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The year 2010 – sorrows and joys of joint stock companies

The article with the title: “The year 2010 – sorrows and joys of joint stock companies” by Lawyer Tran Thanh Tung – Partner of Phuoc & Partners Law Firm is published in Saigon Economic Times issued 01/2011 published on 30/12/2010.

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The end of a year is the time for people to meditate on joys and sorrows in that year. This article combines joys and sorrows in last year of joint stock companies.

Misfortune at the beginning of the year: limitation on the capacity of capital mobilization

The sorrow of joint stock companies at the beginning of the year is the Decree 01/2010/NĐ-CP issued on 4 January 2010. This Decree is applied to joint stock companies in offering private placement (i.e. offering shares or the right to buy shares directly to professional stock investors or less than 100 unprofessional investors).

In order to issue stocks of private placement, the joint stock company has to complete a lot of procedures, both internal and external, such as the ratification of private placement plan or the plan of utilization the money collected in an offering course. Besides, the company has to register with the business registration authority, report the result of the offering course and the list of shareholders to the authorities, announce the result of the offering course on the company’s website, etc.

This Decree increases the cost of capital mobilization and decreases the effect of utilization of the collected capital because this money cannot be profitably invested right away but will be blockaded at the bank until the completion of the offering course. More important, two offering courses must be at least six months apart, i.e. the company will make at most only two offering courses each year.

Therefore, this Decree strips the joint stock companies of the capacity of fast capital mobilization, which is the greatest advantage of this company model. Consequently, may this Decree unintentionally terminate the joint stock company model?

Complication in charter capital

At the beginning of second quarter of this year, the Government continued to promulgate Decree 43/2010/NĐ-CP regarding the registration of enterprise, in which there is an important regulation on charter capital of joint stock companies (Item 4, Article 40). According to this Item, the joint stock companies must not take into charter capital the value of the shares to be offered. That means charter capital consists of only the shares paid completely to the company by shareholders, but does not consist of the capital has not been paid or will be paid (corresponding to the shares to be offered). This continued to be confirmed in Item 4, Article 5 of Decree 102/2010/NĐ-CP dated 1 October 2010. These regulations are contrary to the Law on Enterprises.

First , t is necessary to say that charter capital of joint stock companies is divided into equal parts, called shares. In order to make advantage for joint stock companies, the Law on Enterprises requires shareholders hold at least 20% of total shares to be offered, and the remaining will be contributed in three years from the day of establishment. Therefore, the shareholders need to pay only a small capital (20% of charter capital), but are even able to mobilize 100% of charter capital for the company to operate by offering 80% of charter capital to outside shareholders.

Thus, the most reasonable interpretation is that charter capital must include the value of all the shares to be offered. This interpretation conforms to Item 6, Article 4 of the Law on Enterprises in the definition that charter capital is the capital contributed or committed to be contributed in a fixed time by members and shareholders and that definition will be recorded in the charter of the company (that means charter capital consists of not only the capital has been contributed).

Due to the above mentioned regulation, the registration of capital raise of joint stock companies in fact is very complicated and puzzles a lot of companies. They want to issue shares to raise capital but do not know in which type of capital to put these shares to be offered. If these shares are put in charter capital, it is contrary to Decree 43, but if they are not put in charter capital, how purchasers will be convinced to buy these shares?

No investors would like to invest their money in the company if their capital is not charter capital. The reason is that in a company there are only two types of capital: loan capital – the capital borrowed by the company, and charter capital – the capital contributed by shareholders. The capital, if not contributed capital (charter capital), must be loan capital; and shareholders would rather purchase shares to contribute to charter capital in order to become owners of the company than lend the capital to the company in order to become creditors.

A more surprising thing is that nowadays in reality the Item 4, Article 40 is not applied by some registration authorities. When the joint stock companies want to raise their capital, they are instructed with procedures of increasing the charter capital. A guidance executive has confessed that Item 4, Article 40 is deemed as does not exist, because if this regulation is applied, the business registration authority does not know how to implement it.

Sorrows of listed companies

It seems that the year 2010 is a sorrowing year for companies listed in securities market. VN-Index fluctuated around the level of 500 points, while HNX went down to the level of 100 points. A lot of listed companies were sorrowful because stocks were dirt-cheap. There was time at which 2-3 stocks could trade for only a bowl of noodle.

The price manipulation and price exaggeration spread in the market. However, the optimists think that the fact that some big bosses were criminally treated due to their manipulation of stock price is a necessary warning for the “air-crew” committing price manipulating. This strong measure is reckoned as powerful enough to pull the real investors – people who have retreated because they were exhausted of money and trust on the transparency of the market – to turn back.

Joyful because the right of initiating prosecution

However, the year 2010 witnesses a progress in protection of small shareholders. That is the promulgation of Decree 102/2010/NĐ-CP on 1 October 2010, allowing shareholders the right of initiating civil prosecution against president, members of board of management or director in case they do not carry out correctly and sufficiently their assignments or use information, know-how and business opportunities of the company or abuse their status, position and property of the company for their own interest or interest of other organizations or individuals.

This Decree certainly makes small shareholders actively participate in the process of management and operation of the company and makes management officers of the enterprise loyal to interests of the company and the shareholders while operating the enterprise.

In summary, although there are both sorrows and joys, in general the year 2010 witnesses more sorrows than joys for joint stock companies.

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