The dismissal of a member of the board of management resulting in the changes of the company charter and key considerations

In the course of running a business, the Charter serves as a crucial legal framework establishing many fundamentals for the enterprise to operate and for its shareholders to manage the business, including the establishment of voting mechanisms for shareholders to decide important issues of the enterprise. When it comes to sensitive issues, such as appointments, dismissals, or replacements of enterprise managers, the voting ratio becomes a key factor. In the case to be discussed in this article, the vote for dismissal of an enterprise manager was taken place in an enterprise in the form of a joint-stock company and conducted by its the General Meeting of Shareholders (to be specific, voting to dismiss a member of the Board of Management). However, this decision would also cause the need to modify and supplement the content of the existing Charter, which, according to the Charter itself, such modification and supplementation of the Charter requires a voting ratio for approval higher than that required for the dismissal of a Board of Management member. 

This article aims to provide readers with an additional legal perspective and to propose solutions to issues that arises in case of voting to changes in the content of the Charter, especially in the context of significant and sensitive decisions such as replacement of enterprise managers.  

The dismissal of a member of the board of management

1. Voting Majority in accordance with the laws

Currently, for joint-stock companies, the Enterprise Law stipulates two main voting majority ratios for a resolution to be passed: 

(i) if it is agreed by a number of shareholders representing from 65% or more of the total voting shares of shareholders who cast in the shareholders meeting, for certain reserved matters defined by the Enterprise Law and, if necessary, specified in the Charter, such as: 

– Classes of shares and the total number of shares of each class; 

– Change of lines of business and business sectors;  

– Change of the organizational and managerial structure of the company; 

– Investment project or sale of assets valued at thirty five (35) or more per cent of the total value of assets recorded in the most recent financial statements of the company, except where the charter of the company stipulates some other percentage or value; 

– Re-organization or dissolution of the company; 

– Other matters as stipulated in the charter of the company. 

(“Reserved Matters”) 

(ii) if it is agreed by a number of shareholders representing from 50% or more of the total voting shares of shareholders who cast in the shareholders meeting, for issues which are not Reserved Matters.  

Please note that: Both voting majority ratios above can be modified to another specific higher ratio stipulated in the Charter, and these voting majority ratios are also not applicable to special cases that necessitate a different voting mechanism as defined by the Enterprise Law, such as the election of members to the Board of Directors and the Supervisory Board. 

Accordingly, for the dismissal of members of the BOM, the Enterprise Law does not set any specific voting ratio but allows enterprises to decide on this issue. Specifically, the Enterprise Law allows enterprises to pick up the issues that are considered important to them, requiring a voting majority ratio of at least 65% or more to pass on those issues (Reserved Matters). In cases where it is not considered as a Reserved Matter to the enterprise, the dismissal of members of the BOM will be considered a normal matter and only requires a voting majority ratio of 50% or more to be passed on. 

2. The occurence of legal problems

In practice, based on the above regulations, some enterprises have stipulated in their Charters that “amendments and supplements of the content of the Charter” shall be considered a Reserved Matter that requires a specific voting majority ratio to be passed. Accordingly, this has caused some conflicts in the way of applying this regulation when it comes to voting issues that result in a change to the content of the Charter. 

To make it easier to understand, we can take the dismissal of a BOM member as an example. At first, please bear in mind that the dismissal of a BOM member does not automatically come with a change in the content of the Charter. For the most part, it would need to change the content of the Charter when it comes to the cases where the Charter recognizes the personal information of the seniors/enterprise managers. In such cases, the dismissal of a BOM member will trigger a need to amend and supplement the content of the Charter due to the recordal of the information of the dismissed BOM member.  

As a result, it leads to a contradiction in the way of applying this regulation as to whether or not the dismissal of a BOM member that changes the content of the Charter is considered as the case of “amending and supplementing the content of the Charter” and shall be treated as Reserved Matters, requiring a voting majority ratio of 65% or more. 

3. Practice of resolving the above issue in court

In 2022, the High People’s Court of Ho Chi Minh City issued appeal decision No. 716/2022/QDPT-KTDM, which is partially related to this issue. Accordingly, the context of the Case is summarized as follows: Mr. T is both a shareholder (accounting for 48.94% of the Charter Capital) and a member of the BOM of the TBD Company. In 2021, the TBD Company holds an annual general meeting of shareholders (GMS), which, amongst others, includes the following 02 issues:  

(i) Issue 01: Dismissing Mr. T from a BOM member; and 

(ii) Issue 02: Amending the content of the Charter in terms of the dismissal in Issue 01. 

