“The joint-stock company is the most complex in terms of enterprise regulations. Its management structure has many departments and positions and thus, requires the laws to prescribe clearly the functions and duties of each department and position to avoid overlapping while operating the business. This article will explain the role of the inspection committee, one of the management departments, in inspecting other departments of the joint-stock company. Generally, it does not receive enough attention, especially by a newly established joint-stock company. However, it is quite essential in the inspection of a joint-stock company.”
The Law on Enterprises does not clearly stipulate whether an inspection committee is required or not. However, to understand when exactly the establishment of an inspection committee is required, let us analyze the regulations on the organizational structure of a joint-stock company for clarification. Clause 1, Article 134 of the Law on Enterprises 2020 provides:
“Article 137. Organizational and managerial structure of shareholding companies
(a) A General Meeting of Shareholders, a Board of Management, an Inspection Committee and a director or general director. If a shareholding company has less than eleven (11) shareholders and the shareholders being organizations together own less than fifty (50) per cent of the total shares of the company, it is not required to have an Inspection Committee;
(b) A General Meeting of Shareholders, a Board of Management and a director or general director. In this case, at least twenty (20) per cent of the total members of the Board of Management must be independent members and there must be an auditing committee under the Board of Management. The organizational structure, functions and duties of the auditing committee shall be regulated in the company charter or in the operational rules of such auditing committee issued by the Board of Management.”
According to the above regulations, the organizational structure of a joint-stock company can operate in two models. However, according to Point b, to be able to choose this management model, the Board of Management must have at least 20% of its members who are independent members and must establish an Auditing Committee directly under the Board of Management. If the above conditions are not satisfied, the joint-stock company will have to choose the management model specified in Point a, which includes the Inspection Committee.
In addition, considering the management model according to Point a, the Law on Enterprises 2020 makes an exception that it is not required to establish an Inspection Committee if the joint-stock company has less than 11 shareholders and the institutional shareholders own less than 50% of the company shares.
Thus, applying both the above provisions, a joint-stock company is required to have an inspection committee if one of the following conditions is not satisfied:
The rights and obligations of the Inspection Committee in accordance with the Law on Enterprises 2020 include:
It can be seen that the role and intervention of the Inspection Committee in the administration and management of the company is quite comprehensive. With the ability to monitor and report violations of departments and positions such as the Board of Management, or the Director or General Director, the Inspection Committee is an incredibly important committee that helps in ensuring that the General Meeting of Shareholders takes care of the effective management of the company and limits the abuse of rights of departments and positions that affect the company’s business activities.
With the main function of deeply intervening in the company’s business, the Law on Enterprises sets standards for the members of the Inspection Committee to ensure that the Inspectors have a certain level of qualification to participate in inspection activities. Accordingly, they must be trained in one of the following fields: economics, finance, accounting, auditing, law, business management or in a specialized faculty appropriate for the business activities of the company. Further, the Law on Enterprises 2020 does not restrict the company charter to stipulate other standards. In addition, the head of the Inspection Committee must have a university or higher graduation degree in one of the following fields: economics, finance, accounting, auditing, law, business management or in a specialized faculty relating to the business activities of the company, except in a case where the charter of the company provides for other higher standards.
It should be further noted that, in the process of participating in supervision, the Inspection Committee shall not be influenced by any departments or positions including the Board of Management. The role of the Inspection Committee is independent and within the company, it is only responsible to the General Meeting of Shareholders.
As analyzed above, the Inspection Committee is one of the important parts in the management structure and operation of the joint-stock company and will help the General Meeting of Shareholders to supervise the departments and positions in the joint-stock company operating in accordance with their functions.
Besides, the selection of qualified individuals to participate in the management of the company as a part of the inspection committee is also one of the key factors to achieve the best efficiency.
With the choice of establishing a joint-stock company at hand, investors need to carefully study the cases where it is necessary to establish an Inspection Committee to avoid violation of the provisions of the enterprise laws, especially in the case of foreign organizations contributing capital to the company.
The article is based on the current laws at the time of drafting as noted above and may no longer be appropriate at the time the reader accesses this article due to changes in applicable law and specific cases that the reader wants to apply. Thus, the article is for informational reference only.