Corporate Governance of a Joint Stock Company: Other: Director’s remuneration, duties of officers, related party transactions, derivative actions by shareholders

 

Directors’ remuneration in a JSC

Board directors and General Director

1.1.       The Enterprise Law 2014 substantially follows the provisions of the Enterprise Law 2005 regarding remuneration payable to Board directors or the General Director. In particular,

1.1.1. the charter of a JSC may freely provide how Board directors and the General Director are to be paid.[1] If the charter is silent on the method of compensating Board directors and General Director, then the default rules under the Enterprise Law 2014 will apply.

1.1.2. details about payments paid to Board directors or General Director of a JSC must be presented as a separate item in the annual financial statements of the company and be reported to the annual meeting of the Shareholder Meeting.[2] Similar requirements also apply to Public JSCs;[3] and

1.1.3. In the absence of different provisions in the charter of a JSC,

(a)        remuneration payable to Board directors must be unanimously agreed by all Board directors and be approved at the annual meeting of the Shareholder Meeting.[4] Remuneration for Board directors will be based on the number of days and a daily remuneration rate.[5] In addition, a Board director will be entitled  to reimbursement for expenses incurred by the Board director in performing his/her duties; and

(b)        remuneration payable to the General Director is decided by the Board.[6]

Remuneration of Inspectors

1.2.       Similar to remuneration paid to Board directors,

1.2.1. the charter of a JSC may freely provide how Inspectors are to be paid;[7]

1.2.2. In the absence of different provisions in the charter of a JSC,

(a)        details about payments paid to Inspectors of a JSC must be presented as a separate item in the annual financial statements of the company and be reported to the annual meeting of the Shareholder Meeting;[8] and

(b)        remuneration payable to Inspectors must be approved by the Shareholder Meeting.[9] The Shareholder Meeting is no longer required to decide payments to Inspectors based on the nature of the works of the Inspectors as in the Enterprise Law 2005.[10]

General duties of officers of a JSC

Board directors and General Director

2.1.       It is beyond the scope of this book to examine duties of directors in a JSC in details.[11] In general, except for one important change, the wording on duties of a Board director and the General Director of a JSC under the Enterprise Law 2014 remains nearly the same as in the Enterprise Law 2005.[12] In particular, under the Enterprise Law 2014, a Board director or a General Director of a JSC has the following duties:

2.1.1.   To exercise his or her delegated powers and perform his or her delegated obligations strictly in accordance with laws, the charter of the company, and the resolutions of the Shareholder Meeting.[13] This duty remains the same as in the Enterprise Law 2005 except that the word “duties” (nhiệm vụ) is replaced by “obligations” (nghĩa vụ);

2.1.2. To exercise his or her delegated powers and perform his or her delegated duties honestly and prudently to their best ability in order to assure the maximum legitimate interests of the company.[14] Different from the Enterprise Law 2005,[15] a Board director and a General Director is not required to act in the best interests of “shareholders” of the company. It is not clear if the change is intentional or accidental. This is because in the next duty (see 22.1.3) the Enterprise Law 2014 still refers to “shareholders” in addition to company;

2.1.3. To be loyal to the interests of the company and its shareholders.[16] This duty remains the same as in the Enterprise Law 2005;

2.1.4. To not use information, know-how, business opportunities of the company, his or her position and powers and use assets of the company for his or her own personal benefit or for the benefit of other organisations or individuals. This duty remains the same as in the Enterprise Law 2005. Similarly, a Board director of a Public JSC generally must not use the information he or she can obtain thanks to his or her position for his or her own personal benefit or for the benefit of other organizations or individuals;[17] and

2.1.5. To notify in a timely manner, fully and accurately the company of enterprises in which he or she or his or her related persons own or have contributed capital or controlling shares.[18] This duty remains the same as in the Enterprise Law 2005. However, under the Enterprise Law 2014, a Board director, the General Director and Inspector are subject to a more stringent disclosure requirement regarding “relevant interests” (lợi ích liên quan) (see 22.2).

