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Articles

date: 11-12-2014 11:03:43

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


 
 

The article written by Lawyer Tran Thanh Tung - Partner of Phuoc & Partners is published on Saigon Economic Times dated 4/12/2014.

For more information about Lawyer Tung, please click here

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Enterprise Law (EL) 2014 adopted by the National Assembly on 26 November 2014 replaces EL 2005. The spirit exudes from EL 2014 is the recognition and respect for the right to freedom of business, granting more powerful autonomy to enterprises, and the State cedes the leading role to the market and moves back as an investor in the common playing field
With the radical change in the direction of friendly to enterprises, we may deem that EL 2014 is a legal Innovation, creating a transparent environment for the growth of enterprises in Vietnam. The following article points to the main content of EL 2014 affecting profoundly and directly to enterprises of Vietnam.
 
The freedom of business: From Constitution to EL and Investment Law (IL) 2014
 
We are not be able to fully understand the spirit of innovation in EL and IL 2014 if we do not read them in company with the Constitution 2013.
 
Constitution 2013 recognizes the right to freedom of business is a human right and is one of the fundamental rights of citizens. Moreover, not as unspecific as provisions of the Constitution 1992 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) Outside of the limit of the freedom is what the law prohibits, in other words, if the State wants to ban something, it must be expressed clearly.
 
This spirit covers from A to Z and is clearly reflected in EL and IL 2014, particularly in the regulation of prohibited industries and range of industries in certificate of business registration ("CBR").
 
Banned Industries: The ban has been clearly stated
 
What business to do and whether the law prohibits than business is always the first question in any business plan. Current EL does not mention banned industries. Instead, Article 30 in IL 2005 prohibits the investment in the field harmful to (i) national defense, national security, public interest, (ii) historical monument, culture, ethics, habits and customs of Vietnam, (ii) the people's health, natural resources, environment; and (iv) hazardous waste treatment project taken from outside to Vietnam and production of toxic chemicals or use of toxic agents are prohibited. The problem is that it is not easy to determine the scope of the prohibited investment field, so, in essence, the prohibition limit cannot be determined in accordance with Article 30
 
However, this is completely changed 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[1] industries: drug business; chemical and prohibited mineral business; business of plants and animals that are wild, endangered, rare and are derived from natural; prostitution business; buy and sell people, human tissues and organs, and the business activities relating to human asexual reproduction. To clarify this prohibition limit, in Appendixes 1 and 2 of IL drugs, the animals, plants and minerals that are prohibited in business investment are listed in detail. In the legislative history of Vietnam, perhaps this is the first time a legal document accompanied with the appendixes providing in detail and meticulous as the IL issued this time. The ultimate goal is a clear statement that what enterprises are allowed to do, what they are not allowed to do and where the limit of free business right is.
 
Business registration: No need specifying the business line
 
Enterprises are obliged to "conduct business activities in accordance with the business lines as stated in the Business Registration Certificate (BRC)"[2], which has been perceived as a prejudice in the minds of many people. This ties the enterprises to the industries the State has devised, listed and allowed enterprises to register. So BRC trades are determined in the direction of restricting the enterprise’s right to business activities which, in the ultimate analysis, are granted by the State.
 
However, once the business limitation has been clarified, 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. And the BRC shall contain 4 contents such as business name and business registration code, head office address, information on legal representative and company members and charter capital. From now on, there shall be the end of not just the 2-3 page long business lines of the BRC but also the registration for their supplementation and amendment therein when you want to step into any new business area.
 
From the perspective of management, enterprises  will no longer have to worry about whether their underway work is in line with their registered business lines or their signed/to-be- signed contracts are subjected to a lawsuit from their partners and declared as invalid by the court on the grounds that the work content does not stay within the registered business lines. For entrepreneurs, this is a critical release of thinking rather than groping for an answer to the question: What can I do?. They will stay in a peace of mind with their awareness 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 game rules
 
If realized from the perspective that the more expanded the corporate freedom the more narrowed the State management, the 2014 Law on Enterprises may be viewed as the State‘s concession to the market. The State no longer has the right to grant business lines to enterprise, allow them to do or not do anything. Enterprises are not required by the State to have a seal. Like other investors and entrepreneurs, the State of the 2014 Law on Enterprises shows up as a player in a level playing field under the same game rules.  
Under Article 88, the state-owned enterprises where the State holds 100% of the charter capital shall be established in form of the one-member limited liability company and comply with the Law on Enterprises related to the one-member limited liability company, 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 company shall be established and operated in form of the two-member limited liability or joint stock company, and then the State shall also be a member or shareholder like other members or shareholders and comply with the charter company and the  Law on Enterprises like any investor.
 
