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Enterprise law 2014 – Expansion of the free business right in an equal legal environment

The article was written by Lawyer Tran Thanh Tung – Partner of Phuoc & Partners is published in Saigon Economic Times dated 7/12/2014.

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Enterprise Law (“EL”) 2014 adopted by the National Assembly on 26 November 2014 replaces EL 2005. Importantly, EL 2014 finally recognises the right to freedom of business – granting more powerful autonomy to enterprises and with the State ceding their leading role in the market to that of an investor in a common playing field.

With this radical, “enterprise-friendly” shift in direction, we consider EL 2014 to be a real legal innovation, creating a more transparent environment for the growth of enterprises in Vietnam. The following article points out the main contents of EL 2014 which profoundly and directly affects enterprises in Vietnam.

The freedom of business: From Constitution to EL and Investment Law (IL) 2014

To fully understand the spirit of innovation in EL and IL 2014, we need to read them in company with the Constitution 2013.

Constitution 2013 recognizes that the right to freedom of business is a human right and is one of the fundamental rights of citizens. Moreover, whilst the provisions of the Constitution 1992 were unspecific; that a citizen has the right to freedom of business in accordance with the law; Article 33 of the Constitution states that “everyone has the right to freedom of business in industries that the law does not prohibit”. This provision contains two important points: (i) everyone has the right to freedom of business; and (ii) the law prohibits only that which is outside the bounds of such freedom. In other words, if the State wants to ban something, it must be expressed clearly.

This is reflected in EL and IL 2014, particularly in the regulation on prohibited industries and the range of industries covered by a certificate of business registration (“CBR”).

Banned Industries: The ban has been clearly stated

What a business can do and whether the law prohibits that business is always the first question in any business plan. Current EL does not explicitly state the banned industries. Instead, Article 30 in IL 2005 prohibits investments in fields harmful to (i) national defence, national security and public interest; (ii) historical monuments, culture, ethics, habits and customs of Vietnam; (ii) the people’s health, natural resources and environment; and (iv) hazardous waste treatment projects taken from outside to Vietnam and production of toxic chemicals or use of toxic agents. The problem is in the difficulty in determining the scope of the prohibited investment field, so, in essence, the prohibition limit cannot be determined in accordance with Article 30.

However, this has been completely overhauled in EL 2014. In Article 7 on the rights of enterprises, the Law states expressly that enterprises are “allowed to do business freely in industries that are not prohibited by the Law.” So what does the Law prohibit? The Law prohibits business investment in the following 06 industries: drugs; chemicals and prohibited minerals; dealing in plants and animals that are wild, endangered or rare and are naturally derived; prostitution; the buying and selling of people, human tissues and organs; and business activities relating to human asexual reproduction. Appendixes 1 and 2 of IL clarifies these prohibitions, particularly detailing the drugs, animals, plants and minerals that are prohibited in business investment. In the legislative history of Vietnam, this is perhaps the first time a legal document has been accompanied with appendixes providing meticulous detail as with the IL. The ultimate legislative goal should be the clear articulation of what enterprises are allowed to do, what they are not allowed to do and what are the limits to the free business right.

Business registration: No need to specify the business line

Enterprises are obliged to “conduct business activities in accordance with the business lines as stated in the Business Registration Certificate (BRC)”, which in the minds of many people us an undue restraint on businesses; connecting enterprises to industries the State has devised, listed and allowed enterprises to register. BRC trades are thence pre-determined and as such restricts an enterprise’s right to business activities as they are, when analysed in more detail, granted only by the State.

However, once the new business limitation legislation is enforced, the listing of business lines aimed at determining the enterprise’s right to business activities will become meaningless.

In the 2014 Law on Enterprises, the business line is no longer a BRC. From now on, there will be no need for the 2-3 page long business lines of the BRC but also the supplementation and amendment of registration when enterprises want to step into a new business area. The BRC shall now only contain the business name and business registration code, head office address, information on their legal representative and company members and charter capital.

From a management perspective, enterprises will no longer have to worry about whether their undertakings are in line with their registered business lines or their signed/to-be-signed contracts, which may be subject to a lawsuit from their partners, will be declared as invalid by the court on the grounds that its contents are not within the registered business lines.

For entrepreneurs, questions such as “what can I do?” have been replaced with greater certainty and peace of mind with the knowledge that all their business activities are legal as long as they are not in clear violation of the law.

The State investor as a player in a level playing field under the same rules

If expanded corporate freedom and narrowing of the State’s management has been realised, the 2014 Law on Enterprises may also be viewed as the State conceding to the market. The State no longer has the right to grant business lines to enterprises, dictating what they may or may not do; enterprises are not required by the State to have a seal. Like other investors and entrepreneurs, the State under the 2014 Law on Enterprises is another player in a level playing field under the same rules.

Under Article 88, state-owned enterprises where the State holds 100% of the charter capital shall be established in the form of a one-member limited liability company and comply with the Law on Enterprises relating to one-member limited liability companies, except for some specific provisions on appointment, capital management and information disclosure. When the State does not hold 100% of the company’s charter capital, such a company shall be established and operated in form of a two-member limited liability or joint stock company, and then the State shall also be a member or shareholders like other members or shareholders and comply with the charter company and the Law on Enterprises like any investor.