2.2.       Subject to stricter disclosure standards provided in a charter of a JSC, the Enterprise Law 2014[19] requires a Board director, General Director, Inspector or other officers of a JSC to disclose to the company the following information (Relevant Interest Information):

2.2.1. information of the enterprise in which he/she owns capital contribution or shares; ratio and time of such ownership of capital contribution or shares;[20] and

2.2.2. information of the enterprise in which his/her “related persons” jointly own or separately own shares or capital contribution of more than 10% of charter capital. Under the Enterprise Law 2005, the reporting threshold is 35%.[21]

2.3.       The Relevant Interest Information must be disclosed in writing within seven business days after the Relevant Interest Information arises or changes.[22] The disclosure must be reported to the annual meeting of the Shareholder Meeting and must be maintained in the head office of the JSC and, if necessary, the JSC’s branches.[23] There is no requirement for “displaying” the list of Relevant Interest Information in the Enterprise Law 2014 except for information on companies a Board director, General Director or other company officers hold controlling interest together with their related persons.[24] Under the Enterprise Law 2014, disclosures of similar Relevant Interest Information must be open for inspection by shareholders and other directors.[25] In addition, the Enterprise Law 2014 expressly requires a JSC:[26]

2.3.1. to facilitate shareholders and other directors to access, sight, make an extract and copy the list of related persons of the company “and other contents” which presumably also include Relevant Interest Information; and

2.3.2. to stipulate in its charter the procedures for reviewing, making an extract and copying the declarations of related persons and Relevant Interest Information.

2.4.       Under Decree 71/2017, a Board director of a Public JSC must disclose:

2.4.1. to the Board of the JSC any remuneration that he/she receives from subsidiaries, affiliated companies or other organisations where he/she acts as representatives of the Public JSC;[27] and

2.4.2. to the Board and the Inspection Committee of the Public JSC any transaction between (a) the Public JSC, its subsidiaries, or companies of which 50% or more of the charter capital is held by the Public JSC  and (b) such Board director, or a related person of such Board director.[28]

Inspectors

2.5.       Under the Enterprise Law 2014,[29] similar to the Enterprise Law 2005,[30] an Inspector of a JSC is subject to similar duties of a Board director and a General Director except that an Inspector is also required to comply with professional ethic rules.[31]

Legal representatives

2.6.       For the first time under the Enterprise Law 2014, a legal representative of an enterprise including a JSC has the following fiduciary duties:

2.6.1. To exercise the delegated rights and perform the delegated obligations honestly and prudently and to his or her best ability in order to assure the legitimate interests of the company.[32] This is similar to duty of a Board director except that a Board director must assure maximum legitimate interest not just legitimate interest;

2.6.2. To be loyal to the interests of the company; not to use information, know-how or business opportunities of the company; not to abuse his or her position and power or to use assets of the company for his or her personal benefit or that of other organisations or individuals.[33] This is similar to duty of a Board director except that there is no reference to “shareholders” of the company; and

2.6.3. To notify the company in a timely, complete and accurate manner of the fact that he or she and a person related to him or her is the owner or holds controlling shares or shares of capital contribution in other enterprises.[34] This is similar to the duty of a Board director.

2.7.       Strangely, a legal representative of a JSC does not have a “compliance duty” which is to comply with laws, charter, and resolutions of the Shareholder Meeting as in the case of a Board director, the General Director or an Inspector.

Business judgement rules

2.8.       In certain jurisdiction, a Board director is protected by the “business judgement rules”[35] whereby an officer of a company is entitled to the presumption that he or she acted in good faith, and absolves the officer of personal liability unless it is established that he or she engaged in fraud, bad faith or an abuse of discretion. The business judgment rule protects officers from liability when they make good faith business decisions in an informed and deliberate manner.

