Supervisors;

- Review and handle violations by the Board of Directors and the Board of Supervisors that cause damage to the company and its shareholders;

- Decision to reorganize and dissolve the company;

- Decide to amend and supplement the Company Charter, except for the case of adjusting the charter capital due to selling new shares within the number of shares allowed to be offered as prescribed in the Company Charter;

- Through annual financial reports;

- Through the company's development orientation, decide to sell assets with a value equal to or greater than 50% of the total asset value recorded in the company's accounting books;

- Decision to buy back more than 10% of total sold shares of each type [18, Article 70];

Thus, compared to the 1990 Company Law, the General Meeting of Shareholders has been supplemented with the following rights:

- Decide on the type of shares and the total number of shares that can be offered for each type; decide on the annual dividend rate for each type of shares;

- Elect, dismiss, remove members of the Board of Directors, members of the Board of Supervisors;

- Decision to reorganize and dissolve the company;

- Through the company's development orientation, decide to sell assets with a value equal to or greater than 50% of the total asset value recorded in the company's accounting books;

- Decision to buy back more than 10% of total sold shares of each type;

In addition to adding more powers to the General Meeting of Shareholders, the 1999 Law on Enterprises also stipulates many specific contents related to the organization and operation of the General Meeting of Shareholders that the 1990 Law on Enterprises does not have, such as: Authority to convene the General Meeting of Shareholders (Article 71); List of shareholders entitled to attend the General Meeting of Shareholders (Article 72); Agenda and content of the General Meeting of Shareholders (Article 73); Invitation to the General Meeting of Shareholders (Article 74); Conditions and procedures for conducting the General Meeting of Shareholders (Article 76); Approval of decisions of the General Meeting of Shareholders (Article 77); Minutes of the General Meeting of Shareholders (Article 78).

Thus, it can be seen that through the provision of additional rights for the General Meeting of Shareholders. According to the 1999 Enterprise Law, shareholders have also been given many more rights. This has greatly helped shareholders in the process of protecting themselves.

2.2.2.2. Board of Directors

According to Article 80 of the 1999 Enterprise Law, the Board of Directors is the company's management body, with full authority to decide on all matters relating to the company's purposes and interests on behalf of the company, except for matters under the authority of the General Meeting of Shareholders. The Board of Directors consists of no more than 11 members, passing decisions by voting at meetings, obtaining written opinions or other forms as prescribed by the Company Charter. Each member of the Board of Directors has one vote.

The Board of Directors has the right to decide and recommend the following matters:

- Decide on the company's development strategy;

- Propose the type of shares and the total number of shares of each type that can be offered for sale;

- Decision to offer new shares within the number of shares allowed to be offered of each type; decision to raise additional capital in other forms;

- Decide on investment plan;