Recently, a partner who is the Chairman of the Board of Directors of a company contacted us to ask for help with a legal issue that his company is facing while working with the newly appointed auditor. According to him, his company was formerly a state-owned enterprise, which was equitized in 2012. At the time of switching to operating as a joint stock company, the company had more than 200 shareholders who were employees of the company who had previously registered to buy shares with a charter capital of more than 40 billion VND. At the end of 2021, to supplement the lack of operating capital due to the company’s operating losses, the Company’s General Meeting of Shareholders approved a plan to issue additional shares to existing shareholders. The company received the money to buy shares from the shareholders and completed the registration of an increase in charter capital at the Business Registration Office (was granted a Business Registration Certificate recording the increase in charter capital). 

According to the provided Shareholder Register, from its establishment until before 2022, the Company has maintained more than 100 shareholders. In early 2022, a number of major shareholders collected and bought back shares from other shareholders, leading to a reduction in the number of shareholders in the Company to less than 100 and has remained so since then.

Compare with relevant provisions of (i) Securities Law 2006[1] effective from January 01, 01 to December 2007, 31; and (ii) Securities Law 12[2] Effective from January 01, 01, the Company meets the conditions to become a public company from the time of conversion to a joint stock company and is obliged to submit a public company registration dossier to the State Securities Commission (“SSC”) within 90 days from the date of meeting the conditions to become a public company.

The Company’s failure to submit the application for registration as a public company to the State Securities Commission before 2022 is an administrative violation in the securities sector (violation of regulations on public companies). The Company’s delay in submitting the application for registration as a public company is determined to be over 36 months and therefore the Company may be subject to a fine ranging from VND XNX the VND XNX due to late submission or failure to submit application for public company registration.[3]

The time for calculating the statute of limitations for handling administrative violations in the securities sector is specified in Article 6.2.[4] and Article 6.3.b[5] Decree 156. The provisions of Article 6.3.b of Decree 156, although referring to Article 13.7 of Decree 156, only mention the act of late submission of documents while Article 13.7 of Decree 156 stipulates both the act of late submission of documents and the act of not submitting documents, so in this case, we believe that there is a basis to argue that the time of termination of the Company’s violation to determine the time of calculating the statute of limitations for administrative violations is the day when the total number of shareholders of the Company falls below 100 shareholders, because:

• Since the beginning of 2022, the total number of shareholders of the Company has been adjusted to less than 100 shareholders and there has been no change up to the present time; and
• The Company currently no longer meets the conditions to become a public company under the provisions of the Securities Law 2019 and is not obliged to report or submit a public company registration dossier to the State Securities Commission.

According to Article 6.1 of Decree 156 and Article 6.1.a of the Law on Handling of Administrative Violations 2012, the statute of limitations for administrative sanctions in the securities sector is 2 years from the date the violation ends. In our assessment, the risk of not submitting the public company registration dossier to the State Securities Commission is controllable.

However, the legal risks arising from the Company issuing shares to more than 100 shareholders without offering securities to the public as prescribed in Article 4.19 of the Securities Law 2019 (the legal document in legal effect at this time) are much more serious.

According to the provisions of Articles 16.1 and 25 of the Securities Law 2019, the issuance and offering of new shares to existing shareholders of the Company as mentioned above must be registered with the State Securities Commission and the Company is only allowed to issue shares to existing shareholders after the State Securities Commission has issued a Certificate of Public Offering of Securities and the Company has published the issuance notice in an electronic or printed newspaper for three consecutive issues. However, in reality, the Company has not carried out any of the above procedures before issuing shares to existing shareholders and registering to increase charter capital with the business registration authority.

The Company’s offering and issuance of shares to more than 100 existing shareholders without submitting a registration dossier to the State Securities Commission is an administrative violation in the securities sector (violating regulations on public offering of securities in Vietnam). Pursuant to Article 10.5 and Article 10.8 of Decree 156, the Company may be subject to various forms of sanctions, including (i) fines ranging from VND XNX the VND XNX; and (ii) the remedy is to force the recall of issued shares and refund to shareholders the purchase price of shares plus interest.

We have found a number of administrative penalty decisions issued by the State Securities Commission against two public companies (including: TSG Investment and Construction Joint Stock Company[6] and Construction Investment and Construction Joint Stock Company 134[7]) to handle the act of offering and issuing individual securities by these companies but not registering with the State Securities Commission. Accordingly, in addition to imposing monetary penalties, the State Securities Commission requires these companies to recall the shares they have offered and to refund investors the money for purchasing shares or deposits (if any) plus interest calculated at the interest rate stated on the bond or the interest rate of the bank’s non-term deposit where the violating companies opened an account to collect money for purchasing shares or deposits at the time the decision to apply this measure takes effect within 15 days from the date of receiving the investor’s request.

The application of the above-mentioned remedial measures by the State Securities Commission may cause many practical consequences, causing many difficulties and impacts on related parties. Specifically, many shareholders at the time of the Company’s capital increase are no longer working at the Company and do not hold any shares because they have transferred all of their shares to others, so it is not easy to contact and request these shareholders to complete the procedures. The rights of the transferee of shares from the original shareholders who have done so in good faith (have completed payment and have been recognized by the Company as shareholders) have not been mentioned in the penalty documents of the State Securities Commission, so it is unclear how they will be handled.    

In the case of the Company, because the transaction of buying and selling shares between shareholders and the Company is a civil transaction and can be declared invalid if it does not comply with the regulations on form. Article 119.2 of the 2015 Civil Code stipulates: “In cases where the law stipulates that a civil transaction must be expressed in a notarized or certified document, registration must comply with that regulation”. As analyzed above, the Company is only allowed to offer shares to its existing shareholders after completing the registration procedure with the State Securities Commission, so in this case, the share purchase and sale transaction between the Company and the shareholder is at risk of being invalidated due to not meeting the legal formalities if there is a complaint from the shareholder who registered to buy shares before.

The auditors have considered the existence of the above-mentioned legal risks (which, if they occur, would be very difficult to handle thoroughly and absolutely) to be a material event and have refused to conduct an audit for the Company. In addition, we understand that the Company has received a number of letters expressing interest in investing capital to become a major shareholder of the Company from a number of potential investors. In this case, we believe that the issue of the Company’s previous invalid capital increase will be carefully considered during the legal due diligence process conducted by the investor and will certainly be a significant obstacle to the decision to participate in investing capital in the Company or not.   

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[1] Article 25.1.c and 25.2 of the Securities Law 2006.

[2] Article 32.1.a and 32.2 of the Securities Law 2019.

[3] Article 13.7 of Decree 156/2020/ND-CP of the Government issued on December 31, 12, stipulating administrative sanctions for violations in the field of securities and the securities market (“Decree 156“).

[4] The time for calculating the statute of limitations for administrative violations in the securities sector is prescribed as follows:
a) For administrative violations in progress, the statute of limitations is calculated from the time the person with authority to perform official duties discovers the violation;   
b) For administrative violations that have ended, the statute of limitations is calculated from the time the violation ends.

[5] b) For the violation of late submission of public company registration dossiers as prescribed in Clauses 1, 2, 3 and 4, Point a Clause 5, Clause 6, Clause 7, Article 13 of this Decree, the time of termination of the violation to calculate the statute of limitations for penalty is the date of submission of public company registration dossiers to the State Securities Commission.

[6] Decision No. 797/QD-XPVPHC dated October 27, 10 , and Decision No. 798/QD-XPVPHC October 27, 10.

[7] Decision No. 59/QD-XPHC dated January 30, 01.