2.9.       Vietnamese law does not expressly provide for a “business judgment rules” for a Board director of a JSC.[36] However, in the context of a Public JSC, Article 41.2 of the Public JSC Model Charter provides that “the company shall pay compensation to a person who has been, is or is likely to become a party involved in a claim, suit or legal proceeding … where such person was or is a member of the Board of Directors, an Inspector, General Director (or Director), or a manager … provided that such person has acted honestly, carefully, and diligently in the interests or not contrary to the interests of the Company, and on the basis of compliance with law and on condition that there is no discovery or confirmation that such person breached his/her obligations.” The wording of Article 41.2 of the Public JSC Model Charter suggests that a Director who makes an erroneous business decision may be protected from liability if he/she can prove that he/she has exercised his/her duty of care, and duty to act honestly. This is quite close to the business judgment rules except that the burden of proof belongs to the director (who must prove that he/she has acted with the duty of care and honestly and complied with the law) not the company. Arguably, the wording of Article 41.2 of the Public JSC Model Charter could be used in charters of both Public JSCs and non-Public JSCs to provide business judgement rules protection to Board directors of a JSC.

2.10.     There is another interesting question about the validity of a transaction or contract, which has been approved by the Board in violation of the duties of the Board directors. Will such contract or transaction be held invalid on the ground that when the Board directors approve such contract or transaction, they are not acting in the best interest of the relevant JSC? One can argue that since the directors are acting against the law (i.e. not acting in the best interest of the relevant JSC), the Board approval is not valid and accordingly the transaction or contract subject to such approval is also not valid.[37] However, this argument relies on the implication that if a person approving a document is acting illegally, then the document is also illegal. This may not always be the case.[38] In addition, this argument also may have unexpected consequence since it may subject many contracts or transactions to the risks of being invalidated.

D&O Insurance

2.11.     In the context of Public JSCs, Decree 71/2017 allows a Public JSC to procure director and officers insurances (D&O insurance) insurance for duties of its Board directors if permitted by the Shareholder Meeting.[39] Article 14.3 of Decree 71/2017 limits the scope of D&O insurance to existing Board directors of a Public JSC and is silent on whether other managers or past Board directors may have D&O insurance provided by a Public JSC. In addition, the insurance policies for a Board director’s duties must not cover liabilities arising from “violation of laws and charter of the Public JSC”.[40] The exception cases where D&O insurance is not available to a Board director under Decree 71/2017 is quite broad since a breach of duties of a Board director may also constitute a violation of the law.

2.12.     The Public JSC Model Charter applicable to Public JSCs seems to suggest that it is possible to extend the D&O insurance procurement to persons who are or have been Board Members, Inspectors, (General) Director, managers, employees or authorised representatives of a Public JSC.[41] Reading Decree 71/2017 and the Public JSC Model Charter together, one may reasonably conclude that a Public JSC may procure D&O insurances for persons who are or have been Board Members, managers, employees or authorised representatives of a Public JSC if such procurement is approved by the Shareholder Meeting. However, the Public JSC Model Charter seems to confirm that non-compliance with the law is not covered by D&O insurance.[42]

2.13.     The Enterprise Law 2014 is silent on D&O insurance for non-Public JSCs. However, by analogy, it is arguable that a non-Public JSC can procure D&O insurance for its Board directors similar to a Public JSC.

Control of related party transactions in a JSC

What is a related party transaction?

3.1.       Vietnamese law does not have a legal definition of a related party transaction (RPT). However, the Enterprise Law 2014 requires various transactions between a JSC with certain specific counterparties related to its shareholders or Directors to be approved by the Board or the Shareholder Meeting. Those transactions as discussed below could generally be considered as RPTs.

3.2.       Under Article 162.1 of the Enterprise Law 2014, any transaction (giao dịch) or contract (hợp đồng) between a JSC and any of the following parties must be approved by the Board or the Shareholder Meeting depending on value of the transaction:

3.2.1. A shareholder that owns more than 10% of total ordinary shares of the JSC (a 10% Shareholder);

3.2.2. authorised representatives of a 10% Shareholder;

3.2.3. a “related person” (người liên quan) of a 10% Shareholder or authorised representatives of a 10% Shareholder;

3.2.4. a Board director of the JSC;

3.2.5. the General Director of the JSC;

3.2.6. a “related person” of a Board director or the General Director of the JSC;

3.2.7. companies that should be included in the list of a Relevant Interest Information of the JSC (see 22.2)

3.3.       The difference between a “contract” and a “transaction” under Article 162.1 of the Enterprise Law 2014 is not clear. A contract is defined as an agreement between parties in relation to the establishment, modification or termination of civil rights and obligations.[43] The term “transaction” usually has a broader meaning than “contract” as it may include unilateral undertaking. However, in the context of Article 162 of the Enterprise Law 2014, it is not clear if a contract can also be considered as a transaction under Article 162 of the Enterprise Law. While the distinction is subtle, it may be important. Under Article 162.2 of the Enterprise Law 2014, in the case of RPTs being a “transaction”, only a summary of the main contents of RPT can be sent to the Board. On the other hand, in the case of RPTs being a “contract”, the JSC needs to send a draft of the contract.

