Shareholder disputes: Practical tips to prepare shareholder agreements and company charters
July 14, 2020 Arbitration
Preparing shareholder agreements and company charters – practical tips to prepare yourself for future shareholder disputes
It is common practice for business investors, when setting up a joint venture or following a M&A project, to seek protection of their investment via a shareholder agreement and company charter.
These documents are often designed with the intention to impose rules that the shareholders must follow and allow non-default shareholder(s) to sue for damages (or any other remedies available) if there is a breach. Nevertheless, filing a lawsuit or arbitration claim amid a shareholder dispute is the very last thing you want to do, regardless of how good your chances of winning are. Litigation proceedings will always be very time-consuming and, as the business will not be able to operate normally during the dispute, there is the potential that the company may collapse or be significantly damaged by the time the dispute is resolved. Thus, when drafting shareholder agreements and company charters, you must aim to minimize the possibility of such a situation from the outset, either by preventing the other side from breaching the agreement or ensuring that you still have enough control over the business to keep it running should a shareholder dispute arise. Below are some practical tips for ensuring the validity of these instruments and ensuring that your business operations remain uninterrupted.
1 Ensuring the existence of a quorum for the shareholder’s meeting
The 2014 Enterprise Law provides that, by default, if a shareholders’ meeting is re-convened for the third time (due to failure to meet the quorum in the first and second meeting), it can be conducted regardless of how many shareholders are present. This rule is often invoked when drafting shareholder agreements and company charters. The rule has the effect of minimizing deadlock and compelling shareholders to actively join meetings.
However, in practice, should the company have only a few shareholders (approximately 02 to 04 shareholders), such a rule may not bring any real benefits. If there is a disagreement, no shareholder will be absent from the meeting and lose his/her voting rights. He/she will surely join the meeting and the deadlock will be maintained.
The existence of this third meeting quorum rule also creates a serious risk. A major shareholder (who has the right to convene a shareholders’ meeting) can intentionally send meeting invitations to the wrong addresses so that the opposing shareholder(s) will not be present. Then, at the third meeting, that shareholder will have enough votes to pass any resolutions he/she desires. This will most likely constitute a clear breach of the terms of the company charter and/or shareholder agreement. However, from a third party perspective, such as the DPI, the only documents that will be reviewed are the meeting minutes and the resolution, and they will likely find those documents in compliance with the charter (since DPI is not aware of the circumstances surrounding the meeting invitations). It is not a third party’s duty to monitor the internal issues of the company, especially since the 2014 Enterprise Law provides that a shareholders’ resolution will always be deemed valid and effective until it is declared otherwise in court or arbitration. The result is that any shareholder having the right to convene a shareholders’ meeting can use this scheme to issue shareholders’ resolutions and cause the DPI to alter the company license in almost any way they wish (even changing the legal representative of the company). To reverse this, the opposing parties need to file a lawsuit with the court or arbitration and a final resolution may take up to 01 – 02 years (which is too late to undo any damage done).
Thus, the shareholder agreement and company charter should modify the above-mentioned default rule and ensure that a quorum will always be required, regardless of how many times the shareholders’ meeting is re-summoned.
2 Legal representatives and company seals
It is common practice in a joint venture that the shareholders will agree to split the appointment of the management personnel, e.g. one party appoints the CEO while the other party appoints the CFO. However, it should always be kept in mind that neither the title of CEO nor CFO is recognized under Vietnamese law. The only title that matters to the authorities is the legal representative (i.e. the person who can sign documents on behalf of the company). Your party may control both the CEO and CFO positions, but if they are not the legal representatives you will be powerless in a shareholder dispute and cannot even file a lawsuit on behalf of the company. On the other hand, if the other side has control over all the legal representatives, they can take whatever action they desire and it is very difficult for you to prevent them. During a dispute, removing or replacing the legal representatives will often be impossible due to the deadlock between shareholders.
Thus, if you have significant shares in a company, you should maintain control over at least 01 legal representative and, if possible, mandating that his/her signature will be required for important transactions.
It should be further noted that even if you control the legal representative, it may also be useless if you are not in possession of the company seal. Though the 2014 Enterprise Law provides that the usage and requirements of the company seal depend on the regulations of the company charter, it is still common practice in Vietnam that a company document must be stamped with the company seal (in addition to being signed by the legal representative). Thus, if you do not have possession of at least 01 company seal, your legal representative may be powerless to take any official actions.
3 Control over bank accounts
Bank accounts are always important, and the party that has control over them has a significant advantage in a shareholder dispute. However, during formation, some parties primarily focus on the shareholder agreement and company charter and neglect to review the documents submitted to the bank when opening the company bank account(s). It is important to consider that the bank will allow the customer to regulate how the bank account(s) will be controlled (e.g. who can withdraw money, how many persons need to approve a high value transaction, etc.). This is a matter quite separate from the shareholder agreement and the charter. For instance, the shareholder agreement and the company charter may contain terms that require all documents to be signed by 02 legal representatives. However, if the bank account registration documents are neglected and the other party registers their legal representative as the sole person in charge, you may lose control over the bank account(s) when a dispute arises.
 Department of Planning and Investment, i.e. the government agency in charge of company registration.
Authors: Derek Phan
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