Law on Enterprise 2020 – Some remarkable changes

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Law on Enterprise 2020 – Some remarkable changes

On June 17th, 2020, the National Assembly promulgated the new Law on Enterprises (“Law on Enterprise 2020”), which shall be effective on January 01st 2021 with some remarkable shifts compared to the previous version, such as cutting administrative procedures, allowing the conversion of sole proprietorship into joint stock company…. Let’s us take a look on several important changes of Law on Enterprise 2020 which may impact on the operation of the Enterprise as follows:

1. Timeline for capital contribution 

Law on Enterprise 2020 retains the requirement that the charter capital must be contributed as undertaken within 90 days from the date of issuance of the Enterprise Registration Certificate. However, the duration of transporting or importing assets contributed as capital and conducting administrative procedures for conversion of ownership of assets shall be excluded under Law on Enterprise 2020[1]. This adjustment is practical for capital contribution activities of the Enterprise. For contributed assets from other countries, there should be a certain amount of time for the transportation, the customs procedures or other assets which require to register the owner conversion for real estates, transports, intellectual property rights, especially real estates with tremendous value need more time to carry out the ownership conversion into the Enterprise. Law on Enterprise 2020, though, has not specified the time at which members/founding shareholders are required to begin transporting, importing or implementing administrative procedures to make the initial capital contribution, it is generally understood that members or founding shareholders  must follow the essential procedures to convert the ownership of contributed assets from them into the Enterprise within 90 days from the date of issuance of the Enterprise Registration Certificate.

2. Abrogating the regulations on reporting changes of enterprise managers:

Under Law on Enterprise 2014, the Enterprise must make a report to the business registration division within 05 working days from the date of information changes of any of the following persons: member of the Board of Directors, member of the Inspection Committee or the Inspector, Director or General Director[2]. The fact that this provision arises unnecessary administrative procedures, causing difficulties for enterprises, especially for the joint stock company when information changes of the member of the Board of Directors must also be notified to the competent State agency. However, Law on Enterprise 2020  has officially abrogated this requirement and cut the red tape off. There’s one concern is that how the processing of manager information recorded and published on the National Business Registration Portal will be solved. Whether the Enterprise has to execute any information adjustment steps or such information is automatically removed by the business registration division. The Enterprise shall wait for the Decree guiding Law on Enterprise 2020 to determine next procedures.

3. Regulations on Legal Representative 

Both Law on Enterprise 2014 and Law on Enterprise 2020 have allowed the limited liability company and the joint stock company to be represented by one or more legal representatives. Rights, obligations and titles of the legal representatives have been regulated in the company’s Charter. However, the Law on Enterprise 2020 supplements the case that the division of rights and obligations of each legal representative is not specified in the company’s Charter, each legal representative of the company is the representative with the full authority of the Enterprise to the third party. All of them must take joint responsibility for any damage to the Enterprise as prescribed by civil laws and relevant laws[3]. Through the above provision, should the charter be silent as to such allocation of duties of each legal representative, each legal representative may be considered as “unlimited liability partner” and has joint liability for total damages, creating a mechanism that involves “members monitoring each other”. Should there is a mistake, all unlimited liability partners will use their own assets and be jointly and severally liable for losses. Besides, each legal representative should be cautious and careful with other legal representative’s decisions because the poor decisions may impact on them, even if they were neither involved in the alleged incident nor aware of it.

4. Allowing for the issuance of corporate bonds by a limited liability company [LLC]

Given that the Law on Enterprise 2014 have not stipulated that an LLC may issue corporate bonds, there seems unfamiliar to many people. With Decree No. 163/2018/ND-CP amended and supplemented by Decree No. 81/2020/ND-CP, it is acknowledged that an LLC is entitled to issue bonds when certain conditions are met[4]. Typically, the huge commotion has emerged where the Xich Lo Do Trading Service Company Limited recently announced a successful capital raise of VND 738 billion by issuing bonds, owing to the correlation of capital size, business situation compared to the money raised from bond issuance. Law on Enterprise 2020 has officially stipulated the right to issue bonds in accordance with the Law on Enterprise and other relevant laws[5]. Consequently, an LLC is permitted to issue individual bonds when satisfying the following conditions: audited financial report, full payment of principal, a guarantee of financial safety ratio and interest rate of previously offered bonds (if any), etc. In terms of the order, detailed procedures may have to wait until the Government has written guidance.

