In the recent controversial case of shareholder dispute in Vietnam, the appellate court of Ho Chi Minh City (Appellate Court) held that two following articles of a company charter conflict with each other and therefore the provisions of the Enterprise Law 2014 are applied to resolve the dispute:

·         Article 10.1 of the company charter which provides a member’s right to request the redemption of its capital contribution portion if such member objects a resolution of the Members’ Council on some important matters of the company; and

·         Article 23.1 of the company charter which requires a consensus of all members on some important matters of the company.

How two clauses of a company charter could be regarded as conflicting with each other?

1.        The Appellate Court’s opinion makes us question ourselves that how or in which situation two clauses of a company charter or a contract could be regarded as conflicting with each other? Vietnamese law has no rule of contract construction that could help to answer this question. In a common sense approach, if two clauses indicate inconsistent agreements or intentions of parties on the same matter, then they could be regarded as conflicting with each other. In this approach, Article 23.1 of the company charter (all members’ consensus on important matters) does not conflict with Article 10.1 of the company charter (member’s right to request the company to redeem its capital contribution portion). These Articles deal with the different matters in two different situations in chronological order. In particular:

1.1.         We understand that Article 10.1 of the company charter is similar to Article 52.1 of the Enterprise Law 2014 (or Article 51.1 of the Enterprise Law 2020) to which a member has the right to request the company to redeem its capital contribution portion if such member has a dissenting vote against a resolution of the Members’ Council on certain matters (Special Resolution). Article 52.1 of the Enterprise Law 2014 (or Article 51.1 of the Enterprise Law 2020) suggests that this redemption right could be triggered if there is a Special Resolution which should be duly passed and such member has a dissent vote against such Special Resolution;

1.2.         Given Article 23.1 of the company charter requires a consensus of all members on certain importation matters, no Special Resolution is duly passed if no consensus is reached. Accordingly the redemption right contemplated in Article 10.1 of the company charter is not triggered;

1.3.         Article 23.1 of the company charter could effectively make the situation contemplated in Article 10.1 of the company charter never happen since no Special Resolution is duly passed if no consensus is reached. However, as long as the Enterprise Laws allow members to agree a different voting threshold, i.e., the consensus in this case, those Articles 10.1 and 23.1 of the company charter should not be regarded as conflicting with each other.

No ground for the Appellate Court to apply the 75% voting threshold

2.         Even if there are two conflicting clauses in a company charter, there is no rule of law on the prevailingness of the provisions of the Enterprise Laws. And even if the Enterprise Laws are applied, Article 60.3 of the Enterprise Law 2014 or Article 59.3 of the Enterprise Law 2020 provides respectively that “if the company charter has no different provisions” or “if the company charter has no different threshold” then the voting thresholds at 65% or 75% of the charter capital shall be applied to pass resolutions of the Members’ Council. It appears that the Appellate Court “forgot” those wordings of the Enterprise Laws and cherry-picked to invoke the 75% voting threshold to recognize the validity of the disputing Resolution where no consensus is reached as required by Article 23.1 of the company charter. If the entirety of Article 60.3 of the Enterprise Law 2014 or Article 59.3 of the Enterprise Law 2020 is applied, then the requirement of a consensus provided at Article 23.1 of the company charter must be respected.

Lessons to remember - veto right should be paired with anti-deadlock mechanisms

3.         Veto right of a minority shareholder or consensus for a reserved matter is not uncommon in joint ventures in Vietnam. A deadlock situation where a consensus cannot be reached is likely to arise in these voting arrangements. There is a range of contractual mechanisms which can be provided in the company charter or shareholders’ agreement to enable the parties to resolve deadlock situations or shareholder disputes. It appears to us that the company charter in the recent shareholder dispute case fails to provide anti-deadlock clauses to resolve the deadlock situation. Several lessons for investors to remember from this case would be that:

3.1.         If veto right or consensus on a reserved matter is provided, the investors must provide in the company charter and shareholders’ agreement anti-deadlock clauses to deal with deadlock situations. The lack of anti-deadlock clauses to navigate and resolve deadlock situations could lead to disputes and unforeseeable outcome;

3.2.         It is important to identify when and in which scenario a deadlock has arisen. The investors need to avoid hair trigger clauses and ensure that situations cannot be manipulated to create a deadlock. It is common to have the escalation phase and clauses to salvage the relationship and continue the joint venture by encouraging parties to reach a compromise. For example, the escalation provision could require each party to have its senior managers to amicably discuss a disagreeable matter and deliver a written letter to explain to the other party on its position on the disagreeable matter and its reasons for adopting that position. This could discourage a party from abusing a deadlock while giving each party an opportunity and cooling time to reconsider its position, facts, supporting rationales; and

3.3.         There should have breakup provisions to facilitate amicable separation or termination of the joint venture. It is common to see a put option or call option selected as exit ways for the parties that enables the holder of the option to require the other party to sell or buy its equity interests in the joint venture. A party, especially a minority shareholder, may have various reasons to disagree a reserved matter which may hinder the joint venture’s business development. However, when it comes to exit situations, each party would make up their mind seriously.

Written by Ha Thi Dung.