OECD Review of the Corporate Governance of State-Owned Enterprises in Viet Nam

10. Equitable treatment of shareholders and other investors

Abstract

This chapter examines the country’s practices related to the Chapter IV of the SOE Guidelines on equitable treatment of shareholders and other investors. It looks at policy of communication and consultation with non-state shareholders, participation of minority shareholders in shareholder meetings and SOEs’ engagement in co‑operative projects such as joint ventures and public private partnerships.

Overarching recommendation from the SOE Guidelines

Where SOEs are listed or otherwise include non-state investors among their owners, the state and the enterprises should recognise the rights of all shareholders and ensure shareholders’ equitable treatment and equal access to corporate information.

10.1. Ensuring equitable treatment of shareholders

The state should strive toward full implementation of the OECD Principles of Corporate Governance when it is not the sole owner of SOEs, and of all relevant sections when it is the sole owner of SOEs. Concerning shareholder protection this includes: A1. The state and SOEs should ensure that all shareholders are treated equitably;

According to the Law on Securities and the Law on Enterprises, non-state shareholders in SOEs have the same legal rights and interests as shareholders in other companies, and as the State with regard to voting rights, questioning and dividend rate.

Per 2020 Enterprise Law, should an SOE offer preferred shares, the rights and obligations associated with them must be passed by the general meeting of shareholders and fully disclosed to all shareholders. The Law prescribes that non-state shareholders should be given full access to information disclosed by the SOE and that they are entitled to request resolutions or decisions of the general meeting of shareholders or the BOD to be suspended or rescinded.

The 2020 Law on Enterprises, which took effect from 1 January 2021, has a measure in place to empower small shareholders in joint stock companies. The Enterprise Law 2014 previously required shareholders or groups of shareholders to hold at least 10% of shares in at least six months to be entitled to intervene in corporate governance and oversight. Shareholders or groups of shareholders were required to hold at least 1% of shares in at least 06 months to file a lawsuit against BOD members, Directors or the CEO on their own or the enterprise’s behalf.

However, the 2020 Law on Enterprises Enterprise Law 2020 has lowered the said rate of ownership from 10% to 5% to allow shareholders to review, look up, and obtain important data or materials of the enterprise, to request the Board of Control (BOC) to examine corporate operations, or to summon a general meeting of shareholders.

The exclusive right to nominate members of the BOD and the BOC remains with shareholders and shareholder groups holding at least 10% of total shares. Shareholders holding at least 1% of total shares are allowed to file a lawsuit against the leadership. However, the latest Enterprise Law no longer requires these shareholders to hold their shares in at least six months. The repeal of this requirement has brought a positive change to small shareholders as it enables them to raise their voice right upon developing an interest in the company rather than having to wait for six months during which many events could take place.

To comply with relevant laws, there are regulations in the organisation and operation charter of SOEs to encourage small shareholders to make questions and present opinions to SOEs’ management and ownership entity. The Law No.69 on Management and Use of State Capital Invested in Production and Business in Enterprises does not provide for holding voting preference shares when equitizing enterprises.

However, in SOEs, state shareholder accounts for a large proportion of over 50% on average, so it plays a dominant role in the decisions of the general meeting of shareholders. The OECD mission team was informed that in practice there are no specific protections for minority investors in equitised companies; all material decisions are made by the General Meeting of Shareholders (GMS) by simple majority vote. At the same time, the state can use priority shares (e.g. “golden shares”) according to the Article 116 of the 2020 Law on Enterprises on so-called “preferred voting shares” with a larger number of votes attached to them than the common stock. The relevant clauses are the following:

• Clause 1 Article 116: Only organisations authorised by the government and founding shareholders may hold preferred voting shares. The preferred voting powers of founding shareholders shall be effective for three years from the issuance date of the Enterprise Registration Certificate. The right to vote and voting preference period of preferred voting shares held by organisations authorised by the government shall be specified in the Company’s Charter. After this period expires, preferred voting shares shall become common shares.

• Clause 3, Article 116: Holders of preferred voting shares must not transfer these shares to other persons unless it is demanded by an effective court judgment or decision or transferred in accordance with inheritance laws.

