“The Law on Enterprisese 2020, taking effect from 01 January 2021, has brought many changes to the business and internal management of enterprises. Following up, the Decree No. 01/2021/ND-CP on enterprise registration was issued to instruct the procedures of enterprise registration.“
Compared to the ‘Law on Enterprises 2014’, the ‘Law on Enterprises 2020’ has changed and put several matters in the internal area of enterprises so that they can handle such matters by themselves. Among those are the regulations on the process of private share placement in joint-stock company, which previously required notifying to business registration offices everytime joint-stock companies wanted to have private share placement to find new shareholders for the companies.
This article will focus on the differences of the ‘Law on Enterprises 2020’ from the ‘Law on Enterprises 2014.’
To clearly identify the differences, this article will summarize the process of issuing private shares under the ‘Law on Enterprises 2014’:
Step 1: Implementing a General Meeting of Shareholders and deciding on private share placement.
Step 2: Within 05 working days from the date of issuance of the decision on private share placement, the company must notify the business registration office about it.
Step 3: Within 05 working days from the submission date of the notification in ‘Step 2’, if no objection is received from the business registration office, the company can sell the private share to individuals and organizations registering to purchase shares.
Step 4: Within 10 days after the placement is completed, the company shall register to change its charter capital at the business registration office.
In summary, according to the Law on Enterprises 2014, joint-stock companies shall initially perform the notification procedure on private share placement to the business registration offices. After that, it will be allowable for them to sell shares to individual and organizations demanding purchasing shares. Besides, after completing the placement, they must perform the registration procedure to change their charter capital.
Conditions for private share placement:
Different from the regulations of the ‘Law on Enterprises 2014’, the ‘Law on Enterprises 2020’ has provided certain conditions for joint-stock companies which want to have private share placement. These conditions are particularly that:
It can be seen that the ‘Enterprise Law 2020’ has introduced the conditions for the communication method when implementing placements, as well as the limit on the number and the object of the private share placement. The above provisions have partly clarified the scope of placement for a joint stock company not being a public company, requiring the company to determine in advance the specific object of the placement.
The ‘Law on Enterprises 2020’ requires joint-stock companies not being public companies to perform their private share placements in accordance with the following provisions:
Step 1: The company decides the plan for private share placement.
Step 2: Shareholders of the company perform their priority right for purchasing shares (except in the case of merger or consolidation of the company) in accordance with the provisions on Share offering to existing shareholders (Article 124.2 of the Law on Enterprises 2020). Accordingly, at least 15 days before the expiration of the share purchase registration deadline, the company must notify shareholders in writing by a method to ensure the notifications reach their contact addresses stated in the register of shareholders.
Step 3: If shareholders and transferees of priority rights for subscription do not register to subscribe for all shares, the remaining shares may be offered for sale to shareholders of the company and to other persons with conditions not more favourable than the conditions offered to shareholders, except where otherwise approved by the General Meeting of Shareholders.
Step 4: Within 10 days after the completion of placement, the company shall register to change its charter capital at the business registration office.
Thus, the process of private share placement compared to the ‘Law on Enterprises 2014’ has been simplified in terms of the administrative procedures at the business registration office; specifically, the procedure for notifying the private share placement ( Step 2 and Step 3 according to the process of the ‘Enterprise Law 2014’). According to current regulations, a joint-stock company only needs to carry out procedures for changing charter capital at the business registration office when the sale of shares has been completed.
Regarding the internal process in a joint-stock company while performing private share placement, there are many differences. Instead of just the General Meeting of Shareholders making a decision on private share placement as before, the ‘Law on Enterprises 2020’ has added priority to the existing shareholders of a joint-stock company to buy shares before offering them to other individuals or organizations. The actual number of private shares to be offered is the number of shares that have not been registered for purchase by the company’s existing shareholders at a selling price not more favorable than the offering price to the shareholders.
As mentioned above, the ‘Law on Enterprises 2020’ has reduced a part of administrative procedures when joint-stock companies perform private share placement. In addition, the provision on the priority right for existing shareholders to buy shares before offering such shares to other individuals/organizations is also a way to increase the stability of a joint-stock company other than a public company. When the existing shareholders have the opportunity to increase their influence in the company as well as limit the number of members contributing capital to the company, prevents the difficulty in reaching consensus in operating the company, especially in the early stage of company establishment.
However, with the ‘Law on Enterprises 2020’ setting out an internal process for private share placement, investors and joint-stock companies need to pay attention to and follow the prescribed process to avoid legal risks or internal conflicts, especially with existing shareholders.
Written time: 14 April 2021.