In 18 June 2020, the National Assembly of Vietnam approved the new Enterprise Law 59/2020/QH14 (“Enterprise Law 2020”), which comes into effect from 1 January 2021. The Enterprise Law 2020 contains 10 Chapters and 218 Articles, and replaces the Enterprise Law 68/2104/QH1 (“Enterprise Law 2014”). This law guides the operations of companies and similar organisations in Vietnam, but does not apply to or cover “Household” (unincorporated) businesses.
Changes arising from Vietnam’s new enterprise law 2020
Significant changes arising from the Enterprise Law 2020 include:
1. Changes to the form and procedures for company seals
Article 43 of the Enterprise Law 2020 allows enterprises to use both physical seals (with circles, polygons and other shapes), along with seals in the form of digital signatures. This will reduce burdens placed on enterprises for the physical “stamping” of documents for validity in an increasingly digital world.
2. Organisational structures of one-member limited liability companies, owned by a corporate investor
The Enterprise Law 2020 has changed the operational structures for a One-Member Limited Liability Company, where it is owned by a corporate investor, now allowing for one of two models to be adopted:
Having a Chairman, and Director/General Director; or
Having a Council of Members and Director/General Director
A Legal Representative must hold at least one of the positions of Chairman or Director/General Director. This is a change from the former Law, as there is no longer a requirement for the appointment of Controllers in the organisational structure of a one-member limited liability company owned by a corporate investor.
3. Capital contribution periods
The Enterprise Law 2020 retains the requirement that the Charter Capital of a company must be fully contributed within 90 days from the date of issuance of the Enterprise Registration Certificate. However, where capital is contributed via assets, the time for transportation, importation and associated administrative procedures for the transfer of ownership of an asset is not included in the 90 day period.
4. Changes to procedures for enterprise registration
The Enterprise Law 2020 regulates permitted methods for undertaking the business registration procedures. The permitted methods are:
a) Registering enterprises directly at the Business Registration Office;
b) Enterprise registration through postal services; or
c) Registering enterprises via an electronic information network.
Therefore, the implementation of business registration procedures by postal service and internet registration will now be applied consistently nationwide.
In additional, the Enterprise Law 2020 also removes the procedure for notification of changes to an enterprise’s manager (Article 12 Enterprise Law 2015) as well as the procedure for registering a seal before use.
5. Changes to transfers of contributed capital
The Enterprise Law 2015 states that payment for all ownership transactions (buying, selling, transferring shares, contributing capital and receiving dividends) of foreign investors must be done through a Capital Account opened at a bank in Vietnam, except when paying with assets.
However, Article 10 of Circular 06/2019/TT-NHNN, issued by the State Bank of Vietnam, stipulates that transfers of capital between non-resident investors are not required to be transacted through a Capital Account. In essence, non-resident investors are not required to transfer funds from abroad into a Capital Account where those funds are to be transferred back out of Vietnam by the non-resident selling party.
This Circular created inconsistency between the Enterprise Law 2015 and the Laws on foreign exchange management.
In order to remedy this problem, the Enterprise Law 2020 only requires that payments for capital transfers be made in accordance with foreign exchange regulations, except for when payment is made by way of assets or other non-cash payments.
6. Authority and liability of the legal representative
The Enterprise Law 2020 adds provisions that where a Joint Stock Company or Limited Liability Company have more than one Legal Representative, the specific rights and obligations of each individual should be recorded in the company’s Charter.
Where the specific division of rights and obligations for each Legal Representative is not specified in the company’s Charter, each Legal Representative of the company retains complete legal representation of the company before third parties.
In addition, it is worth noting that the Enterprise Law 2020 introduces the concept that Legal Representatives can be jointly liable for any damage caused to the business (often referred to as “joint and several liability”). This presents a significant change to the potential liabilities of individuals appointed as Legal Representatives where there are multiple Legal Representatives in an organisation.
7. Adjustment to the concept of ‘state owned enterprises’
From 1 January 2020, enterprises where the State holds more than 50% of its charter capital or voting rights will be regarded as a State Owned Enterprise. This contrasts with the Enterprise Law 2015, which only specifically identified enterprises with 100% state-owned charter capital as being State Owned Enterprises.
8. Clarifications to definition of family members
The new Enterprise Law 2020 clarifies and expands the definition of family members. Those who meet the definition will be restricted from holding a number of positions in enterprises (ie, a family-related person of the General Director of a public Joint Stock Company cannot hold the position of manager or inspector). This is in order to ensure the objectivity, honesty and transparency in company operations.
The definition of family-related persons in the Enterprise Law 2020 includes: a husband, wife, natural father, natural mother, adoptive father, adoptive mother, father-in-law, mother-in-law, natural children, adopted children, sons-in-law, daughters-in-law, biological brother, biological sister, brothers-in-law, and sisters-in-law.
Compared to the corresponding provisions of the Enterprise Law 2015, the new definition of family-related person is both expanded and more specific in application.
9. Amending regulations on the individual offering of bonds
The Enterprise Law 2020 provides for a much stricter regime over the issuance of corporate bonds and other securities. Where a Joint Stock Company, which is not a public corporation, wants to issue corporate bonds or other securities, it must meet a specific set of requirements, which include matters including having an up to date audit report. The Enterprise Law 2020 also envisages the issuance of corporate bonds by Limited Liability Companies, but does limit this and does not permit the issuance of “other securities” for which Joint Stock Companies are permitted.
In addition, the buyers of bonds from the above companies must meet the definitions of “Strategic Investors” or “Professional Securities Investors”, depending on the transaction/securities, with the definitions being those contained within provisions of the Securities Law 2019 (which will also take effect on 1 January 2020).
The effect of these laws are the tightening the issuance of bonds and other securities and increasing the transparency in the process.
10. Provisions for the protection of small/minority shareholders
According to the Enterprise Law 2020, the rights of a shareholder or a group of shareholders owning 5% or more of the common shares, or a smaller percentage as stipulated in the company’s Charter, include the access to certain corporate information and the ability to convene a Shareholders Meeting to review the actions of the Board.
Compared with Enterprise Law 2015, the new law reduces the minimum ownership requirement from 10% to 5%, and also removes the holding requirements (as the old law required shareholders to hold their shares for at least 6 months before their rights could be exercised).
Voting thresholds have also been amended, with the simple majority voting thresholds at shareholder meetings reduced to 50%, from 51%. The new Enterprise Law 2020 also permits Joint Stock Companies to adjust the value threshold for major transactions in their Charter for which will require shareholder approval (ie, the disposal of assets above a certain value).