OECD mission team has been informed that while the government acknowledges that this golden share rule can prevent essential SOEs of national interest from being sold to investors beyond the state control, in reality it is not yet enforced. All the Ministries, government entities that the OECD has interacted with confirmed that they are not aware of any cases where the State holds golden share in a company. The Chapter 12 of this report on assessment on SOE disclosure and transparency also indicates that SOEs do not disclose any information about golden shares or power of veto over corporate decisions in their periodical reports on the company’s business management.

Box ‎10.1. General provisions of the 2020 Law on Enterprises on protecting the rights and interests of minority shareholders

The 2020 Law on Enterprises prescribing general provisions on joint stock companies (with or without a State shareholder owning more than 50% of the charter capital) includes a number of articles protecting the rights and interests of minority shareholders as follows.

Interests regarding assets:

• Clause 1 of Article 115 and Clause 1 of Article 124: shareholders are given priority to purchase additional shares in proportion to their holding of common shares in the company.

• Clause 1 of Article 115: Transfer their shares to other persons except for the cases specified in clause 3 Article 120 and clause 1 Article 127 of the Law, and other relevant laws.

• Article 132: Shareholders are entitled to request the company to repurchase their shares.

Interests regarding corporate governance:

• Clause 2 of Article 115: Shareholders or shareholder groups holding at least 5% of total common shares or less permitted by the Company’s Charter shall have the rights to: Review and extract the minutes of meetings, resolutions, and decisions of the BoD, mid-year and annual financial statements, reports of the BOC, contracts, transactions subject to approval by the BOD, and other documents except those that involve the company’s business secrets; demand the convention of a GMS; request the BOC to investigate into specific matters related to the company’s management and operation where necessary; other rights prescribed by the Law and the Company’s Charter.

• Clause 5 of Article 115: shareholders or shareholder groups holding at least 10% of total voting shares or less permitted by the Company’s Charter may nominate members to the BOD and BOC.

• Interests regarding information: Joint stock companies shall disclose information per Article 164.

Interests regarding the recovery of rights:

• Shareholders or shareholder groups holding at least 5% of total common shares or less permitted by the Company’s Charter shall be entitled to request the Court or an arbitral tribunal to consider invalidating the BOD’s resolution in part or in full should the procedures for convening the GMS and decision issuance of the GMS prescribed in the Law and the Company’s Charter be contravened or should the resolution’s content violate the law or the Company’s Charter (Article 151).

• Article 166: Shareholders or shareholder groups holding at least 1% of total common shares may, in their own names or in the company’s name, file lawsuit against a member of the BOD or the Director/CEO to claim the interests or damages for the company or other persons.

Source: Submissions from the Ministry of Finance and State Capital Investment Corporation of Viet Nam

10.1.1. Rules and procedures for transactions among SOEs

There are no special regulations regarding transactions between SOEs. In addition, the selection of contractors providing consultancy services, goods, and construction and installation services for development investment projects where the State or an SOE makes up at least 30% of the capex shall adhere to the provisions of the Law on Bidding. Investment projects using land for the construction of commercial residential properties; commercial and service properties; or multi-purpose or multi-functional complexes for business purposes and PPP projects shall comply with provisions on bidder selection under the Law on Bidding.

The Government’s Decree No. 132/2020/ND-CP dated 5 November 2020 on tax management of enterprises engaging in related party transactions specifies its applicability and how an actor is determined to have engaged in related transactions. The Decree No. 132/2020/ND-CP applies to entities manufacturing and trading products and services which are corporate income tax (CIP) payers and engage in transactions with their related parties.

10.1.2. Options for redress that minority shareholders have when they consider their rights violated

When detecting signs of violation of common interests and their own interests, small shareholders can send petitions to SOE boards, ownership entities, line ministries, and the government in accordance with regulations prescribed in the Law on Enterprises, the Law on Securities and the Law on Complaints and Denunciations. Minority shareholders are entitled to request the Court or an arbitral tribunal to consider invalidating the BOD’s resolution in part or in full as prescribed by Article 151 of the 2020 Law on Enterprises. Also, as per the 2020 Law on Enterprises, shareholders or shareholder groups holding at least 1% of total common shares may file a civil lawsuit against members of the BOD, the Board of Management (BOM), or the CEO on their own or the company’s behalf in certain cases prescribed in the Law.