The stamp: an essential unleashing in the digital envirionment
 
The stamp has ever been likened as the "gem stamp" in the enterprise, not any document is recognized and respected in the absence of a red stamp thereon. Who holds the stamp can have full control of the company, even stop all its operations.
 
However, in the business environment where transactions are done through mouse clicks, the stamp gradually loses its role. The 2014 Law on Enterprises officially wiped its role of symbolizing the company’s power. Enterprises, at their own discretion, now decide on the form, quantity and content of the stamp as well as its management, use and maintenance[3].
 
With this regulation, the police agencies shall no longer have the right to come to an enterprise to check its stamp use or enterprises do not cost time and money to go to and from the police office for any stamp engraving or penalties due to stamp loss. And the image of a corporate secretary diligently and painstakingly stamping on the towering stacks of documents will fade away over time.  Much time and costs could be saved from the elimination of this stamp, at least from the perspective of the enterprise.
 
Legal representative: Sorry, you are not the unique person
 
The 2014 Law on Enterprises has pretty much changed in terms of corporate governance, including changes in the 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[4].
 
This change greatly influence the organizational structure and corporate governance, but in the direction of modern corporate governance. Each director - legal representative of the company – shall then have the right to represent the company under his 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 the two-member limited liability company and the  General Meeting of Shareholders in the joint stock company, the Law on Enterprises this time tends to lower the conditions of the presence proportion and the decision making proportion in the Members Council’s Meeting or the General Meeting of Shareholders.
 
For the 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[5] while this percentage is 75% under the current Law on Enterprises[6]. The adoption proportion of the 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, reorganization or dissolution of the company[7]. However, in case where the company gathers any written opinion, the decision can only be adopted upon acceptance by the number of members holding at least 65% of the charter capital rather than 75%[8] according to the current law. This provision seems to encourage the decision adoption in writing by the Members Council.
 
For joint stock companies, these changes are deeper and closer to the practice of the international joint stock companies. The quorum proportion for the first meeting of the General Assembly of Shareholders is just over half (51% of 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 in the presence of 33% of of all the voting shares. Minority shareholders could be more worried because compared with the current law, the enterprise needs at least 51% of all the voting shares so that its second meeting new 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), especially 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 more participation in the company activities invested by them, rather than passively authorize  large shareholders to make decisions.
 
Joint stock company – More options for organization form
 
Under the current Law on Enterprises, the organization structure of joint stock company including the General Meeting of Shareholders, the Board of Directors and Director (General Director). In case where a company has over eleven  individual or institutional shareholders holding 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[9]: (i) General Meeting of Shareholders, Board of Directors, Control Committee and Director, General Director (in case of such joint stock company with less than eleven shareholders as institutions holding less than 50% of its total shares, such 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 company is required to have an internal audit committee under the Board of Directors). In addition to giving more options for the enterprise to choose the appropriate form, the 2014 Law on Enterprises officially acknowledges the role of the independent members in the Board of Directors. This might aim to balance the decision by large shareholders and the transparency in the corporate operations to protect small shareholders.
 
 Still filled with worries
 
As analyzed above, it can be said that the 2014 Law on Enterprises is open and friendly with the enterprise.
 
As usual, the Law on Enterprises LDN will be guided for implementation by the relevant authorities, and the question arises as to how the reformative spirit of the 2014 Law on Enterprises will be followed by the written guidelines. The 2014 Law on Enterprises still has legal gray areas for both the reform and the constraints such as the requirement that the enterprise applicant shall submit the criminal record to the business registration agency[10], the fact that enterprises may be entitled to sue the business registration agency due to refusal of the proposed name of their enterprises[11] and the provision on stamp details. . . ? However, we can still believe the 2014 Law on Enterprises will improve entrepreneurship and create a legal framework to protect the rights of free commerce formally announced by the 2013 Constitution.

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[1] Article 6 of the Law on Investment.
[2]Article 9 of the 2005 Law on Enterprises.
[3]Article 44 of the 2014 Law on Enterprises
[4]Article 13 of the 2014 Law on Enterprises
[5] Article 59 of the 2014 Law on Enterprises
[6] Article 51of the 2005 Law on Enterprises
[7]Article 52.(3) of the 2005 Law on Enterprises and Article 60.(3) of the 2014 Law on Enterprises
[8]Article 52.3 of the 2014 Law on Enterprises
[9] Article 134 of the 2014 Law on Enterprises
[10]Article 18 of the 2014 Law on Enterprises: “Once required by the Business Registration Agency, the enterprise applicant shall submit to such Business Registration Agency”.
[11] Article 38 of the 2014 Law on Enterprises: “Pursuant to this Article and Articles 39, 40 and 42 of this Law, the Business Registration Agency has the right disapprove the proposed name of the enterprise.

 

 

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