Recently, Asia Legal assisted a joint-stock company (“Company“) to conduct a transaction to transfer shares of founding shareholders and amend the Company’s Charter.
This case is an opportunity for us to learn how to apply the internal management regulations of joint stock companies under the Enterprise Law 2020 in a profound way. Below is the background information of the case and this article outlines our experiences in dealing with legal issues arising through the above case.
Background
The Company was newly established in 2021 in the form of a joint stock company, founded by 4 (four) shareholders and doing business in the field of construction and construction materials supply. The company has no foreign investment capital. After a period of operation, the founding shareholders have the need to transfer a part of their shares to an individual. The transfer rate along with the rights of new shareholder post-closing deal has been agreed upon by the parties. After the transfer, the share ownership ratio of shareholders is as follows:
| Shareholder | Share ownership rate | Position in Company |
| First founding shareholder | 27% | Chairman of Board of Directors |
| Second founding shareholder | 27% | General Directors |
| Third founding shareholder | 18% | Department Director |
| Fourth founding shareholder | 18% | Department Director |
| Existing shareholder | 10% | Department Director |
The Company engaged Asia Legal’s legal services with the following request:
- Drafting the share transfer document to record the agreement of the parties; and
- Amend the entire Charter in accordance with law and the actual management of the Company.
A special feature of the Company at the time of establishment of the Company is all shareholders agree that the votes of shareholders at the General Meeting of Shareholders (“GSM”) are equal and all shareholders are members of the Board of Directors (“BOD”). At the same time, the two shareholders owning the largest number of shares respectively hold the positions of Chairman of the Board of Directors and General Director (“GD“), both concurrently being the legal representative of the Company. Each remaining minority shareholder, including new existing shareholders, heads a department within the Company. The Company does not have a Board of Supervisory (“BOS”).
The requests of the Company seemed simple at first, but after delivery of the first draft of the Company’s Charter, we received a lot of questions from shareholders about the terms related to the rights and obligations of shareholders and members of the BOD. This took us by surprise. Through the meeting with shareholders, we realized that we have not fully exploited the information and needs of shareholders, leading to the failure to meet the expectations of the client, forcing us to review the law and regulations thoroughly again. After the second editing, we are satisfied because we were able to answer all of our clients’ concern.
Issues
From the request of the Company, certain legal issues arise, generally belonging to the internal management aspect of the Company. We realize that the Company attaches great importance to protecting the interests of minority shareholders, the provisions of the Charter must be consistent the accuracy of the actual management and administration of the Company as mentioned above, but still be in accordance with the law and at the same time meet the needs of all shareholders. Basically, we have introduced the main provisions required in the Charter under Article 24 of the Enterprise Law 2020. Besides, we also identified a number of important issues that need to be resolved as follows:
- Identifying the Executive officers in the Company in order to bind the responsibilities of the Executive officers;
- Curbing related party and applying measures to monitor abusive related party transactions in the Company;
- Setting the conditions for the transfer of shares at the request of shareholders;
- Delimitation of authority of the Chairman of the Board of Directors and the General Director when exercising the rights of the legal representative;
- Determining the authority of the GSM, the BOD and the GD, especially the authority to approve, approve and decide on important transactions.
Practical experiences
1. Identifying the Executive officers in the Company in order to bind the responsibilities of the Executive officers:
The purpose of identifying the Executive officers in the Company is not only to specify the individuals that meet the conditions to manage the business[1], but also, to bind their responsibilities. Under the Law on Enterprise 2020, there are obligations that Executive officers shall comply with, which are to perform their rights and obligations diligently and with utmost good faith, and to ensure the maximum benefits of the Company; to be loyal to the interests of the Company. It is strictly forbidden to take advantage of their position and authority to use the information, know-how, business opportunities and assets of the company for wrong purposes or cause damage to the company. They also must promptly, fully and accurately notify the Company of related interests. An executive officer who violates one of the above provisions shall be personally or jointly responsible for compensating for lost benefits and damages to the Company and third parties[2].
With the concept of Executive officers, we settled on the rights and duties of each position and consider the role and function of that individual in the management structure of the Company. Based on that, the Executive officers within the scope of Company’s Charter comprises of: “Chairman of the Board of Directors, members of the Board of Directors, General Director, Directors of Departments, Chief Accountant“.
The Law on Enterprise 2020 approaches the concept of “Executive officers” by listing certain positions. In addition, the Company is relatively autonomous in determining Executive officers and their rights and obligations, but in that event, Executive officers must be specified in the Charter[3]. In this case, all shareholders hold the position of Director in charge of a specialized department, such as customer relations, product development, etc. They develop the department’s plan, organize the implementation of the plan through the coordination of subordinate staff by imposing order, check and review the results, report the outcome to GD and BOD. That is the exercise of the right to manage and operate the business activities of the person in charge.
