Super-majority rule causes headaches
Bui Ngoc Hong, Indochine Counsel
Viet Nam's Law on Enterprises was passed in 2005, a year before the nation's accession to the World Trade Organisation. Upon accession, conflicts immediately arose between the terms of the WTO treaties to which Viet Nam had acceded and provisions of domestic law, including the Law on Enterprises.
One of the major differences regarded voting ratios required for the passage of decisions by an enterprise's management decisions. Under the terms of the Working Party Report governing Viet Nam's WTO accession, decisions are made by a vote of members representing a simple majority of shareholders.
Articles 51, 52, 103 and 104 of the Law on Enterprises meanwhile provide that votes of shareholders representing at least 65 per cent of equity are required to pass a decision, and this super-majority requirement rising to 75 per cent in some cases.
During negotiations for Viet Nam's WTO accession, WTO members agreed that Viet Nam may cap foreign ownership of enterprises in some service sectors to no more than 51 per cent of equity. Recognising that Viet Nam's super-marjority requirement would prevent majority owners from controlling tan enterprise's management, paragraph 502 of the Working Party Report stated:
"Viet Nam will ensure that, notwithstanding the requirements in the 2005 Enterprise Law, investors establishing a commercial presence as a joint venture under the commitments in Viet Nam's Schedule of Specific Commitments will have the right to establish, through the enterprise's Charter, all the types of decisions that had to be submitted to the Members' Council or Shareholders' Meeting for approval; the quorum rules, if any, that governed voting procedures; and the precise percentages of voting majorities necessary to make all decisions, including a simple majority of 51 per cent."
Such language would appear unequivocal, giving foreign shareholder(s) with 51 per cent equity authority to pass any decisions in a foreign-invested company. In reality, however, the interpretation and implementation of this language has been highly restricted, excluding a number of sectors or industries without the minority shareholders' agreement.
A task force for implementation of the 2005 Enterprise Law, via Document No 771/BKH-TCT of November 26, 2007, made a strict interpretation of Paragraph 502 of the Working Party Report. Accordingly, a shareholder with 51-per-cent equity may pass all decisions in a company only when all the following conditions are met:
1) the company is established pursuant to a joint venture agreement;
2) The company's scope of business is within services sectors subject to Viet Nam's commitments to the WTO on opening the market services; and,
3) the voting majority requirement of 51 per cent is set forth in the joint venture's charter or articles of association.
Under this interpretation, a foreign-invested enterprise is not exempted from the super-majority rule if (i) it is a wholly foreign-invested company, or (ii) foreign investment is by way of indirect investment, e.g., purchase of shares on the stock exchange.
The super-majority exemption would also not apply to companies in non-service sectors, or in a service sector not subject to market-opening under Viet Nam's WTO commitments. However, it is no easy matter for a foreign investor to obtain approval to invest in any service sector inot subject to market-opening under Viet Nam's WTO commitments.
The waiver of the super-majority rule in companies otherwise eligible also requires an express agreement in the charter of articles of association governing the formation of the joint venture. This effectively requires the written agreement of the minority shareholders to the waiver. A minority shareholder holding as much as 49 per cent of the equity, if not agreeing to subscribe to the simple majority rule, can still prevent the shareholder with 51 per cent equity from controlling the enterprise.
This requirement that the minority agree to waive the super-majority requirement has already been a bone of contention in companies established prior to the passage of the 2005 Law on Enterprises. The Working Party Report gave these companies until June 30 of this year to negotiate a new charter to select a new voting rule. In many cases, minority shareholders have resisted giving up this power.
In sum, in order for the super-majority requirement to be waived, there must be a written agreement among majority and minority shareholders expressed in the join venture charter, and the enterprise must operate in a specified services sector subject to WTO commitments. Where it is impossible for a simple majority shareholder (or even a minority shareholder) to meet the conditions for obtaining a simple-majority rule, a shareholding structure with non-voting preferential shares can enlarge the voting weight of a shareholder with voting shares beyond the shareholders ownership equity.