The members contributing capital to a limited liability company or shareholders in a joint stock company jointly sign a membership agreement or shareholder agreement (hereinafter collectively referred to as “TTCĐ”) is becoming increasingly popular in practice. Vietnamese law currently does not have specific regulations on the form and content of this type of agreement. Respecting the right to freedom of agreement between parties within the scope of not violating the prohibitions of law and social ethics is one of the basic principles stipulated in Clause 2, Article 3 of the 2015 Civil Code. Therefore, capital contributors/shareholders (hereinafter collectively referred to as “shareholder”) can freely negotiate and sign a collective bargaining agreement to stipulate specific contents to protect their legitimate rights and interests as well as issues that the company’s charter (“Regulations”) or the law on enterprises has not yet regulated. This article will raise some legal issues to help the parties consider to build appropriate provisions in the TTCĐ to ensure the validity of this document, optimize the company’s operation as well as protect the rights and interests of the participating parties.
General overview of TTCĐ
As mentioned, Vietnamese law currently does not have a specific definition of a shareholder agreement. A shareholder agreement can be signed privately between a number of shareholders and is binding on the parties involved. The shareholder agreement will stipulate terms directly related to the company’s operations, the rights of shareholders, the conditions that shareholders must comply with, along with sanctions applicable if any violations occur.
Unlike the Charter, the GMS is not required to be made public, so shareholders are free to negotiate specific contents that have not been mentioned or are not suitable to be recorded in the Company Charter. The GMS can be established before or after the company is established. Founding shareholders can sign this agreement before the company is established to serve as a basis for regulating the relationship between shareholders and between them and the company. The GMS, after being signed, will help shareholders clearly understand their rights and obligations related to the establishment of the company and the subsequent operation of the company, and at the same time serve as a legal basis for regulating the relationships between shareholders. The GMS can also be established and signed after the company is established and put into operation in the following typical cases:
- Startups raising capital: When raising capital to expand, startups may need a shareholder meeting to protect the control of the founders, clearly stipulate voting rights and the mechanism for future exit (if any). The shareholder meeting can also help record the specific interests of new investors (especially in cases where investors invest in later rounds of funding into the startup in the form of preferred shares).
- Mergers and Acquisitions (M&A) transactions: A CTA is usually drafted after an M&A transaction. The signing of a CTA aims to protect the buyer’s investment and the rights of existing shareholders in the acquired company, through regulations on management structure, management decision-making power, transfer of shares/capital contributions, divestment, etc.
Basic contents of TTCĐ
A shareholder’s agreement may include many important contents such as: the establishment of the company, charter capital, capital contribution and ownership ratio of each shareholder, organizational and management structure, dividend distribution method, time and conditions for dividend distribution. In addition, the shareholder’s agreement may also regulate special issues such as the issuance of new shares, restrictions on the transfer of shares, special rights of shareholders, and the resolution of deadlocks and disputes. In particular, a shareholder agreement may protect minority shareholders by identifying “reserved issues” that require the consensus of all shareholders or a specific majority of voting shares.
Specifically, the content of TTCĐ can be divided into three main types including:
One is, Vote trust is related to voting rights. According to the Enterprise Law 2020, shareholders have the right to vote directly, through an authorized representative or other forms prescribed by law and the company’s charter. Vote trust may allow shareholders to pool their voting shares/capital contributions into a block by creating a voting trust (voting trust) and transferred to a trustee for a certain period of time. However, the trustee shareholders still retain economic benefits such as dividends and profits from the shares thanks to a trust certificate from the trustee. This method is often used to protect minority shareholders, helping them form a powerful bloc in voting on important decisions.
Secondly, Share transfer clauses related to share transfers. In practice, share transfer clauses on this content are often encountered in the following forms: (i) restricting the transfer of shares/capital contributions within a certain period of time; (ii) giving priority to selling shares/capital contributions to the company’s shareholders; (iii) the remaining shareholders must buy shares/capital contributions when a shareholder wants to sell or when an event occurs according to the agreement; (iv) requiring shareholders to sell shares/capital contributions when an event occurs according to the agreement; (v) requiring the sale of shares/capital contributions together when other shareholders sell; (vi) requiring other shareholders to sell together when that shareholder sells shares/capital contributions. These provisions aim to ensure the long-term commitment of shareholders to the company, or to give priority to selling shares to existing shareholders to maintain internal control.
Third, Shareholders are involved in the management of the company. This is an important benefit to encourage shareholders to participate in the agreement, by giving them greater power than other shareholders. These rights often include: (i) appointing people to management positions of the company; (ii) deciding or vetoing important issues of the company such as amending, supplementing the company’s charter, reorganizing the company, implementing large projects and contracts affecting the company’s assets, etc.
Compare the Articles of Association and the Company Charter
If the company charter is considered a mandatory legal document, acting as a “charter” that constitutes the company, then the TTCĐ is also an important document that investors often draft and sign together before registering to establish or contribute capital to the company. Although both of these documents aim to regulate the rights and obligations of shareholders, they still have fundamental differences, specifically
| TTCĐ | Regulations | |
| Validity | An agreement between shareholders, not mandatory but plays an important role in specifically regulating the relationship between shareholders, is an agreement, a civil transaction that is binding on the signing parties. | As a mandatory legal document, it is binding on all members, shareholders in the company as well as individuals holding management positions or other positions mentioned in the Charter. Therefore, the company charter has a higher legal value than the GMS. |
| Nature | Flexibility in creation and amendment, depending entirely on the agreement between the parties signing. This Agreement only applies to the shareholders who have signed it and is not considered an amendment or supplement to the Charter unless agreed by all shareholders and clearly stated in the Charter. | Considered as the “law” of the company, it is built on the provisions of the Enterprise Law and signed by the founding shareholders when registering to establish the company. The company must operate within the provisions of the Charter and amending the Charter requires a more complicated process. |
| Write comment here… | More flexible and diverse, delving into specific aspects that the Charter does not cover or is not appropriate to record. Key contents may include:– Special rights and obligations of shareholders (such as purchase rights, sale rights, preemptive rights to purchase or transfer, etc.).– Commercial agreements between shareholders (such as key personnel nomination rights, reservations, restrictive covenants, deadlock resolution). | Covers basic business issues such as business information, organizational structure, charter capital, shareholder rights and obligations, profit sharing principles, etc. specifically regulated in Article 24 of the Enterprise Law 2020. |
| Priority when there is a conflict | No priority is given where a conflict arises. However, shareholders may agree that the CTC shall take priority, and in this case the parties may amend the charter to ensure compliance with the CTC. | Take precedence and be referenced first in the event of any conflict. |
| Terms and Conditions | It is necessary to meet the conditions for the validity of a normal civil transaction, including the voluntariness of the parties, civil conduct capacity and other conditions as prescribed by civil law. | It is valid when it is constructed in accordance with the requirements on content and form as prescribed by the Law on Enterprises, and is recognized by the business registration authority when the company is established, or is approved by the competent authority of the company. |
In practice, to ensure the effectiveness of the GMS, and to resolve issues that may arise due to differences between the GMS and the Charter, shareholders can choose the following methods: (i) reflect the maximum content of the GMS in the Charter; (ii) clearly agree on the order of priority for applying the provisions of the GMS in the event of a conflict or inconsistency between specific provisions of the GMS and the Charter; and (iii) clearly stipulate the obligations of shareholders in ensuring that all provisions of the GMS are effective, including amending the Charter to the extent necessary.
Article written by: Nguyen An Huy – Trainee Lawyer
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