Therefore, it is necessary to bind the responsibility of the Department Directors to the Company not only because they are shareholders but also executive officers of the Company.
Particularly for the position of Chief Accountant, this individual plays the role of the head of the accounting apparatus, organizing the accounting work in the Company. The Chief Accountant also handles transactions with banks on behalf of the Company, and works with tax authorities in procedures related to the finance and accounting of the Company. It can be said that the Chief Accountant manages the entire accounting – financial system of the Company. Thus, it is vital to bind the Chief Accountant to perform his duties carefully, faithfully and loyally to the Company as an Executive officer in order to ensure results and the accounting system to be consistent with the law and without adverse consequences for the Company.
It should be noted that the Executive officers in any case do not include the Supervisor, the Head of BOS, because the function of the BOS is to review and supervise internal activities in the Company, which is different from the management function. This function is clearly demonstrated through the authority of the BOS as stipulated in the Enterprise Law 2020. Moreover, from the authority of the Supervisory Board, it can be seen that the subject to the inspection and supervision of the BOS are the activities performed by the Executive officers in the Company, especially for the BOD and the GD. Therefore, the Supervisor should not be the Executive officer in order to be consistent with Nemo judex in causa sua principle[4] and ensure the independent and objective of the BOS with the Executive officers.
2. Curbing related party and applying measures to monitor abusive related party transactions in the Company;
Based on experience, we realize that abusive related party transaction is one of the biggest challenges in corporate governance but often do not receive adequate attention at the time of establishment until the occurrence of dispute. One of the key issues surrounding abusive related party transactions is the identification of those related in the transaction and measures to monitor such transactions.
The legal definition of related parties should be interpreted to be broad enough to capture the party that presents a risk of potential abuse. One of the subjects who is considered as related party is controlling shareholder[5]. Law on Enterprise 2020 listed controlling shareholders as a component of related party with vague characteristics, notwithstanding that its definition is kept in silence. A similar concept is major shareholder being provided under Law on Securities 2019[6], but it is applicable to listed companies.
To solve this matter, we defined controlling shareholder is a shareholder who holds from 10% ordinary shares and above. We also applied measures such as disclosure of related interests to controlling shareholders and required approval from GSM or BOD for the transactions between the company and controlling shareholders or their related parties.
Usually, the control of a shareholder or a group of shareholders over company will manifest through one or more of the following signs:
- governing the adoption of resolutions of the GSM/BOD by holding a certain number (ownership percentage) of shares or votes in the company;
- governing through controlling the rights to convene GSM/BOD and collecting written opinions of the GSM/BOD in the company;
- governing through controlling the terms and conditions of the Charter, amending, supplementing or substituting the Charter, approving through contracts/agreements before, after the establishment of the company or after becoming a shareholder of the company;
- governing through holding a management position in the company.
We have filtered through all the above characteristics and believe that applying only one of them will not be able to classify shareholders because no shareholder holds blocking minority shares or votes to veto resolutions of the GSM or the BOD in his own, all are eligible to convene the GSM, the BOD, nominate candidates to join the BOD, all are Executive officers and directly participate in operating, administering the Company. In fact, all shareholders participated in the process of amending the Charter this time and each shareholder’s request for the terms and conditions of the Charter was considered thoughtfully by the GSM.
Therefore, we have approached the concept of “controlling shareholders” to the maximum extent in order to limit the omission of subjects. Therefore, although the difference in share ownership is not large, we still rely on this characteristic and choose the lowest ratio of 10%, not only because this is the smallest amount of shares owned, but also because this number allows shareholders to exercise control over the meeting of the GSM and members of the BOD. It can be said that, in this case, the percentage of share ownership is the most distinctive feature when determining the rights of shareholders.
It should be noted that the notion of “controlling shareholder” was customized in the specific case of the Company, which may not be applicable to other companies. Hence, it is necessary to distinguish “controlling shareholder” in the Company from shareholders or stakeholders in other organizations when developing the concept of related party.
[1] Article 17 of Law on Enterprise 2020
[2] Article 165 of Law on Enterprise 2020
[3] Paragraph 24 Article 4 of Law on Enterprise 2020
[4] Nemo judex in causa sua principle is a rule against bias. It laid down a principle of natural justice that no one is a judge in his own case. This is the principle that we put into the Charter. The Law on Enterprise 2022 neither sets out this principle clearly nor prohibit the Supervisor to become an Executive officer.
[5] Paragraph 23 Article 4 of Law on Enterprise 2020
[6] Paragraph 18 Article 3 of Law on Securities 2019