For the definition of “related person” of a non-Public JSC and a Public JSC, please see our posts on Vietnam-Business Law blog.[44][45]

Who needs to approve an RPT?

3.4.       If an RPT under Article 162 of the Enterprise Law 2014 has a value of less than 35% (or a lower percentage provided in the charter of a JSC) of the total assets of the company as recorded in its latest financial statements, such RPT must be approved by the Board.[46] In other cases, the RPT must be approved by the Shareholder Meeting.[47]

3.5.       The value threshold under Article 162 of the Enterprise Law 2014 only expressly applies to a single transaction not a series of related transactions. Accordingly, in theory, the JSC and the relevant related person may agree to “split” the value of single RPT into multiple contracts or transactions each of which has a value of less than 35% of the total assets of the JSC. By doing so, the parties to the relevant RPT may argue that the multiple contracts or transactions are not subject to the approval of the Shareholder Meeting.

Board approval procedures

3.6.       Under Article 162.2 of the Enterprise Law 2014, for an RPT subject to approval by the Board, the representative who enters into an RPT on behalf of a JSC must notify Board directors and Inspectors about:

3.6.1. the counterparties to the RPT; and

3.6.2. the draft contract or a summary of the main points of the RPT.

3.7.       The Board will approve the RPT within 15 days from the date of receipt of the notice unless there is a different time period provided in the charter.[48] The Board directors with the related interest do not have the right to vote.[49]

3.8.       Compared with the Enterprise Law 2005,[50] under the Enterprise Law 2014, a notice of an RPT must now be sent to Inspectors of a JSC, not just Board directors. In addition, the JSC has the flexibility to determine the approval period by the Board. Under the Enterprise Law 2005, the approval period by the Board is fixed at 15 days. In addition, the Enterprise Law 2014 does not require notice of an RPT to be “displayed” at the company’s head office and branches as in the Enterprise Law 2005.[51]

3.9.       The following issues may arise from Article 162.2 of the Enterprise Law 2014:

3.9.1. There is no clear requirement that the person signing a contract on behalf of a JSC must check the list of related persons of such JSC before entering into a contract. Therefore, there may be the case where a JSC incidentally enters into an RPT without knowing about it; 

3.9.2. If the JSC is a parent company of a group of companies, it is not clear whether the consolidated financial statements of the JSC should be used to determine the total assets value of the JSC instead of the non-consolidated financial statements of the JSC. From a commercial perspective, a consolidated financial statement will provide a more accurate view of the financial status of the JSC than a non-consolidated one does. However, technically, a consolidated financial statement provides for the financial status of a group of companies as opposed to the JSC only;

3.9.3. It is not clear as to how to determine the value of a contract in case there is no express total contract price (e.g. a guarantee contract or a merger contract or a shareholder agreement). If a contract has no clear contract value then it is not clear whether such contract should be considered as having “zero value” and be subject to approval by the Board only;

3.9.4. It is not clear as to how to determine whether a Board director has a “related interest”[52] and is not entitled to vote. Presumably, a Board director is considered as having a related interest in an RPT if such Board director is the reason for such RPT is subject to the approval under Article 162.2 of the Enterprise Law 2014 in the first place. However, Article 162.2 of the Enterprise Law 2014 is not entirely clear on this point;

3.9.5. It is not clear whether a Board director with related interests can vote on an RPT as a proxy of another Board Member who has the right to vote on such transaction. There is no clear restriction for a Board Member who does not have the right to vote on an RPT to act as a proxy for another Board Member who has the right to vote; and

3.9.6. If all Board directors have related interests in an RPT and do not have the right to vote on such RPT, it is not clear how the approval procedures should be conducted. Prudently, in such case, the RPT should be presented to the Shareholder Meeting for a vote.