According to the Charter of the TBD Company and the Enterprise Law, the condition for Issue 01 to be passed is the approval from a number of shareholders representing at least 51% of the total voting shares of all shareholders participating in the GMS meeting. As for Issue 02, the condition would be the approval from a number of shareholders representing at least 65% of the total voting shares of all shareholders participating in the GMS meeting. According to the GMS meeting minutes, the meeting was attended by all shareholders of the Company (accounting for 100% of the capital charter), and the voting results on Issue 1 and Issue 2 record the approval from 51% of the total voting shares of all the shareholders. Accordingly, the TBD Company issued a GMS resolution to recognize the passing of the dismissal of Mr. T from a BOM member (not including the content of the amendment and supplement of the Charter). 

Dissatisfied with the above GMS resolution, Mr. T decided to initiate a lawsuit against the TBD Company to request the cancellation of the GMS resolution. Upon careful consideration, the High People’s Court of Ho Chi Minh City upheld the First Instance Judgement, rejecting Mr. T’s request and reaffirming that the issuance procedure and the content of GMS resolution are valid and in line with the Company’s Charter and the Enterprise Law.  

4. Comments

From the above judgement, it seems that the Court has separated two issues clearly: (i) Voting on the dismissal of a BOM member (which requires 51% approval, as requested by the Charter and the Enterprise Law) and (ii) Voting on the amendment of the Charter to be tailored to the dismissal (which requires 65% approval, as requested by the Charter). Accordingly, the Court may have considered that “voting to amend and supplement the Charter” is also considered a seperated issue to be voted on like any other issue and shall not apply the voting majority ratio [of the amendment and supplement of the Charter] to pass any issues that may change the content of the Charter. In other words, the Court may not consider that voting on an issue that triggers the need to amend or supplement the the Charter content shall be treated as the voting on “amending and supplementing the Charter”.  

Currently, the issue of amending and supplementing the Charter content remains a controversial topic that, up to now, still no clear answer has been made officially from competent authorities. However, I personally agree with the judgment of the Court due to the facts that (i) the dismissal of a BOM member shall be effective under a GMS resolution, and (ii) both the Charter and the Enterprise Law do not require such dismissal to be recorded into the Charter to be effective. Accordingly, since the amendment and supplement of the Charter content is not a condition for the dismissal of a BOM member to be effective under the laws and the Charter, then the dismissal of a BOM member also is not necessary to amend and supplement the Charter content to be effective; thus it may not be considered not falling to cases subject to the amendment and supplement of the Charter.  

On the other hands, I personally believe that the amendment and supplement of the Charter content shall not be treated as an issue to be voted. Specifically, the Charter shall just be treated as a constituent document with the ultimate purpose of recording the fundamentals of the enterprise agreed by the enterprise owners (in this case, the GMS). Accordingly, the amendment and supplement of the Charter content will be an inevitable consequence in the event that the GMS passes an issue recorded in the content of the Charter. Moreover, setting the voting majority ratio to the amendment and supplement of the Charter content seems to be unreasonable and causes unnecessary conflicts because, in essence, voting to “amend and supplement the Charter content” is actually a repeat of the same voting to the underlying issue that has been voted by the GMS before. Therefore, in my opinion, the amendment and supplement of the Charter should be treated as a formality issue arising from the decision of the GMS as the same as the GMS meeting minutes and shall not be treated as a substantive issue of the enterprise to be voted.  

5. Key takeaways

In terms of the above judgment, although the Court perhaps did not try to address the matter of amending and supplementing the Charter content to ensure the scope of legal proceedings (i.e., out of the scope of Mr.T’s lawsuit), still below may be some key takeaways for enterprises to avoid the above conflicts when dismissing a BOM member:

  • Enterprises (Joint Stock Companies) should not stipulate into the Charter that the amendments and supplements of the Charter content an issue to be voted or is treated as a Reserved Matter requiring a voting majority ratio of 65% or more.
  • In case the Enterprise (Joint Stock Companies) has recorded the amendment and supplement of the Charter content as an issue to be voted with the voting majority ratio as a Reserved Matter like the case discussed in this Article, then it is recommended that you should try your best to meet the voting rate of a Reserved Matter to avoid any conflicts first. However, it is still worth noting that voting on a specific issue that triggers the need to amend or supplement the Charter content may not be automatically considered as nor be required to meet the same voting rate as voting on “amending and supplementing the Charter” to be effective accordingly.
  • Moreover, as explained above, setting a specific voting majority ratio to the amendment and supplement of the Charter content may cause unnecessary conflicts. Therefore, it is also recommended that the voting on the amendment and supplement of the Charter content should be removed from the Charter as soon as possible.

Bonus: For enterprises in the form of LLC, since the Enterprise Law stipulates that “amending and supplementing the Charter” is an issue to be voted on and only passed if it is approved by a number of equity members representing at least 75% or more of the total charter capital of the enterprises, thus you cannot remove this content from the Charter. However, the advice and rationale in this case is still the same as the JSC case above.  

 

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.

Share: share facebook share twitter share linkedin share instagram

Find out how we can help your business

SEND AN ENQUIRY

    Send Contact
    Call Us
    Zalo
    This site is registered on wpml.org as a development site.