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Is the glass half empty or half fill? On September 5 2007, the government promulgated Decree 139/2007/ND-CP ("Decree 139") detailing some provisions of the Law on Enterprises passed by the National Assembly on November 29 2005 (the "Law on Enterprises"). Decree 139 provides specific guidelines on the establishment, management, operation, restructuring and liquidation of enterprises operating in Vietnam, including domestic and foreign-invested enterprises. Decree 139 reflects the commendable efforts made by the Vietnamese Government to attract foreign direct investment into Vietnam and encourage the transparent operations of enterprises.
Enterprises subject to Decree 139
Decree 139 not only governs enterprises established under the Law on Enterprises, but also enterprises set up and operating under the repealed Law on Companies, enterprises converted from state-owned enterprises and foreign-invested companies set up under the repealed Law on Foreign Investment (collectively called as the "enterprises"). Those foreign-invested companies which have not been re-registered under Decree 101/2006/ND-CP dated September 21 2006 would also be subject to Decree 139. This addresses concerns about the application of the Law on Enterprises, and other issued regulations implementing the law, to enterprises that have not been re-registered or do not wish to re-register.
To the extent that Decree 139 contradicts other specialised laws and regulations, Decree 139 provides that the relevant provisions under the specialised laws and regulations prevail.
Prohibited business lines and conditions on business
Decree 139 identifies 14 prohibited business lines, including business involved in weapons, drugs, debauched cultural services and products, gambling, brokerage of adoption for foreigners, goods or products which have not been permitted for circulation in Vietnam. Decree 139 further prohibits any other business lines that are not allowed to be carried out under specialised laws. Examples of those lines may include the manufacture of certain pharmaceuticals or lottery businesses. Prior to Decree 139, regulations on prohibited business lines were complex and inconsistent. As a result, the interpretation and application of those regulations were difficult for both the licencing authorities and enterprises.
The head of the Vietnam Chamber of Commerce and Industry's ("VCCI") Legal Department, Tran Huu Huynh, said in an interview that the inconsistency amongst the pre-Decree 139 regulations did obstruct enterprises even though the Law on Enterprises 2005 provides that enterprises have the right to conduct any business not prohibited by law. Decree 139 now appears to assist enterprises in identifying specific lines that they are entitled to apply for and register.
As a matter of practice prior to Decree 139, many implementing documents issued by various ministries and local authorities were either inconsistent with the Law on Enterprises or created additional conditions not required by laws for certain businesses. The creation of additional conditions, licences, certificates and permits not provided for in other specialised legislation have had negative effects as they cost time, money and might mean missed business opportunities.
To create favourable conditions and encourage enterprises, Decree 139 provides that from September 1st, 2008 any conditional business lines and pre-conditions for business operation which are required by any regulations will no longer be valid, except for those expressly set out in specialised laws passed by the National Assembly, ordinances by the Standing Committee of the National Assembly, government decrees, or relevant decisions by the prime minister. It is not clear if business conditions set out in other types of legislation that were issued before the effective date of Decree 139 will continue to apply or be revoked. Nevertheless, this provision is a significant step to prevent arbitrary interference by several ministries and local authorities by setting additional conditions or requirements on business.
One condition is the requirement for a particular amount of legal capital for enterprises carrying out business in certain specialised lines. Article 7 of Decree 139 provides that, with respect to business lines subject to this requirement, the amount of legal capital shall be determined by the relevant authority in compliance with specialised laws and regulations concerning the relevant business line. Article 7 of Decree 139 goes on to require that the chairman of board and the general director of an enterprise (or all partners in a partnership) shall be responsible for the precision and honesty of the commitment to contribute the charter capital of the relevant enterprise when applying for the incorporation. This requirement may expose the chairman of board, particularly the general director who is usually not the owner of the business, to potential liability that should not be borne by them individually.
Procedure for setting up foreign-invested companies
Decree 139 provides for a new licencing procedure for foreign investors setting up business in Vietnam. Before Decree 139, foreign investors must have a specific "investment project" in order to set up a foreign-invested company in Vietnam. (This procedure was called establishing a "project-based company"). Decree 139 now provides that, if any foreign investor who intends to contribute 49% or less of the charter/equity capital in order to set up a foreign-invested company with local parties in Vietnam, the company can be licenced without requiring a specific "investment project." This new procedure should be appreciated by foreign investors whose investment in services was restricted under Vietnam's WTO commitments to no more than 49% of the charter capital in joint venture companies in certain business lines.