Shareholder approval procedures

3.10.     Under Article 162.3 of the Enterprise Law 2014, for an RPT subject to approval by the Shareholder Meeting,

3.10.1. the representative who enters into an RPT on behalf of a JSC must notify Board directors and Inspectors in the same manner as in the case of Board approval (see 23.6);

3.10.2. the Board will then submit the draft contract (if the RPT is a contract) or explain the main content of the transaction (if the RPT is a transaction) at the Shareholder Meeting or collect written opinions from shareholders; and

3.10.3. the shareholders with related interests (cổ đông có lợi ích liên quan) do not have voting right; contracts and transactions will be approved where shareholders representing 65% of the total remaining votes agree unless otherwise provided in the company’s charter.

3.11.     Comparing with the Enterprise Law 2005,[53] the Enterprise Law 2014 has the following changes:

3.11.1. the person signing the RPT must notify the Board of the RPT. Under the Enterprise Law 2005, there is no procedure for the Board to be aware of an RPT;

3.11.2. a notice of an RPT must now be sent to Inspectors of a JSC not just Board directors;

3.11.3. it is now clear that “shareholders with related interests” instead of “related shareholders” do not have the right to vote; and

3.11.4. while an RPT will be approved by a 65% vote, the charter of a JSC may provide for a lower voting threshold (e.g. 51%). Under the Enterprise Law 2005, the voting threshold for an RPT is fixed at 65%.                

3.12.     The procedures for the Shareholder Meeting to approve an RPT are also subject to similar issues as in the case of the procedures for the Board to do so (see 23.9).

Disclosure of RPTs

3.13.     The Enterprise Law 2014[54] follows the provisions of Decree 102/2010 and requires the JSC to maintain and retain in its head office a list of its related persons and their transactions with the company. Such RPT list must be open for inspection by all shareholders, managers, and Inspectors of the company.[55] As a matter of good corporate governance, maintaining transparency as provided in the Enterprise Law 2014 is recommendable. However, the Enterprise Law 2014 does not take into account the need to maintain the confidentiality of a JSC’s business. For example, under the Enterprise Law 2014, a competitor of a Listed JSC may easily obtain information regarding the JSC’s RPTs by just purchasing one share in the Listed JSC.

Remedies for noncompliance

3.14.     The Enterprise Law 2014 provides that an RPT, which has been entered or performed without being approved in accordance with Article 162.2 or 162.3 of the Enterprise Law 2014 and cause damages to the JSC will be invalid. In such case, the persons signing the RPT, the related shareholders, the related Board directors, and the General Director must jointly and severally compensate for damages and return to the company any benefit derived by them from the performance of the RPT.[56] It is not clear if the joint and several liabilities under Article 162.4 of the Enterprise Law 2014 is a strict liability or not.

3.15.     Compared with the Enterprise Law 2005,

3.15.1. if an RPT is not approved in accordance with the Enterprise Law 2014, the RPT could only be held invalid if the RPT causes damages to the JSC. Under the Enterprise Law 2005, there is no requirement for damages. This requirement makes it more difficult for challenging an RPT if there is no proof of damages suffered by the JSC; and

3.15.2. now it is clear that the liability imposed on the persons signing the RPT, the related shareholders, the related Board directors, and the General Director are joint and several. Under the Enterprise Law 2005, it is not clear whether if this is the case.

3.16.     The following issues may arise from Article 162.4 of the Enterprise Law 2014:

3.16.1. Article 162.4 of the Enterprise Law appears to require a JSC to follow Articles 162.2 and 162.3 of the Enterprise Law strictly to ensure the validity of an approved RPT. In practice, this may be difficult to achieve in certain cases. For example, Articles 162.2 and 162.3 suggest that a draft RPT must be circulated and approved before it is officially signed. However, in many cases, a JSC would want to sign the RPT first and obtain the necessary corporate approval later which is often structured as a condition precedent to the contract; and

3.16.2. Article 162.4 of the Enterprise Law does not make clear whether the terms “related Board directors” or “related shareholders” refer to:

(a)        the Board director or the shareholder who do not have the right to vote under Article 162.2 or 162.3 of the Enterprise Law but have violated the requirements of Article 162; or

(b)        the Board directors or the shareholders who do not comply with the requirements under Article 162; or

(c)        the Board directors or the shareholders who have approved the relevant RPT.

