[Blaw] Project

HANOI UNIVERSITY

Faculty of Management and Tourism

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BUSINESS LAW

LAWS ON MINORITY

SHAREHOLDERS PROTECTION

Tutor: Ms. Ho Thuy Hang

Group members: Tut 3 AC12

Nguyen Thi Hai Linh ID: 1204010055

Vu Hong Ngoc ID: 1204010068

Duong Thuy Linh ID: 1204010051

Hoang Thi Thuy Quyen ID: 1204010080

Doan Thu Trang ID: 1204010104

Hanoi, December 5th 2014

TABLE OF CONTENTS

I. Introduction.............................................................................................1

II. Current regulations on protection of minority shareholders...............

1. The right of minority shareholders regarding the general meeting..................

1.1. Calling for a general meeting..........................................................................

1.2. Attending and voting at the general meeting...................................................

1.3. Apply the condition of Shareholder's Meeting.................................................

2. The right to appoint director................................................................................

3. The ability to control major transactions............................................................

4. The right to request the company to buy back shares........................................

5. The ability to access company’s information.......................................................

6. Pre-emptive right....................................................................................................

III. Current situations and shortcoming regulations ................................

1. Current situation of minority shareholder protection........................................

1.1. Situation of violating shareholders’ basic rights.............................................

1.1.1. Right to attend and vote in Shareholders’ Meeting is restricted.......................

1.1.2. Right about information of shareholders...........................................................

1.2. State shareholders’ abuse of power in shareholding companies....................

1.3.Violation of minority shareholder’s right in reality................................................

1.4. Conflicts in the way of carrying out shareholders’ right..................................

2. Shortcoming regulations........................................................................................

IV. Recommendation and conclusion..........................................................

1. Recommendation....................................................................................................

2. Conclusion...............................................................................................................

REFERENCES..............................................................................................

Laws on minority shareholders protection

I. Introduction

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I. Current regulations on protection of minority shareholders

Definition of minority shareholder

Minority shareholders are shareholders who have minority stakes in a company that is

controlled by a majority shareholder.

The majority shareholder is most commonly the company's parent but may also be an

individual or a group of connected shareholders. This is more common with smaller

companies and in emerging markets.

Reasons why company must protect them

Theoretically, the investor protection issue can be viewed from a narrow (firm-level) or a

broad (country – level) perspectives. From the former perspective, minority shareholders

need to be protected because of the potential for oppression both by managerial power and

the majority rule. From the latter perspective, “minority shareholder protection is a significant

factor that can encourage investment and support the development of financial markets and

economic growth”. The corporate world today subdivides into rival systems of dispersed and

concentrated ownership. In this system, shareholders generally… “take a "hands-off"

approach with companies they own” and “maintain their distance and give executives a free

hand to manage”

1. The right of minority shareholders regarding the general meeting

1.1. Calling for a general meeting

In theory, ultimate control over a company’s business lies with the membersin a general

meeting. In practice, however, the residual powers of the membership are extremely limited

and general meetings are to a large extent controlled by directors. Be that as it may, the

shareholders’ meeting remains the main vehicle for shareholders who wish to influence the

course of corporate business.

In normal cases, the annual general meeting is the only yearly occasion when the general

body of shareholders is given the opportunity to consider, criticise and comment upon

important affairs of the company and where shareholders can voteon the directors'

recommendation as to dividends, to approve or disapprove the directors' remuneration, and, if

thought desirable, to remove and replace all or any of them.

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Article 79 of the Enterprises Act 2005 also provides for some specific cases where minority

shareholders have the right to request the convening of an Extraordinary general meeting:

-The Board of Management commits a serious breach of the rights of shareholders or the

obligations of managers or makes a decision which falls outside its delegated authority;

-The term of the Board of Management has been expired for more than six months and a new

Board of Management has not been elected to replace it;

-Other cases stipulated in the charter of the company.

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1.2. Attending and voting at the general meeting

Shareholder participation is an essential precondition for effective corporate governance.

Participation in general meetings helps shareholders, directly or indirectly, take dicisions and

manifest their wishes so as to direct the company in a way which best benefits them and

protects their interests.

Article 79 Enterprises Act 2005 also provides that odinary shareholders have the right to

attend and to vote at the general meeting as provided by law. The Regulations on Corporate

Governance also expressly prohibits public listed companies from any restriction on the

shareholders’ right to attend the general meeting.

1.3. Apply the condition of Shareholder's Meeting

The General Shareholder’s Meeting is recognized as the absolute institution representing the

Company and its decisions, adopted in compliance with the dispositions of these Statutes and

concerning all shareholders including those who are absent, abstinent or in disagreement.

The shareholders present, in a General Meeting that has been duly notified, can determine by

majority all issues that concern the General Meeting .

The Shareholders General Meeting is made up of all shareholders holding a minimum of one

hundred shares, either present or represented by proxy. The owners of less than one hundred

shares may form a group to reach the aforementioned number. The group will be represented,

either by one of the group or, by another shareholder who possesses in his own right the

number of shares necessary to take part in the General Meeting.

2. The right to appoint director

The shareholders exert indirect control over the company’s management through their power

to elect the directors. Where directors are appointed at the general meeting, a member holding

51 per cent of the voting shares is able to elect the whole of the board. As to the right to

nominate candidates for election to the board, it is also determined by the Company's articles

of association. Shareholders who wish to nominate candidates for election have to notify in

advance the company of their intention to propose that person for appointment. In addition,

they must adhere to the dates and follow the procedures set out in the articles.

