Within the context of corporate governance in Vietnam, in addition to the signing authority of the legal representative, the approval of transactions with significant value often requires consent from either the General Meeting of Shareholders (“GMS”) or the Board of Directors (“BOD”). This mechanism plays a crucial role in ensuring transparency and protecting the interests of the stakeholders, particularly for transactions that may substantially affect the company’s assets or operations. However, the delineation of approval authority between these two authorites remains unclear in many cases, posing challenges in the implementation and compliance with the law. The following article will provide an in-depth analysis of the relevant legal aspects to clarify this issue.
Pursuant to the Law on Enterprises 2020, unless otherwise stipulated in the company’s Charter, the authority to approve transactions related to GMS and BOD, is allocated as follows:
Under Point d, Clause 2, Article 138 of the Law on Enterprises 2020, the GMS has the authority to:
“Decide on investments or the sale of assets valued at 35% or more of the total asset value recorded in the company’s most recent financial statements, unless the company’s Charter specifies a different ratio or value.”
Pursuant to Point h, Clause 2, Article 153 of the Law on Enterprises 2020, the BOD has the authority to:
“Approve contracts for the purchase, sale, borrowing, lending, and other transactions valued at 35% or more of the total asset value recorded in the company’s most recent financial statements, unless the company’s Charter stipulates a different ratio or value and such contracts or transactions fall within the GMS’s approval authority as prescribed in Point d, Clause 2, Article 138, and Clauses 1 and 3, Article 167 of this Law.”
Accordingly, it can be seen that the approval threshold for transactions of these two authorites revolves around the rate of 35% or more of the company’s asset value. Therefore, the factor of determining the approval authority belonging to the GMS or the BOD will depend on the nature of the transaction. Specifically, unless otherwise provided in the company’s Charter:
1. Approval Authority of the GMS
- Legal Basis: Although the law does not provide explicit criteria, the GMS, as the highest decision-making authority directly affecting the company’s interests, is generally entrusted with the authority to approve transactions that significantly impact the company’s assets or interests.
- Scope of Transactions: Investment decisions or asset sales.
- Approval Requirements: Approval of the transaction must be obtained during the GMS meeting by an affirmative vote of at least 65% of the total voting shares (Point d, Clause 1, Article 148 of the Law on Enterprises 2020).
2. Approval Authority of the BOD
- Legal Basis: The BOD is primarily responsible for overseeing the company’s daily business operations and making strategic decisions. Delegating authority to approve operational or business-related transactions to the BOD ensures greater efficiency by minimizing the necessity of convening the GMS.
- Scope of Transactions: Transactions not classified as investment decisions or asset sales within the GMS’s approval authority, such as contracts for the purchase, sale, borrowing, lending, or other agreements.
- Approval Requirements: Approval is granted if a majority of the attending BOD members vote in favor (Clause 12, Article 157 of the Law on Enterprises 2020).
From the above analysis, it can be seen that, if purely considering the regulations specified in the above, the determination of approval authority depends largely on whether the transaction is classified as an investment activity or a regular business operation.
However, the law does not provide clear definitions or distinctions between these transaction categories, leading to ambiguities and potential overlaps in practice. For instance, the law lacks a mechanism to distinguish between contracts arising from investment or asset sale decisions and ordinary procurement contracts. This regulatory gap may result in misidentification of the approving authority, thereby leading to the transaction or contract being invalidated.
Therefore, in fact, the charters of some companies often establish detailed provisions in their Charters specifying the scope and thresholds for the approval authority of the GMS and the BOD. In addition, in order to limit risks, companies often prioritize obtaining approval from the GMS as long as the transaction valued at 35% or more of the company’s assets.
See more:
1/ Conditions for foreign investors to engage in the advertising services business in Vietnam
2/ Service for obtaining an operating license for foreign language centers
3/ Some considerations when investing in establishing companies or branches abroad
Disclaimers:
This article is for general information purposes only and is not intended to provide any legal advice for any particular case. The legal provisions referenced in the content are in effect at the time of publication but may have expired at the time you read the content. We therefore advise that you always consult a professional consultant before applying any content.
For issues related to the content or intellectual property rights of the article, please email cs@apolatlegal.vn.
Apolat Legal is a law firm in Vietnam with experience and capacity to provide consulting services related to Business and Investment and contact our team of lawyers in Vietnam via email info@apolatlegal.com.