Presumably, Article 162.4 should only refer to either (a) or (b) not (c).

Control of RPTs in Public JSCs

3.17.     Decree 71/2017 contains certain general requirements for RPTs. Article 25.1 of Decree 71/2017 requires a RPT to be made in writing based on the principles of fairness and voluntariness. To support this requirement, the Public JSC Model Charter contains a requirement for a RPT being reviewed by an independent consultant in terms of fairness and reasonableness.[57]

3.18.     The content of a RPT must be clear and specific and must be disclosed to shareholders when requested. A Public JSC must maintain necessary measures to prevent a related person from interfering the company’s operation and causing damages to the Public JSC through the control of transactions, sales, price of goods and services of the company.[58] A Public JSC must maintain necessary measures to prevent a shareholder or its related persons from entering into transactions causing loss of capital, assets and other resources of the Public JSC.[59] Except for the requirement that a RPT must be made in writing, other provisions of Decree 71/2017 regarding RPTs are broad and not clear. Therefore, compliance with these provisions would likely depend on the discretion of the relevant Public JSC and/or related authorities.

3.19.     In additions to similar restrictions regarding RPTs provided under the Enterprise Law 2014, Decree 71/2017 further impose the following restrictions to some RPTs of Public JSCs:

3.19.1. A Public JSC must not extend loans or guarantees to Board directors, Inspectors, General Director, other managers of the company and their “related persons” being individuals or organizations unless otherwise permitted by the Shareholder Meeting.[60] Under this requirement, a RPT being a loan or guarantee of any amount given by a Public JSC needs to be approved by the Shareholder Meeting. This is different from the Enterprise Law 2014 where only an RPT exceeding certain value needs to be approved by the Shareholder Meeting (see 23.4);

  

3.19.2. A Public JSC may not extend loans or guarantees to its individual shareholders and the related persons of such shareholders, unless the Public JSC is a credit institution;[61]  

3.19.3. A Public JSC may not extend loans or guarantees to its institutional shareholders or their related persons being individuals, unless:

(a)        The Public JSC is a credit institution; or

(b)        The institutional shareholder is also a subsidiary of such Public JSC and does not have any shares held by the State; and the institutional shareholder contributed capital or bought shares in the Public JSC before 1 July 2015 according to Article 16.6 of Decree 96/2015.[62]

3.19.4. A Public JSC may not extend loans or guarantees to an institutional related persons of a shareholder of such Public JSC, unless:

(a)        the Public JSC is a credit institution;

(b)        the Public JSC and the institutional related persons are of the same group or companies operating as a corporate group, and and the Shareholder Meeting or the Board approves this transaction according to the charter of the Public JSC; or

(c)        other cases provided by law.[63]

It is not clear why the above prohibitions applies to loan and guarantee transactions only but not to other types of transactions. For example, if a Public JSC mortgages its assets to secure for obligations of its shareholders then technically such mortgage is not subject to this prohibition.[64] However, from a commercial perspective, such a mortgage functions similar to a guarantee.

Derivative actions by shareholders

4.1.       A shareholder or a group of shareholders of a JSC owning at least 1% of “the number of ordinary shares“[65] for six consecutive months (a 1% Shareholder) has the right, on their own behalf or on behalf of the JSC, to initiate a “legal action regarding civil liability” (khởi kiện trách nhiệm dân sự)[66] against a Board director or the General Director of the JSC in the following cases:[67]

4.1.1. a Board director or the General Director breach the obligations of managers of the company;

4.1.2. a Board director or the General Director fail to implement correctly their assigned rights and obligations; or fail to implement or fail to implement completely and promptly resolutions of the Board;

4.1.3. a Board director or the General Director implement their assigned rights and obligations contrary to the provisions of law, the charter of the JSC or resolutions of the Shareholder Meeting;

4.1.4. a Board director or the General Director use information, know-how or business opportunities of the JSC for their own personal benefits or for the benefits of other organisations or individuals;

