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Key legal issues regarding shareholder agreements

Key legal issues regarding shareholder agreements
Key legal issues regarding shareholder agreements

In current business practice, prior to the establishment of an enterprise, capital contributors in a limited liability company and founding shareholders in a joint-stock company (hereinafter referred to as “shareholders”) prefer to conclude a shareholder agreement (a document between shareholders that specifically stipulates issues of governance, and protection of the legitimate rights and interests of the parties to the agreement). However, shareholder agreement is a relatively new legal concept in Vietnam is not regulated by the enterprise law yet. So, what is a shareholder agreement and how does this agreement affect the establishment and operation of a company? The following article shall answer these questions.

Definition of “shareholder agreement”: There are currently no specific provisions defining this agreement in Vietnamese law and the purpose and time of concluding this agreement varies highly. Based on different practices, shareholder agreement can be understood as an agreement between the shareholders of a company on issues related to the company and/or the interests of shareholders. An agreement can be made before or after the enterprise is established, in which there are additional and/or more specific provisions to expand the interests of a group of participating shareholders or to contribute to effective corporate governance. Such an agreement is the basis for dispute resolution in the event of internal conflicts. In this article, the shareholder agreement is considered an agreement established prior to the establishment of the company and forms the basis for new shareholders to jointly establish the company.

The shareholder agreement is not prescribed in Vietnamese corporate law, but has become increasingly popular among investors because of its role and purpose. Existing in parallel with and independent of the company’s charter, the shareholder agreement, depending on the specific context and aim of the shareholders, is usually for distributing benefits among the participating shareholders to the agreement while ensuring higher confidentiality compared to the company’s charter. It also forms the basis for signing shareholders to control the transfer of shares, creating favorable conditions for shareholders to participate in voting or future operations of the company.

Contents of the shareholder agreement: A shareholder agreement addresses issues like voting rights (a right of shareholders under the Enterprise Law), the transfer of shares, corporate governance and management.

Transfer of shares: Shareholders have the right to freely transfer their shares to others, except in certain cases as prescribed by the Law on Enterprises. However, to ensure shareholders’ commitment to the company, the shareholder agreement may contain restrictions on the right to transfer shares for a certain period of time, or to avoid public disclosure. If the company is controlled by outside investors, the founding shareholders agree to give priority to existing shareholders for selling. However, the number of shares is not subject to a limit under the enterprise law. Investors should also note that such an agreement to restrict transfer is against the provisions of the enterprise law and the operating charter. Hence, its application, in practice, will not be legally feasible.

Management of the company: The shareholder agreement may contain provisions on appointing personnel to hold managerial positions in the company, and the right to decide or oppose important matters of the company such as amending and supplementing the charter, restructuring and reorganizing enterprises, disposal of properties of great values, carrying out large-scale investment activities, entering into contracts that may affect the company’s assets, etc.

Investors need to understand that the Charter acts as the “law” of the concerned enterprise. It is a legal framework recognized by law to manage and regulate the company. According to enterprise law, every company must have a charter. In contrast, the shareholder agreement is not a required document in the company’s internal documents. A shareholder agreement is signed between the founding shareholders to provide a preliminary framework for certain rights and obligations of shareholders. Since the enterprise law does not specify any provisions governing the shareholder agreement, the settlement of disputes arising from this agreement will be governed by the provisions of the law on contracts if the shareholder agreement meets the conditions of a valid contract under the provisions of the Civil Code.

In reality, an increasingly diverse business environment has led to an equally complicated operation and management of enterprises, resulting in an inevitable tendency for disputes between shareholders. To limit this undesirable consequence and to have a clear and transparent basis for shareholders to resolve disputes within the company, the need for a shareholder agreement has gradually increased. Once the enterprise law has specific provisions to govern the shareholder agreement, it is certain that the value of this agreement will strengthen and the rights of the parties to the agreement will also be enhanced. Rights and responsibilities of business managers and shareholders will also be ensured.

The article is based on applicable law at the time noted as above and may no longer be appropriate at the time the reader approaches this article as the applicable law has changed and the specific case that the reader wishes to apply. Therefore, the article is only for reference.