Often when new entrepreneurs set out to incorporate a Vietnam private limited company, they are confronted with certain basic questions that revolve around the definition of a corporation. For instance, what are the connotations of the term legal personality in the context of companies? What constitutes a Vietnam corporation? Who runs the company? What are their functions and liabilities? What is meant by a company’s Constitution? Where and how does limited liability come into play?
This guide provides answers to most of these questions and serves as a good starting point for individuals who are planning to incorporate a Vietnam company for the first time. If you have an overall understanding of what a company is, you can skip this article and proceed directly to Vietnam limited liability partnership registration guide that outlines the requirements, procedure, timeline and other relevant details of company incorporation.The following topics are covered in this guide:
The following topics are covered in this guide:
- Legal Nature.
- Company Secretary.
- Key Components.
- Memorandum and Articles of Association.
- Company Directors.
- Share Capital.
- Company Shareholders.
Legal Nature of Vietnam Corporation.
Individuals planning to incorporate a Vietnam company for the first time are often unsure of how an incorporated company differs from its owner from a legal perspective. Companies incorporated in Vietnam have two legal characteristics that enable them to undertake activities in their own right. They are:
- Separate legal personality.
- Legal capacity.
Separate legal personality.
The law treats a Vietnam incorporated company as being a separate person from its members and those who manage its operations. What this essentially implies is that:
- The company can incur and receive obligations and hold property in its own name, enter into contracts with its members, directors or employees and with third parties.
- The company can be the plaintiff or defendant in civil proceedings and in certain cases may be a defendant in criminal prosecutions.
- The legal rules that separate a company from its participants are referred to by lawyers as the corporate veil.
- The company continues unchanged even if the identity of its participants changes.
- The company can enter into legal relationships with its members or directors.
Consequences of treating a corporation as a separate legal entity.
- A company’s obligations and liabilities are its own and not of its participants.
- A company’s rights are its own and not those of its participants.
- A company can sue and be sued in its own name.
- A company has perpetual succession.
- A company’s property is not the property of its participants.
- A company can contract with its controlling participants.
Despite the general rule that a Vietnam incorporated company and its participants must be treated as separate legal entities, courts under certain circumstances (outlined below), treat both as the same person.
- Where the corporate form is used to avoid an existing legal duty.
- Where the company is being used to perpetuate fraud.
- Where the company is acting as the agent or partner of the controller.
- Wrongful trading provisions.
Legal capacity of a corporation.
Companies’ ability to carry out acts of legal effect is referred to as their capacity.
- Companies have full capacity to carry on or undertake any business or activity, do any act or enter into any transaction.
- Companies have the legal capacity to do most of the things that a natural person can do and some additional things - such as issue shares and create floating charges over their property.
However participants of the company may be permitted to decide on the limits of the powers of their creation. These limits may be spelt out in the company’s constitutional documents - the Memorandum of Association and Articles of Association.
How Does A Corporation Operate?
Companies operate through officers or agents. The directors are often considered as the “brain and nerve centre” of the company, followed by the members or shareholders. They represent the mind and will of the company and control what it does. Acts of the directors and members are acts of the company. The scope of the powers of each of these organs is defined by the Memorandum and Articles of Association, in addition to the general principles of Vietnam company incorporation laws.
The board of directors is responsible for the conduct and the management of affairs of a company. More specifically, they have fiduciary and ethical responsibility and accountability for what a company does. Shareholders being owners of the company have the power (through voting rights) to select members of the board of directors.
A private limited company incorporated in Vietnam may have one or more directors. However at least one of the directors must be a local resident of Vietnam. Listed public companies are required to have three directors.
Role of directors.
The role of directors is to manage or supervise the management of the business of the company. Functions vary depending on the size and type of company and the role of directors in it. In the case of small businesses, the directors manage the company’s business, in the sense that they work in the business and make day to day decisions involved in running it. In larger companies, directors take on a supervisory function, leaving day to day decision making to the executive management. As most of the company’s powers are vested in the board of directors, they actually control its affairs and are thus answerable to the company’s shareholders collectively.
Directors have very broad powers of management. This means that most of the capital and enterprise decisions that must be made by the company in the course of its operations, will be made by the directors.
Duties of directors.
Duties of directors fall under two broad categories:
- Statutory duties of care, skill and diligence.
- General law duties or fiduciary duties of loyalty and good faith.
Statutory duties are administrative duties, enforced by the Accounting and Corporate Regulatory Authority of Vietnam such as:
- General duties of disclosure.