4.1.5. They abuse their positions and powers and use assets of the company for their own personal benefit or for the benefit of other organisations or individuals; and

4.1.6. Other cases in accordance with law and the charter of the company.

4.2.       By allowing a 1% Shareholder to take legal action on behalf of a JSC against a Board director or the General Director of the JSC, the Enterprise Law 2014 has expressly introduced derivative actions to corporate law in Vietnam. The Enterprise Law 2014 further provides that:[68]

4.2.1. the order and procedures for initiating a legal action will be implemented in accordance with the corresponding provisions of the law on civil proceedings; and

4.2.2. the expenses for initiating a legal action will be included in expenses of the JSC if a 1% Shareholder initiates a legal action on behalf of the JSC, except for the case where the petition of the 1% Shareholder who initiates the legal action is rejected.

4.3.       The Enterprise Law 2014 introduces derivative actions to Vietnam corporate law. However, many important rules associated with derivative actions are not included in the Enterprise Law 2014.[69] In addition, the Enterprise Law 2014 also leaves many issues relating to derivative action unclear. Therefore, implementation of derivation actions in Vietnam (if it really happens) would likely to either be very difficult or very inconsistent. In particular,

4.3.1. it is not clear whether under the Enterprise Law 2014, the right to take action against a Board director or the General Director is intended to be exclusively reserved for 1% Shareholder and a less-than-1% Shareholder will not have the right to take action against a Board director or the General Director. Under the general rules on non-contractual claim,[70] any shareholder suffering damages due to action of Board director or the General Director could initiate a non-contractual claim in the name of the shareholder. Some practitioners take the view that a less-than-1% Shareholder will not have the right to take action against a Board director or the General Director;[71]

4.3.2. it is not clear while derivative action is limited to breach of duties by Board directors or the General Director of a JSC only. Under the Enterprise Law 2014, Inspectors, legal representatives and other positions provided in the charter of a JSC may also have certain fiduciaries duties (see 22);

4.3.3. it is not clear why failure to implement correctly rights of a Board director or General Director is also subject to claim by a 1% Shareholder (see 24.1.1). Presumably, a Board director or a General Director should have their own discretion as to how a right to be exercised as long as such exercise does not violate any obligation of the Board director or the General Director;

4.3.4. reference to “the law on civil proceedings” (pháp luật tố tụng dân sự) in the Enterprise Law 2014 suggest that a derivative action can only brought to the courts not to commercial arbitration.[72] However, it is not clear how this requirement could reconcile with a charter which uses commercial arbitration as the dispute resolution forum;

4.3.5. even the Enterprise Law 2014 provides that law on civil proceedings will apply to a derivative action, it is not clear if the law on civil proceedings as it currently stands could accommodate a derivative action. This is because:

(a)        A claimant (nguyên đơn) is defined in the Civil Procedures Code 2015[73] as the person whose rights or benefits are infringed or another person allowed by the Civil Procedures Code 2015 to take legal action.[74] A 1% Shareholder taking legal action for a JSC does not belong to either case; and

(b)        An authorised representative (người đại diện theo ủy quyền) in civil proceedings in the Civil Procedures Code 2015 is determined in accordance with the Civil Code 2015.[75] In turn, the Civil Code 2015 provides that an authorised representation means representation which is established pursuant to a power of attorney between the representative and the principal.[76] The Civil Code 2015 does not expressly include an authorised representation which is established by a legal provision such as Article 161 of the Enterprise Law 2014.

4.3.6. the provisions of the Enterprise Law 2014 do not include common requirements and limitations for a derivative action in other jurisdictions such as:

(a)        a requirement that a notice should be sent to the JSC about the intention of a 1% Shareholder to take derivative action. The JSC is the beneficiary of a derivative action and therefore should know about it before it happens;

(b)        a requirement that a derivative action should not be allowed in case the violation of the Board director or the General Director has been approved or ratified by the Shareholder Meeting; and

(c)        a requirement that a derivative action should be for the interest of the JSC not the 1% Shareholder. Otherwise, a 1% Shareholder may abuse the JSC to achieve its own goals.