How Vietnamese laws control the related-party transactions in enterprises?

 Date: 24 August 2021

Writer: Tuyen Pham

As regulated by Law on Enterprises 2020, the transactions of the enterprise will be executed through the representative. In fact, there are cases where the representative abuses the right of representation in transactions with persons related to the enterprise. How does Vietnamese law stipulate to protect the rights and interests of enterprise? Through this article, BLawyers Vietnam would like to present the following notes. 

I. Who is the related party of an enterprise?

The related party is an individual or organization in one of the following typical cases:

  1. The parent company, its executive and its legal representative, and the person who has the power to designate the executive officer of the parent company;
  2. The subsidiary company, its executive and legal representative;
  3. Any individual, organization or group of individuals or organizations that can influence the enterprise’s operation through ownership, acquisition of shares/stakes, or company’s decision-making;
  4. The enterprise’s executive, legal representative, Controllers;
  5. Spouses, biological parents, adoptive parents, parents-in-law, biological children, adopted children, children-in-law, biological siblings, siblings-in-law and biological siblings of spouses of the executive officer, legal representatives, controllers, members/partners, and shareholders holding the controlling stakes/shares; and
  6. The individuals, organizations, and companies that have stake ownership that dominates the company’s decision-making.

Thus, it can be seen that the related party is the person or entity who has a direct or indirect relationship with the enterprise.

II. Regulation for controlling the related-party transactions

Dealing with related party can lead to many risks for the enterprises. Therefore, Vietnamese law has provisions to control these transactions. Specifically, as follows:

a. Firstly, the following persons have the responsibility to notify the company promptly, fully, and accurately about the enterprise in which they own or have shares/stakes or in which their related persons own, jointly own or have separate controlling shares/stakes:
  1. Legal representative;
  2. Chairman of the Members’ Council;
  3. Chairman of the Management Board;
  4. Director or General Director; and
  5. Some other subjects.
b. Secondly, the law stipulates strict control on the related-party transactions for different types of companies.
  1. For the limited liability company, the transaction between the company and the related party must be approved by the members’ council. The approval is voted at the meeting or in writing with a minimum rate of 65% of charter capital; and
  2. For the joint-stock company, the company shall compile a list of its related party. In addition, transactions between the company and the related party must be approved by the General Meeting of Shareholders or the Board of Directors The approval is voted at the meeting or in writing with a ratio of more than 50% of the total votes of all voting shareholders.
  3. In case of not being approved, the transaction will be considered invalid. At the same time, the person who executed the transaction, the related members, and the related persons who entered into this transaction shall pay compensation for any damage caused and return the benefits generated by such transaction to the company.

In short, the related-party transactions happen frequently and can cause complicated problems for the enterprise. If the enterprise does not have a reasonable control mechanism, the representative can through the transaction to acquire capital and thereby influence the company’s decisions, creating benefits for himself.

Should you have any questions about the above contents, please revert to BLawyers Vietnam at consult@blawyersvn.com. We are more than happy to hear from you!

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