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Authority To Approve Contracts And Transactions In Accordance With Law On Enterprise

Authority To Approve Contracts And Transactions In Accordance With Law On Enterprise

“Issues related to the authority to approve contracts and transactions of individuals and agencies with management authority within the enterprise such as the Owner, the Members’ Council (“MC”), the Board of Directors (“BOD”), and the General Meeting of Shareholders (“GMS”), for each specific type of contract or transaction, is no longer a new area in corporate law. However, the fact that such transactions and contracts are declared invalid if they do not have the approval of the above individuals or agencies, even though they have been signed by the legal representative and stamped for certification by the enterprise’s seal, still causes confusion to managers, and to the enterprise during the course of doing business.”

In order to mitigate unwanted legal consequences that hinder enterprises in business operations, we should look at the authority of competent agencies within the enterprise to approve contracts and transactions. In this article, PLF will provide a general overview of the authority of competent agencies to approve contracts and transactions in the following common types of enterprises:

Limited liability company with two or more members

By law, the following transactions must be approved by the MC:

  • (i) The transactions related to:
  • Members, authorized representatives of members, director or general director, and legal representative of the company;
  • Related persons of the persons specified above; and
  • The manager of the parent company, the person authorized to appoint the manager of the parent company; and related people of these subjects.
  • (ii) Transactions falling into one of the following categories:

Contracts for borrowing, lending, selling assets and other contracts prescribed by the company’s charter with a value of 50% or more of the total value of assets recorded in the financial statements in the latest publication of the company or a smaller percentage or value specified in the company’s charter. It can be seen that,  Law on Enterprise 2020 is based on two aspects: (i) the subject involved in the transaction and (ii) the value and type of transaction to determine the approval authority of the Members’ Council for each transaction. This limits abuse of power by certain persons over the management of the company, and controlling the participation and execution of large-value transactions that are beyond the discretion of the representatives.

One member limited liability company

Unlike a limited liability company with two or more members, depending on the company structure and whether the owner is an organization or an individual, the MC or the company’s president, the director or general director, and the controller are competent authorities to approve transactions pertaining to any of the following:

  • (i) Company owner and related persons of the company owner;
  • (ii) Members of the Members’ Council, the President of the company, the Director or General Director, and the Controller;
  • Related persons of the person specified in Section (ii) above;
  • The managers of the company owner, the persons who have the authority to appoint such managers;
  • (v) Related persons of the persons specified in Section (iv) above.

In case a contract is signed in one of the above cases but has not been approved by the competent authority, the legal consequences is that the transaction is declared invalid in accordance with the law.

In addition to the above provisions, the enterprise law also stipulates the transactions must be subject to the approval authority of the owner of one member limited liability companies, namely contracts for borrowing, lending, selling assets and other contracts as prescribed by the company’s charter which have a value of 50% or more of the total value of assets recorded in the company’s most recent financial statement or a smaller percentage specified in the company’s charter.

Joint stock company

Stemming from the fact that a joint stock company usually has a large number of shareholders and a complex internal governance structure, the Board of Directors and the General Meeting of Shareholders will have the authority to approve the following transactions:

Transactions between the company and the following related persons:

  • (i) Shareholders, authorized representatives of shareholders being organizations owning more than 10% of the total number of ordinary shares of the company and their related persons;
  • (ii) Members of the Board of Directors, Director or General Director and their related persons;
  • Enterprises having members of the Board of Directors, Controllers, Director or General Director and other managers of the company must be declared in accordance with the provisions of Law on Enterprise Law 2020.

Transactions falling into one of the following cases:

Purchase, sale, borrowing, lending and other contracts and transactions valued at 35% or more of the total value of assets recorded in the company’s most recent financial statement.

Decision to invest or sell assets valued at 35% or more of the total value of assets recorded in the company’s most recent financial statement.

Note that depending on the specific case, the Board of Directors or the General Meeting of Shareholders will be the competent authority to approve the above mentioned transactions.

Thus, although the law recognizes the validity of the contracts and transactions signed by the legal representative and stamped by the company, in many cases, when one party is an organization or individual who has the ownership or management relationship with the enterprise, or when a transaction or contract is of large value, the requirement of approval of the owners or the competent internal body will be in place. Therefore, in order to avoid invalidation of a contract, the parties to the transaction need to check whether such contract falls under the approval authority of the owner, or the Board of members, or the General Meeting of Shareholders or not.

Time of writing: May 31, 2021

The article is based on the current law at the time of recording as above and may no longer be relevant at the time readers access this article due to changes in applicable law and specific cases. that the reader wants to apply. Therefore, the article is for reference only.

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