Shareholding ratio and transfer of shares
Foreign investors who wish to purchase an equity interest in domestic companies have faced many legal and practical obstacles. Before Decree 139, there was inconsistencies in the interpretation of shareholding limits and business lines to which foreign investors were subject. Some (especially officials of the Registry of Companies in cities and provinces) relied on Decision 36/2003/QD-TTg dated March 11 2003 and the Ministry of Planning and Investment's Decision 260/2002/QD-BKH dated May 10 2002 to limit the acquisition of equity by foreign investors. They imposed two conditions being: (i) the acquired equity interest must not exceed 30% of the total equity capital of the relevant domestic company as set out in Decision 36 and (ii) the relevant company selling the equity interest can only engage in a very limited range of industries as set out in Decision 260. However, others take the view that those limitations have been repealed by the Vietnamese Government's WTO commitments, except where they are expressly set out in those commitments.
Article 10 of Decree 139 now expressly permits foreign investors to acquire an equity interest in domestic enterprises without limitations on shareholding or business areas, except for the following:
"The shareholding ratio of foreign investors in listed local companies shall comply with the Law on Securities (ie no more than 49 per cent);
"The shareholding ratio of foreign investors in state-owned enterprises in their equitisation process shall comply with the relevant decision on equitisation;
"The shareholding ratio of foreign investors in specific services restricted by Vietnam's WTO Commitments (eg banking and finance, securities, insurance, trading, logistics and forwarding) shall comply with the restrictions set out in those commitments. In addition, any restrictions, including limits on shareholding, set out in specialised laws and regulations such as the Law on Petroleum, Law on Aviation, Law on Education, Law on Lawyers shall also be complied with.
Decree 139 further specifies the procedures for registering an acquisition of equity interest in enterprises. These generally speaking replicate the relevant provisions of Decree 88/2006/ND-CP dated August 29 2006 on business registration.
Cumulative voting
The Law on Enterprises provides that voting to elect members of the board of management in joint stock companies shall be effected via cumulative voting. However Article 104.3(c) of the Law on Enterprises, concerning cumulative voting, is unclear. Decree 139 does not clarify the cumulative voting formula. However, Article 17 of Decree 139 tries to give guidance as to how a shareholder or a group of shareholders nominate candidates for election to the board. In order for candidates to become a board member, shareholders need to calculate the minimum number of voting shares required for one board member to be elected by applying the following cumulative voting formula:
(s x d)
X = __________ + 1
(D + 1)
X = number of shares required to elect a board member
s = number of voting shares represented at the meeting
d = number of Board members the enterprise wants to elect
D = total number of Board members allowed to be elected pursuant to the enterprises' Charter.
Meetings of the Board of Management
Under the Law on Enterprises, a quorum for a board meeting in a joint stock company requires at least three-fourths of the total board members to be present. The law, however, fails to deal with the situation where the board fails to convene a meeting because of the lack of a quorum. To this end, Article 18.2 of Decree 139 permits a board meeting to be convened again within 15 days from the date of failing to achieve a quorum. In a second attempt to call a valid meeting, only a simple majority of the total board members is required to be present to reach a quorum. This is likely to be appreciated by companies that need to convene a board meeting for urgent decisions.
Representative at law
Article 46 of the Law on Enterprises provides that the representative of an enterprise must be a permanent resident of Vietnam. Under the laws on residency, the regulatory conditions and legal procedures for foreigners (who are usually the representatives at law of foreign-invested companies) to become a permanent resident of Vietnam are complex. To solve this difficulty, Decree 139 clarifies that Article 46 of the Law on Enterprises requires the representative at law of an enterprise to reside (which is different from being a "permanent resident") in Vietnam during his/her office term and must register for temporary residency with the local authority in Vietnam.
Other provisions of the Law on Enterprises causing practical difficulties were those concerning the general director (or director). The Law on Enterprises provides that the general director of a joint stock company is not allowed to concurrently serve as the general director of another enterprise. It was unclear whether the general director of a limited liability company, or an enterprise in the form of other corporate vehicles, would be subject to the same restriction.
Article 14.4 of Decree 139 provides a clear answer by stating that the general director of a company (whether it is a joint stock company, limited liability company, partnership or otherwise), the chairman of the board of management of a joint stock company, the chairman of the board of members of a limited liability company can concurrently hold the position of the general director (or the chairman of the board of management of a joint stock company, or the chairman of the board of members of a limited liability company) in any other company. However, they cannot be a general director (or director) of another joint stock company.
Decree 139 is considered to be a sign of progress as the Vietnamese Government follows up its WTO accession. It attracts foreign investment and ensures that the corporate governance of forms of enterprises established in Vietnam are consistent with many developed legal systems. The investment community expects that the implementation of Decree 139 by ministries and local authorities in Vietnam will turn the government's good intentions into reality.
(Vietnam Investment Review, 15 October, 2007) |