- Updating and maintaining the accounting records of the company.
- Preparing the financial statement for the company’s Annual General Meeting.
- Ensuring that the first Annual General Meeting is held within 18 months of the incorporation of the company and, following that, in every calendar year, at an interval not exceeding 15 months.
- Ensuring that regular directors’ and shareholders’ meetings are held in order to review the company’s financial and trading position.
- Ensuring that the company maintains a members register and other statutory books at its registered office.
- Appointing an auditor within three months of incorporating the company.
General law or fiduciary duties, enforced by the Company are as follows:
- Directors must act in good faith and in the interests of the company. In other words, the director must act honestly. The interests of the company are the interests of its members, creditors, other companies in the group, employees, customers, suppliers, and the community.
- Directors must utilize their freedom to make decisions on the behalf of the company wisely.
- Directors must not place themselves in a position of conflict, where a personal interest conflicts with their duty to act in the interests of the company.
- According to Sec 339 of the Companies Act, directors must not knowingly incur debts, where there is reasonable ground to believe that the company would not be able to pay its debts. This duty comes into play only if the company is being wound up or if there are legal proceedings against the company.
- Sec 157 of the Companies Act prohibits directors from using information that they acquire by virtue of their position to meet their personal gains or to cause detriment to the company.
Consequences of breach of duty
Statutory duties are enforced by the Accounting and Corporate Regulatory Authority of Vietnam. Consequences of breach of statutory duties involves a fine imposed by the Registrar. Alternatively, legal proceedings can be initiated and if the offender is found guilty, criminal penalties such as a fine and prison sentence can be imposed.
General law duties are enforced by the company of the which the person is a director. A company’s civil remedies for breach of general law duties include the following:
- A court injunction that orders the director to stop doing something or to make him - her take remedial action.
- A demand for compensation, under circumstances where the director’s breach of duty has resulted in a loss for the company.
- A demand for repayment of profits, under circumstances where the director has made a profit by breaching his fiduciary duties.
- A court order to return property owned by the company, under circumstances where the director holds the company’s property as a result of breaching his/her fiduciary duties.
Role of shareholders.
Shareholders are members of a company. All Vietnam incorporated companies are required to have at least one member. Members are, broadly speaking, owners. They are people who have invested money with the company in the expectation that they will receive a return of their investment, if the company is successful, either in the form of distributions paid out of the company’s profits during its trading life or in the form of a growth in the value of their investment in the company, over time. In a company limited by shares, members are shareholders - people who have subscribed for or purchased shares in a company. Shareholders play an important role in raising capital for organizations.
Shareholders are granted special privileges, including the right to vote on matters such as elections to the board of directors, the right to propose shareholder resolutions, the right to share in distributions of the company’s income, the right to purchase new shares issued by the company, and the right to a company’s assets during a liquidation of the company. Generally, shareholders have a say in limited matters, when compared to directors.
Broadly speaking shareholders have the following powers as per Vietnam laws:
- Power to adopt, modify or repeal provisions in the company’s Memorandum or Articles.
- Power to veto certain reductions of capital, and in the case of public companies.
- Power to remove directors from office and approve auditors.
Shareholders also have reserve powers in the following matters.
- Where the Board is unable to act.
- To commence and prosecute legal proceedings where the alleged wrongdoers control the company.
- To ratify directors’ acts.
Each Vietnam company is required to have at least one company secretary who must be a natural person and have his/her principal or only place of residence in Vietnam. The company directors appoint the company secretary and the Articles of Association provide for the terms and conditions of office to be determined by the director.
The Company Secretary occupies a pivotal role in the incorporation and administration of the company. He/she is the person who ensures compliance with the many regulations affecting companies. He is the one who keeps the necessary registers, sends out notices, organizes meetings, takes down minutes and files whatever forms are required by Accounting and Corporate Regulatory Authority. The main function is to handle all the paperwork and procedural matters involved in running an incorporated company. In short, the smooth running of the company depends on his efforts.
Key duties include.
- Establishing and maintaining all company registers.
- Arranging for shareholder and director meetings.
- Lodging and filing documents with Accounting and Corporate Regulatory Authority.
- Acting as a liaison with the Stock Exchange and ensuring compliance with requirements - announcements, disclosure.
- Arranging for allotment and issue of shares and handling transfer and transmission of shares.
- Providing administrative assistance in the preparation and presentation of annual returns.
- Acting as advisor to directors, other officers and members.