Date: 25 December 2021
Writer: Linh Nguyen
Cross-ownership on a parent-subsidiary company model in Vietnam has not been rare. The basic feature of this type of ownership is that one company has control over another based on a portion of the charter capital. However, there have been several regulations of Vietnamese law limiting cross-ownership on the relation of parent-subsidiary companies. Through this article, BLawyers Vietnam would like to present the cases where cross-ownership is not allowed and sanctions imposing violations.
1. What is cross-ownership?
Cross-ownership is the situation of two enterprises owing each other’s contribution capital or shares. The most basic understanding of cross-ownership is that company A owns company B and company B also owns company A.
There are several forms of cross-ownership such as:
(i) Enterprises have ownership with another one, and each enterprise also has cross-ownership with another enterprise.
(ii) Enterprises with cross-ownership under a circular pattern, also known as circular ownership.
(iii) Enterprises that own each other as well as other enterprises.
(iv) An enterprise at the center of cross-ownership relationships with other enterprises.
Thus, there is no cross-ownership if only one enterprise owns a portion of contribution capital/ shares of another enterprise without a vice versa ownership.
2. Determination of the relation of the parent-subsidiary companies
According to Law on Enterprise 2020, a company is considered as the parent company of another company if it falls into one of the following cases:
- Owning more than 50% of the charter capital or the total number of ordinary shares of such a company;
- Having the right to decide directly or indirectly to appoint most of all members of the Board of Management, Directors or General Directors of such a company; or
- Having the right to decide on the amendment and supplementation of the Charter of such a company.
3. Unallowed cross-ownership cases
Law on Enterprises 2020 does not allow cross-ownership in the following two cases:
- A subsidiary company cannot invest to purchase shares /contribution capital into its parent company
- Subsidiaries of a parent company (sibling companies) cannot concurrently contribute capital or purchase shares to make cross-ownership together.
Therefore, Vietnamese laws do not govern cross-ownership relation between companies not standing in a parent-subsidiary relation.
4. Sanctions imposing cross-ownership violations
Administrative fine
Enterprises may be subject to administrative fines in the field of planning and investment if there is a situation of cross-ownership in the parent and subsidiary companies. Specifically, violating enterprises will bear a fine of from 15 million VND to 20 million VND for one of the following actions:
- Subsidiaries purchase contributed capital or shares of the parent company;
- Subsidiaries of the same parent company purchase contributed capital or shares to make cross-ownership together; or
- Subsidiaries of the same parent company as an enterprise holding at least 65% of state capital contribute capital to establish another enterprise.
Remedial measures
In addition to administrative fines, enterprises must also take the following remedial measures:
- Being forced divestment or withdrawal of shares from the parent company or other subsidiaries; or
- Being forced divestment from established the enterprise.
Shortly, Vietnamese law does not allow cross-ownership on a relation of parent-subsidiary companies. As a result, studying the cases which are unallowed by law could help mitigate potential risks, especially during the process of M&A or restructuring.
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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