A.2. [Concerning shareholder protection this includes:] SOEs should observe a high degree of transparency, including as a general rule equal and simultaneous disclosure of information, towards all shareholders;

Shareholders or shareholder groups holding at least 5% of total common shares are entitled to review and obtain meeting minutes, resolutions, and decisions of the BOD, demand the convention of a GMS, and request the BOC to investigate specific management and operation matters.

As per the 2020 Law on Enterprises, all shareholders of SOEs have the rights to access information via the disclosure of the joint stock company (Article 164). They can access financial statements, periodic evaluation of business activities and procurement of SOEs, comments and votes on the future operation and procurement plan at the GSM and obtain resolutions of the BOD, or designate representatives to participate in the BOD and BOC (Article 115). All shareholders of SOEs can access this information to make investment decisions, propose recommendations to SOE BoDs and competent authorities.

A.3. [Concerning shareholder protection this includes:] SOEs should develop an active policy of communication and consultation with all shareholders;

Standards for SOEs’ communication and consultation with all shareholders have been partially reflected in specific legal policies. For example, the 2014 Law No.69 stipulates that state capital representatives are obliged to evaluate and report the business performance of SOEs on a quarterly basis to the ownership entities. SOEs are required to report the business performance to the ownership entities and the Ministry of Finance summarises the results and reports them to the government. SOEs should also send reports on changes in charter capital to the Ministry of Finance. SOEs are subject to the supervision of the National Assembly, the inspection of the government, and the inspection of the ministries and agencies on the operational situation.

As per Law on Enterprises and Law on Securities. SOEs are subject to the same provisions under applicable laws as joint stock companies. Matters under the authority of the GMS (General Meeting of Shareholders) shall be published on mass media and their documents shall be sent to shareholders at least 21 days prior to the meeting with shareholders’ inputs collected in writing. The BOD of an SOE is able to identify non-State shareholders through the shareholder register (developed and kept by the enterprise) or the Vietnam Securities Depository and Clearing Corporation (VSDC) (if the enterprise has registered securities with VSDC. Regardless, all shareholders shall fairly receive information according to the Laws.

A.4. [Concerning shareholder protection this includes:] The participation of minority shareholders in shareholder meetings should be facilitated so they can take part in fundamental corporate decisions such as board election;

Articles 15, 141, 143, and 144 of the 2020 Law on Enterprises clearly stipulates the right to participate in the GMS of all shareholders (including non-State shareholders). Non-state shareholders may vote in absentia and/or authorise others to attend and vote on their behalf in accordance with the Company’s Charter and the Law on Enterprises. Article 144 of the 2020 Law on Enterprises allows alternative forms of voting for shareholders not physically present at the GMS.

Shareholders may nominate members to the BOD per clause 5 Article 115 of the Law on Enterprises. Per Articles 115 and 166, joint stock companies (including those with State capital) allow the use cumulative voting to protect the rights of minority shareholders. The GMS and/or the BOD may consult experts before making decisions regarding highly technical issues in certain cases.

Non-state shareholders are equal to state shareholders in the nomination of BOD members, which depends on their proportion of shares one holds in an SOE. As prescribed by the Law on Enterprises, shareholders or shareholder groups holding at least 10% of total common shares or less permitted by the Company Regulations may nominate BOD members. Cumulative voting is the process used to elect BOD members. It means that the total number of votes each shareholder is given equals the total number of shares he/she holds times the total number of BOD candidates, and the shareholder may put all or part of their votes in one candidate or more.

Box ‎10.2 Article 15 of the 2020 Law on Enterprises on responsibilities of authorised representatives of the owner/members/partners/shareholders

Authorised representatives of the owner/members/partners/shareholders shall exercise and perform their rights and obligations in accordance with this Law. All limits imposed by the owner/members/partners/shareholders to the authorised representatives’ performance at the Board of Members/Partners or General Meeting of Shareholders shall not apply to any third party.

Authorised representatives have the responsibility to attend all meetings of the Board of Members/Partners or General Meeting of Shareholders; exercise and perform the authorised rights and obligations in an honest and prudent manner to protect lawful interest of the owner/members/partners/shareholders that designated them.

