What is a charter? And the importance of the charter

The charter is one of the mandatory documents that must be submitted to the business registration agency when registering a business. Owners/capital contributors/shareholders are required to draw up a charter in accordance with enterprise law before establishing the company for review and approval by the business registration agency. 

1. What is a charter? 

Enterprise law does not have a specific definition of a company charter. However, the Enterprise Law specifically stipulates the basic contents of a charter, specifically including the following:

• The company’s name, addresses of the headquarters, branches and representative offices (if any); 
• The company’s business lines; 
• The charter capital; total quantity of shares, types of shares and face value of each type (for joint stock companies); 
• Full name, mailing address, nationality of each partner (for partnerships), the owner and each member (for limited liability companies) or the founding shareholders (for joint stock companies). Stakes held by each member or partner (for limited liability companies and partnerships) and values thereof. Quantity of shares, types of shares and value of each type held by founding shareholders (for joint stock companies); 
• Rights and obligations of the members or partners (for limited liability companies and partnerships) or shareholders (for joint stock companies); 
• The organizational structure; 
• Quantity, titles, rights and obligations of each of the enterprise’s legal representatives; 
• Method for ratifying the company’s decisions; rules for settlement of internal disputes; 
• Basis and method for determination of salaries and bonuses of the executives and controllers; 
• Cases in which members/shareholders may request the company to repurchase their stakes/shares (For limited liability companies/joint stock companies); 
• Rules for distribution of post-tax profits and settlement of business losses; 
• Cases of dissolution; procedures for dissolution and liquidation of the company’s assets; 
• Procedures for revising the company’s charter. 

The Charter is a constitution of a business agreed upon and established by the owners/capital partners/founding shareholders. This document is also legally valid to help owners/capital contributors/shareholders comply during operations. 

Any adjustment, amendment, or supplement to the Charter must be agreed upon by the Owner/capital contributing members/shareholders. 

2. The importance of the Charter for company management 

The Charter is a mandatory document by law when carrying out procedures to establish a company. However, many owners/capital contributors/founding shareholders underestimate the value of the Charter, especially for Vietnamese-owned enterprises and small-scale enterprises. They only use a sample charter that includes basic content and does not have any adjustments or agreements to control the company’s management and operation well. So, is the Charter really important and necessary for owners, capital partners, and founding shareholders to consider carefully before establishing a company? 

Some typical examples show the importance of the Charter that owners/capital contributors/founding shareholders have overlooked: 

2.1 Authority to pass decisions of the Company 

Pursuant to Article 59.3 of the Enterprise Law 2020 stipulates: 

“3. In case the company charter does not stipulate a different ratio, resolutions, and decisions of the Board of members shall be passed at the meeting in the following cases: 

a) Be approved by attending members who own 65% or more of the total capital contribution of all attending members, except for the case specified in Point b of this Clause;

b) Be approved by the attending members owning 75% or more of the total capital contribution of all attending members for resolutions and decisions to sell assets valued at 50% or more of the total asset value recorded in the company’s most recent financial report or a smaller ratio or value specified in the company’s charter; amend and supplement the company charter; reorganize and dissolve the company.”

In this clause, the Enterprise Law has empowered the Charter to record a different rate than the rate prescribed by the Enterprise Law. Thus, members can increase the voting rate to less than 65% or increase it to a maximum of 100% in case they want 100% consensus among members when passing an important issue. 

If the Enterprise does not specify the voting rate in the Charter but only records the decision approval rate according to the Enterprise Law, Members owning 65% or more of the capital have full authority to decide on company issues, especially in electing the chairman of the Board of members, director/general director. 

2.2 Legal Representative Authority 

Under Article 12.2 of the Enterprise Law 2020: 

“2. Limited liability companies and joint stock companies may have one or more legal representatives. The company charter specifies the number, management titles, rights, and obligations of the enterprise’s legal representative. If the company has more than one legal representative, the company charter stipulates explicitly the rights and obligations of each legal representative. Suppose the division of rights and obligations of each legal representative is not specified in the company’s charter. In that case, each legal representative of the company is a competent representative of the enterprise before the third parties. All legal representatives must be jointly responsible for damages caused to the enterprise according to the provisions of civil law and other relevant laws.” 

The rights and obligations of the legal representative are also essential and must be expressly noted. 

This content needs to be identified and specified by the owner/capital contributing member/founding shareholder so that the legal representative can efficiently perform their obligations in the company according to their authority and without ambiguity. It is also challenging to determine when there is an overlap in authority to sign contracts and agreements with third parties if the company has many legal representatives. 

2.3 The importance of the Charter when internal conflicts occur within the company and resolving disputes in Court 

As mentioned in the above section, Enterprise Law is only a general legal framework, and the law allows owners, capital contributors, and shareholders to agree and regulate the contents permitted by law. Therefore, the Charter is always considered by the parties including (disputing parties, state agencies, courts, and other relevant parties) during the dispute resolution process. 

A typical example is that on March 13, 2020, the High People’s Court in Ho Chi Minh City issued Decision No. 64/2020/DS-GDT on property claim disputes and requested that civil transactions be declared invalid4. In this case, it is recorded that the Company changed its legal representative from Ms. H to Ms. V and was granted an adjusted Enterprise Registration Certificate by the Department of Planning and Investment of Dong Nai Province, but the Company has not implemented Currently changing the Legal Representative information to Ms. H on the Company Charter. 

Ms. H represented the Company in signing the debt confirmation. When signing the debt confirmation, the Company changed its representative to Ms. V on the Enterprise Registration Certificate. However, the Court still accepted Ms. H’s status as a legal representative because Ms. H is still recognized as the legal representative in the Charter. Therefore, the Court determined that the Debt Confirmation is valid and upheld the Civil Appeal Judgment No. 172/2019/DS-PT dated July 23, 2019, of the People’s Court of Binh Duong Province (no accept the request to declare civil transactions invalid for the document “debt confirmation). 

The above judgment shows that the charter is a very important and legally valid document applied when a dispute occurs. Owners/capital contributors/shareholders should update and adjust the charter to fully include the contents at the time of changing the information on the Enterprise Registration Certificate, as well as consider the rights and obligations of the capital contributors/shareholders, the approval rate of the company decisions to balance the interests of all parties and limit disputes. 

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