5. Additional Protections for Minority Shareholders

Law on Enterprise 2020 has added up the rights of a shareholder or a group of shareholders owning five percent or more, unless the charter stipulates a smaller percentage. These new regulations allow a shareholder or a group of shareholders to sight, consult and make an extract of the book of minutes and resolutions or decisions of the Board of Directors, mid-year and annual financial statements, reports of the Inspection Committee, and contracts and transactions which must be passed by the Board of Directors and other data except for data relating to commercial secrets or business secrets of the company[6]. Accordingly, Law on Enterprise 2020 has excluded documents relating to commercial secrets and business secrets of the company from the scope of the rights of this group of shareholders or minority shareholders. The concept of “business secrets” has been stipulated in the current Intellectual Property Law[7], but, commercial secrets definition is still not specified clearly by any legal documents. Major shareholders or the Board of Directors may, for some reasons, abuse this regulation to make any document a commercial secret if it is not accessible to a minority shareholder or group of shareholders accounting for 5% or more, due to the rule of “documents related to commercial secrets, business secrets” is said to be a too broad scope of adjustment. Removing access to information relating to commercial secrets has inadvertently narrowed the access to information of a minority shareholder or group of shareholders. What if a major group of shareholders control the board and this group does not want a minority shareholder or group of shareholders to access information, it is possible to stipulate that the entire contract adopted by the Board of Directors is labelled “commercial secrets”. However, it should be acknowledged that the addition of individual rights to the minority shareholder or group of shareholders with a ratio of 5% or more is also considered a positive new point of the Law Enterprise 2020 to protect the interests of vulnerable groups.

6. Dismissal of the Board of the Directors member of a joint stock company [JSC]

Law on Enterprise 2020 has put discharge, removal, replacement and addition of members of the Board of Directors into a separate provision[8]. Accordingly, the General Meeting of Shareholders discharges any member of the Board of Directors when such member of the Board is unqualified or submits written notice of resignation which is approved, or other cases prescribed by the company’s Charter. The issue to be clarified here is a dismissal in case of “having written notice of resignation which is approved”. In the circumstance that the company’s Charter does not regulate this content if, for some reason, a member of the Board of Directors wants to resign, but disapproved by the General Meeting of Shareholders. Will that the member of the Board of Directors be allowed to resign? By the provisions of the law, it is not due to inadequate eligibility for approval of the General Meeting of Shareholders.  

At present, Law on Enterprise 2020 has not taken effect, and we have not yet verified the actual effectiveness of the application of some of the new regulations mentioned above. Moreover, Law on Enterprise 2020 will also be guided by Government decrees, circulars of relevant ministries and the Enterprise that can clearly understand these new regulations and apply to business activities of the Enterprise.

If you have any questions or require any additional information, please contact Apolat Legal – An International Law Firm in Viet Nam.

This article is for general information only and is not a substitute for legal advice.

 

 

[1] Article 47, Article 75, Article 113 Law on Enterprise 2020

[2] Article 12 Law on Enterprise 2014

[3] Article 12 Law on Enterprise 2020

[4] Clause 3 Article 1 Decree 81/2020/ND-CP

[5] Clause 4 Article 46 and Clause 4 Article 74 Law on Enterprise 2020

[6] Point a Clause 2 Article 115 Law on Enterprise 2020

[7] Clause 23 Article 4 Law on Intellectual Property 2005

[8] Article 160 Law on Enterprise 2020