Shareholders
BOUNDARIES OF SHAREHOLDER AGREEMENTS: EXAMINING THE VALIDITY OF TYPICAL PROVISIONS OF SHAREHOLDER AGREEMENTS
Shareholder agreements (SHA) in Vietnam, like in many other jurisdictions, are frequently used to manage the relationships among some or all shareholders of a company. An SHA typically comprises four fundamental elements: anti-dilution, secondary share transfer restrictions, decision-making restrictions, and corporate management and control. While the relevant laws provide some degree of coverage for anti-dilution measures[1], the remaining three elements primarily arise from the private contractual arrangements among the relevant shareholders who are parties to the shareholder agreement (SHA Shareholders).
Despite their widespread use in practice, whether the contractual arrangements under SHA are recognized under the Vietnam laws remains questionable, because they may be deemed as interfering with shareholder rights. Therefore, this article aims to examine the legal validity and enforceability of agreements related to share transfer restrictions, decision-making restrictions, and corporate management and control commonly found in SHA in Vietnam.
Share transfer restrictions
In M&A transactions, restrictions on secondary share transfer can be categorized as either absolute or conditional. Absolute restrictions prevent shareholders from transferring their shares during a specific period, with some possible exemptions[2]. On the other hand, conditional restrictions, such as right of first refusal, drag-along right, tag-along right, put option, or call option, only come into effect when specific event or condition arises. The choice of restriction(s) depends on the unique features of the transaction and the preferences of new investor.
Under the Law on Enterprises 2020 (LOE), shareholders are generally free to transfer their shares to others, with some exceptions stipulated by laws[3]. These exceptions deal with restrictions on share transfer for founding shareholders and potential limitations on certain types of shares governed by the company's Charter and relevant share certificates[4].
Restrictions going beyond those provided by laws raise questions about their compliance with the LOE. This concern is exacerbated by Article 16.2 of LOE, which prohibits any action that obstructs a shareholder's rights and obligations in accordance with the applicable laws and company Charter. Thus, there is a risk that the commonly used restrictions mentioned above may be deemed invalid if Article 16.2 of the LOE is interpreted broadly.
Such risk, however, may be not high. Although Article 16.2 of the LOE does not provide clear guidance on the interpretation of "obstruction", it would be more reasonable if it only applies when a shareholder's statutory right is hindered without the involved shareholders’ consent or awareness. When an SHA Shareholder agrees to have their transfer rights restricted under the SHA, it should be considered that the SHA Shareholder having voluntarily relinquished their ability to transfer shares freely. The right to waive a statutory privilege is also a right, which can only be restricted in certain situations, such as national defense and security, social safety and order, social ethics, and public health[5]. In most cases, limiting a shareholder's right to transfer shares is unlikely to have a detrimental impact on these factors. Therefore, it may be not persuasive to nullify a shareholder's decision to limit their own share transfer rights.
Decision-making restrictions
By laws, shareholders typically have the right to make decisions independently based on their voting rights without seeking consent from other shareholders. However, if an SHA is in place, the decision-making ability of an SHA Shareholder may be limited, and they may not have the power to vote at their sole discretion. These limitations are often set out in unique provisions of the SHA, such as (i) pooling agreements, which often require all SHA Shareholders to vote in the same direction on a particular matter; and (ii) dealing with reserved matters, which may prohibit certain SHA Shareholders from voting on a reserved matter without consent from other SHA Shareholders holding veto power.
Unlike share transfer restrictions, which generally do not affect third-party rights, the exercise of pooling agreements or reserved matters can directly influence the company in a manner that favors the SHA Shareholders, while potentially harming the interests of other shareholders of the company. It is important to note that under the 2015 Civil Code, the exercise (or waiver) of a right must not infringe upon the lawful interests of third parties[6]. As a result, the enforceability of pooling or reserved matters agreements may be challenged if they are found to be detrimental to the lawful interests of third parties, particularly other shareholders not being the SHA Shareholders.
Absence of the adverse impact on third-parties, the decision-making restrictions under the SHA should not be held invalid.
Corporate management and control
In Vietnam, the management and control of a joint-stock company is primarily delegated to the board of directors (Board) (known as “Hội đồng quản trị” in Vietnamese). Therefore, investors who invest in a company often aim to secure a certain number of board seats to be occupied by their designated individuals.
By laws, the shareholder's statutory right is limited to the nomination of candidates for appointment to the Board[7] and the actual appointment must be made by the General Meeting of Shareholders (GMS)[8]. However, SHA, particularly those involving pooling votes, may enable the SHA Shareholders to effectively exclude other shareholders from board representation. By acting together under the SHA, these SHA Shareholders can bypass the cumulative voting mechanism and procure that all appointed directors represent only their group. Although the remaining shareholders still retain their nomination right, it becomes irrelevant as their nominees will not have a chance to be appointed by the GMS. Consequently, the other shareholders would be effectively deprived of their opportunity to have their representatives on the Board. If this happens, the provisions related to corporate control may be held invalid as they infringe on the third-party rights of other shareholders who are not party to the shareholder agreement, as outlined in the earlier section of this article.
Similar to the decision-making restrictions, if exercising corporate management and control rights do not negatively impact any third-party rights, including the shareholders not being the SHA Shareholders, then the provisions related to corporate management and control should be legally enforceable.
Of note, Vietnamese law does not have a separate set of provisions specifically governing SHA. Matters under SHA are generally subject to contract law – typically by the Civil Code. Nevertheless, many of these matters could be deemed part of the organization and decision-making of a company, which may also be governed by the LOE (as detailed by company’s charter or articles of association). Given the above concerns on validity of many provisions in an SHA, these provisions and issues of the governing rules should be addressed properly when crafting each SHA.
Author: Nguyen Quoc Bao Senior Associate
Footnotes
[1] Article 115 of the LOE contains a basic anti-dilution clause, which prioritizes a shareholder in subscribing for additional shares in proportion to their existing shareholding in the company. Notably, anti-dilution mechanisms may be far more sophisticated than the basic anti-dilution clause provided by the LOE. However, given the scope of this article, we will not explore this in further detail.
[2] Common exemptions include, among others, the transfer of share to the affiliates of the transferor.
[3] LOE, Article 115.1(d).
[4] LOE, Articles 120.3 and 127.1.
[5] Civil Code 2015, Article 2.
[6] Civil Code 2015, Article 3.4.
[7] LOE 2020, Article 115.5.
[8] LOE 2020, Article 138.1(c).
27 September 2023