Authorised representatives shall be responsible to the owner, members/partners/shareholders for fulfillment of the responsibilities specified in this Article. The owner, members/partners/shareholders that designate these authorised representatives shall be responsible to third parties for performance of these authorised representative.

Source: 2020 Law on Enterprises, Vietnamese Law Portal, https://thuvienphapluat.vn/

A.5. [Concerning shareholder protection this includes:] Transactions between the state and SOEs, and between SOEs, should take place on market consistent terms;

Pursuant to the legal regulations, the organisation and operation charter of many SOEs stipulate transaction limits of SOEs with other organisations, based on the ratio of transaction value/charter capital of SOEs, valuation and appraisal of customers, authority to decide transaction values at SOEs to ensure risk management in business, avoid manipulation of interests and protect the interests of small shareholders.

In addition, the selection of contractors providing consultancy services, goods, and construction and installation services for development investment projects where the State or an SOE makes up at least 30% of the capex shall adhere to the provisions of the Law on Bidding. Investment projects using land for the construction of commercial residential properties; commercial and service properties; or multi-purpose or multi-functional complexes for business purposes and PPP projects shall comply with provisions on bidder selection under the Law on Bidding.

Mechanisms to ensure that transactions between the state and SOEs take place on market consistent terms are partially stated in a fragmented manner in the Law on Enterprises, the Law on Management and Use of State Capital, and relevant laws (The Civil Code, Taxation Law, etc.).

According to the provisions of law, the co‑operation relationship between the State and SOEs should be an equal, voluntary relationship that ensures the interests of both parties. In the event that there are incidents (such as changes in raw material prices) affecting the quality of work, SOEs can submit recommendations to the ownership entities, the government for consideration and decision. On the basis of the provisions of the law and the correct identification of the objective conditions related to the work, the state agency may have a solution to adjust the contract within its scope of authority or submit to the competent authority for consideration and decision.

10.2. Adherence to corporate governance code

B. National corporate governance codes should be adhered to by all listed and, where appropriate, unlisted SOEs

The first Corporate Governance Code of Best Practices was launched in August 2019, but it has not been applied to unequalised SOEs. There is no separate regulation available on corporate governance for SOEs, including unlisted SOEs. Corporate governance requirements that SOEs shall comply with are provided in a fragmented manner in the Law on Enterprises; the Law on Management and Use of State Capital; regulations on corporate governance of public companies, etc. SOEs that are publicly-traded companies will follow regulations on the governance of publicly-traded companies as promulgated by the Ministry of Finance.

10.3. Disclosure of public policy objectives

C. Where SOEs are required to pursue public policy objectives, adequate information about these should be available to non-state shareholders at all times

According to the provisions of the Law on State Enterprises and the Law on Securities, in case SOEs are required to implement public policies at the request of the State, SOEs must fully notify non-State shareholders, except for the fields that the relevant law does not allow. If an SOE is a joint stock company, it must comply with the disclosure provisions in Article 164 of the 2020 Law on Enterprises.

10.4. Joint ventures and public private partnerships

D. When SOEs engage in co‑operative projects such as joint ventures and public-private partnerships, the contracting party should ensure that contractual rights are upheld and that disputes are addressed in a timely and objective manner

When SOEs engage in co‑operative projects, SOEs often participate in the form of public-private partnership (PPP) and joint venture in the form of establishing a new company that is a subsidiary of SOEs (with separate legal status). In case of difficulties or disputes, the competent authorities should in principle evaluate and make decisions on the basis of the operation of this new legal entity taking into account rights of SOE shareholders and other shareholders to the extent that it does not affect the SOEs’ existing business activities.

At present, the Law on Public Investment, the Law on Investment, and the Law on PPP have been promulgated to regulate and control forms of joint venture of all types of enterprises, including SOEs. Both SOEs and private enterprises operate in compliance with the provisions of the Enterprise and other relevant laws. In all joint ventures, investment co‑operations, and PPP, all enterprises, including SOEs, are treated equally on the basis of agreements/contracts between parties. The laws protect the agreements made in the contracts (if not in contravention of the laws). In all joint venture, investment co‑operation or PPP contracts, there are provisions on procedures of dispute settlement agreed upon by contract parties such as mediation, arbitration, and court. This is the common practice for contracts between enterprises to make sure that contract disputes are settled in a fair manner before the law.