The protection of minority shareholders in a joint stock company

ARTICLES

The protection of minority shareholders in a joint stock company

The Joint Stock Company is a popular type of company with outstanding advantages in quickly raising large capital and flexibly transfer capital. The Joint Stock Company is attracting the attention of investors with large business scale and multi-industry in Vietnam. As a counterpart legal entity, the Joint Stock Company is a combination of people having capital and people having the business ability, the shareholders are not probable to direct business and manage the company. In this case, the manager or major shareholders may take advantage of their skills and positions to gain their benefit or cause harm to the company. To ensure sustainable development and promote investors to contribute capital to Joint Stock Companies, the protection of minority shareholders in Joint Stock Companies is an urgent issue that needs to be regulated by laws. At the same time, it is a good practice to ensure fair treatment of all shareholders, including minority and foreign shareholders, in general methods of corporate governance. This principle of “fair treatment among shareholders” is also established in the Corporate Governance Code of the Organization for Economic Cooperation and Development – OECD.

Property right group

Group of property rights includes the right to receive dividends, freely transfer shares, receive a portion of assets when the company is dissolved. Property rights are necessary rights of shareholders when they have contributed capital to the company so minority shareholders and other shareholders have the same property rights under the laws. The property rights of minority shareholders are easily violated due to their limitation in understanding the regulations and the lack of solidarity of the minority group. For example, infringement of minority shareholders’ property rights is the privilege to purchase offering shares. According to Article 115.1.c and Article 124.1 of the Law on Enterprises 2020, shareholders are entitled to prioritize purchasing new shares corresponding to the proportion of ordinary shares owned by each shareholder in the company. However, the Law on Enterprises does not define that the price and conditions to selling shares to the shareholders are the same. This is an opening for significant shareholders having many shares easily cooperate with each other.

Group of corporate governance rights: right to nominate members of the Board of Directors and the Supervisory Board

Under Article 115.5.a of the Law on Enterprises 2020, a shareholder or group of shareholders owning 10% or more of the total of ordinary shares or a smaller percentage as prescribed in the company’s charter has the right to nominate member to the Board of Directors, the Supervisory Board. This is a common right of minority shareholders and other shareholders. However, for the minority shareholder group, this is a significant right to enhance shareholder power. Regarding this provision, in case of minority shareholders gather 10% or more of the total number of ordinary shares, they shall have the right to nominate people to the Board of Directors, the Supervisory Board and know the content of the meeting of General Meeting of Shareholders (General meeting of shareholders usually approves the contents that the Board of Directors has prepared), participates in deciding and proposing opinions on important issues of the company.

Along with the general practice of protecting minority shareholders, the Law on Enterprise 2020 has removed the regulation on the period of continuous ownership of shares at least six (06) months for a shareholder or group of shareholders owning from 10% or more ordinary shares in the right to nominate member to the Board of Directors, the Supervisory Board and the right to sue the manager (Article 166 of the Law on Enterprise 2020). In addition, Article 115 of the Law on Enterprise 2020 supplements that a shareholder or group of shareholders owning from 05% or more of the total number of ordinary shares is entitled to convene a meeting of the General Meeting of Shareholders in several circumstances and request the Supervisory Board to examine issues related to company management. This new regulation has extended the rights of minority shareholders to protect their interests actively.  

Group of rights to information

According to the principles of OECD, the information including the following information (i) the Company’s financial and operating results such as financial statements, (ii) the company’s operating objectives, (iii) ownership of major shareholders, and the right to vote…. These rights support minority shareholders in knowing the company’s specific situation and take measures to check and prevent violations. Moreover, the Law on Enterprise 2020 supplements a provision to gather and update the list of people related to the company. Members of the Board of Directors must declare their benefits related to the company (Article 164 Law on Enterprise 2020). This regulation has opened for minority shareholders to control transactions between the board of directors and their stakeholders, and all transactions would be transparent and fair.   

Regarding this group of information rights, Vietnamese laws and the Law on Enterprise 2020 are quite sufficient. A few inadequacies, such as the amount of information required to provide, are limited, and most data is in the past. However, the Law on Enterprise 2020 also has significant changes related to the protection of minority shareholders. Finally, the benefit of applying this group of rights depends on the minority shareholders’ capacity and their ability to analyze and evaluate information.

Group of rights to restore benefits

This is the right to request the Court or the Arbitration to cancel a part or all of the Resolution of the General Meeting of Shareholders. Other than Law on Enterprise 2014, Law on Enterprise 2020 grants this right to a shareholder or a group of shareholders holding 5% or more of the ordinary shares to request the Court or Arbitration to review and cancel a part or all of Resolution of the General Meeting of Shareholders in case of serious violation of the procedures for convening the meeting and issuing a resolution or the content of the Resolution violates the laws or the company’s charter. According to the provisions of this right, Law on Enterprise has created an opportunity for the shareholders, especially the minority shareholders, to actively intervene in the company’s internal works and proactively protect themselves. However, in the practice of exercising this right, the minority shareholders rarely use it. Besides, the lawsuit in the arbitration can only be made when determining that the dispute falls under the commercial arbitration jurisdiction under Clause 1, Article 2 of Law on Commercial Arbitration 2010- as “Disputes between parties arise from commercial activities”. Commercial activity is the implementation of one or more commercial acts of business individuals and organizations. Therefore, the fact that the shareholders request the arbitrator to cancel the General Meeting of Shareholders’ decision being under the arbitrator’s jurisdiction or not is a matter of many different opinions. When choosing the court settlement, the determination of the request to cancel the General Meeting of Shareholders’ decision is a business or trade dispute according to procedural proceedings or just a business or trade petition. These things still are ignored.

Protecting the interests of minority shareholders is an issue that many countries are concerning. The interests of shareholders or the investors in the economy directly affect each company’s development and the entire economy. Vietnamese laws also have quite full provisions in protecting minority shareholders. However, the exercise of these rights is still ineffective and thorough in practice.

Above is a summary of the group’s rights that minority shareholders should understand to protect their legitimate rights and interests when owning shares in joint stock companies.