The stamp: made redundant in a digital environment

The stamp has been likened to that of a “gem stamp”; enterprise documents were not recognized and respected in the absence of a red stamp. Those who hold the stamp can have full control of the company, even stop all its operations.

However, in the current business environment where transactions are done through mouse clicks, the stamp role has gradually diminished. The 2014 Law on Enterprises has officially removed its role symbolizing a company’s power. Enterprises, at their own discretion, may now decide on the form, quantity and content of the stamp as well as its management, use and maintenance.

With this regulation, police agencies shall no longer have the right to come to an enterprise to check its stamp use and enterprises no longer have to waste money going to and from police offices for stamp engravings or to pay penalties due to stamp loss. The image of a corporate secretary diligently and painstakingly stamping the towering stacks of documents will fade away. Much time and cost can be saved by the elimination of the stamp, at least from the perspective of enterprises.

Legal representatives: sorry, you are not a unique person

In terms of corporate governance, the 2014 Law on Enterprises has fundamentally changed, including changes to the nature of an enterprise’s legal representative. The novel Law allows limited liability and joint stock companies to have more than one legal representative. The number, management titles, rights, duties and obligations of the enterprise’s legal representatives shall be defined in the Company Charter.

This change will greatly influence enterprise organizational structure and corporate governance, but in the direction of modern corporate governance. Each director – the legal representative of the company – shall then have the right to represent the company under their given authority. And once he acts in line with his competence, all his actions shall bind the corporate responsibility.

In order to adapt to the new regulations, enterprises shall clearly define the rights, duties and obligations of each legal representative; at the same time, partners will have to conduct due diligence over the status and authority of the legal representatives before deciding to do business therewith.

Condition on summoning a meeting and issuing a decision in the company – reducing the proportion of presence and voting

For conditions on the Members Council’s Meeting in a two-member limited liability company and the General Meeting of Shareholders in a joint stock company, the new Law on Enterprises looks to lower the conditions on the presence proportion and the decision making proportion both meeting.

For a two-member limited liability company, the Members Council’s Meeting shall be conducted when the number of participating members owning at least 65% of the charter capital is present; this percentage is 75% under the current Law on Enterprises. The adoption proportion of a Members Council’s decision is still at least 65% of the total contributed capital of the attending members, or at least 75% for important decisions such as selling assets of great value, amending and supplementing the Charter and the reorganization or dissolution of the company. However, in cases where the company gathers any written opinions, the decision can only be adopted upon acceptance by the number of members holding at least 65% of the charter capital rather than 75%, according to the current law. This provision seems to encourage decision adoption in writing by the Members Council.

For joint stock companies, these changes are deeper and closer to the practice of international joint stock companies. The quorum proportion for the first meeting of the General Assembly of Shareholders is just over half (51% of all the voting shares) compared with 65% as per the current law. If the first-time meeting cannot take place, the second meeting shall be valid with the presence of 33% of all the voting shares. Minority shareholders may be more worried as compared with the current law; the enterprise needs at least 51% of all the voting shares so that its second meeting is valid. In addition, the proportion of votes to adopt the decision of the General Meeting of Shareholders is also lowered respectively (just 51% instead of 65% as at present); this ratio drops significantly while voting in writing is 51% compared to 75% currently.

These changes will force members and shareholders to take much more care of and have greater participation in their company’s activities, rather than passively authorising large shareholders to make decisions.

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Joint stock company – More options of organization form

Under the current Law on Enterprises, the organization structure of a joint stock company includes the General Meeting of Shareholders, the Board of Directors and Director (General Director). In cases where a company has over eleven individuals or institutional shareholders hold over 50% of all its shares there shall be a Control Committee.

According the 2014 Law on Enterprises, a joint stock company may have two forms: (i) General Meeting of Shareholders, Board of Directors, Control Committee and Director and General Director (for a joint stock company with less than eleven shareholders as institutions holding less than 50% of its total shares, such a company is not required to have a Control Committee); and (ii) General Meeting of Shareholders, Board of Directors, and Director, General Director (in this case at least 20% of the members of the Board of Directors shall be independent members and such a company is required to have an internal audit committee under the Board of Directors). In addition to giving more options for enterprises to choose an appropriate form, the 2014 Law on Enterprises officially acknowledges the role of the independent members in the Board of Directors. This is perhaps to balance the decisions made by large shareholders and provide greater transparency in corporate operations to protect smaller shareholders.

Still filled with worries

As analyzed above, it can be said that the 2014 Law on Enterprises is more open and friendly toward enterprises.

As usual, the Law on Enterprises LDN will be guided for implementation by the relevant authorities, and the question arises as to how much of the reformative spirit of the 2014 Law on Enterprises will be followed by the written guidelines. The 2014 Law on Enterprises still has several legal grey areas requiring further reform and the constraints such as the requirement that enterprise applicants submit a criminal record to the business registration agency, the fact that enterprises may be entitled to sue the business registration agency due to refusal of the proposed name of their enterprises, the provision on stamp details and others. However, we still believe the 2014 Law on Enterprises will improve entrepreneurship and create a legal framework to protect the rights of free commerce formally announced in the 2013 Constitution.

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