3. The ability to control major transactions

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Although the board governs the managerment of company, shareholders till reserve some

powers at general meeting. Specificly, the law allow shareholders to participate in approving

important decisions of the company.

The Article 120.2 of Business Law 2005 states that “contract and transactions in equivalent to

less than 50% of total value of asset recorded in the lastest financial report of the company or

smaller percentage as stipulated in company charter will be approved by the Board of

Management”. However, for the transaction agreement that has the value of 50% or more of

the total assets ,recorded in the lastest financial report unless another ratio is stipulated in the

company charter, decision on investment must be approve by shareholder at the general

meeting(Article 96.1 point c, Business law 2005). The Board of Management will be in

charge of submitting daft contracts or explain the main content of intended transactions

during the meeting This law prevents the manager to abuse their power and act for their own

interest which is discourage the benefit of shareholders. As mentioned above, minority

shareholders also have the right to attend the Meeting as well as vote for their own opinion

except the one have related benefits( Article 120.3, Business law 2005).

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4. The right to request the company to buy back shares

According to the Business Law 2005 stipulated in the Article 90.1, a sharehoder will be

entitled to request the company to buy back his own shares if such shareholder votes against

decisions of the Shareholders’s Meeting in relation to the construction of the company ar

alteration of the rights, obligations of the shareholders that is stipulated in the company

charter. Reconstruction or alteration of the right and obligation have significant negative

impact on minority shareholder. Therefore, the law accepted give them some protection

against the pressure of managers and majority parties. This law also states that the company

must buy back shares at market price or a price as calculated by principle in the company

charter within 90 from the date of receiving such request. If the price fail to be agreed,

shareholder can have other alternatives like sell to other persons or companies.To carry out

this right, sharehoders must sent the request which must be in writing form within 10 days

from the date of adoptin decision.

5. The ability to access company’s information

A crucial condition for minority shareholders is the guarantee of a high degree of

transparency It is obvious that financial transparency and adequate information disclosure are

of ultimate importance in all countries. This is helpful for shareholders to monitor the

company, to make their investment decision, and to exercise their control over the company

through other means. Unfornately, major shareholders who alsway want to takeover the

company and expand their influence, often find way to cover the information for their own

profit. As for the controlling shareholders, by virtue of their control, they have way of

obtaining information, including, for example, from their representatives on the board of

directors. Directors and officers are presumed to be well aware ofcorporate information.

Minority shareholders do not have these advantages. So, in order to develop a strong stock

market, the laws and related institutions of a country must ensure that minority shareholders

receive good information about the value of a company’s business and have confidence that

the company’s insiders do not cheat investors out of most the value of their investments.

Under Vietnam Business law 2005, shareholder or group of shareholders holding more than

10% of total ordinary shares for atleast 6 month or a smaller ratio as specified in the company

charter have the rights to review company’s record, periodical and annual financial report in

the standard of form and reports of the Board of Supervision.

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6. Pre-emptive right

A pre-emptive right is the privilege of existing shareholders to purchase a new offering of

shares before the general pubic. This right aims at preserving the ownership stake of existing

shareholder.

Under the Article 79.1 which indicates the rights of an ordinary shareholder regardless of the

percentage of share owned, shareholders reserve the right to be given priority in subscribing

for new shares offered for sale in proportion to the number of ordinary shares each

shareholder holds in the company. In addition, Article 78.5 of Business Law 2005 also states

that “ same type of share will be given the same rights, interests and obligations”.

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III. Current situations and shortcoming regulations

1. Current situations of minority shareholders protection

Vietnamese corporate law, in comparison with more international jurisdictions, has fewer

codified protections of minority shareholders’ rights. Pure financial investors who hold

minority stakes need to always be aware of instances of self-dealing, dilution of shareholder

interests, transactions among related third parties, and other fiduciary duty violations by the

majority shareholders and management. Protecting minority shareholders, under aspect of

both theory and practice, currently still shows a lot of shortcoming, which discourages

investors, seriously affects business environment and effectiveness of raising funds for

economic growth. According to recent assessment of Deutsche Bank, if the stock markets in

countries like Malaysia, Singapore or Hong Kong get mark 10 for shareholder protection, the

number in Vietnam is just 2. Meanwhile, Report of Business environment 2010 with the topic

“Reform to overcome financial difficulties” by International Finance Organization (IFO) and

World Bank (WB) metioned to the issue of protecting investors, especially minority

shareholders, and indicated that the rank of Vietnamese business environment continued to

decrease and stood at 93 this year.

Current situation of protecting minority shareholder in shareholding companies is particularly

expressed as follow:

1.1. Situation of violating shareholders’ basic rights

Shareholders’ right in shareholding companies was stipulated clearly in Enterprise Law, but

in fact, situation of violating shareholders’ rights still occurs regularly.

1.1.1. Right to attend and vote in Shareholders’ Meeting is restricted

Enterprise Law clearly provides that all ordinary shareholders have the right to participate

and discuss in all Shareholders’ Meeting and vote directly or via proxy; an ordinary share

will be conferred one vote (Article 79.1.a, Enterprise Law 2005).

However, in reality, most of shareholding companies do not follow this article fully. Reasons

that the corporations give are not based on particular legal grounds, just general ideas to

justify their violations like narrow organizing space which is not enough for all shareholders

in the company.

1.1.2. Right about information of shareholders

A majority of shareholders do not have access to important information of the company or

not sufficient or lack of accuracy and loyalty. Minority shareholders almost do not receive

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announcement about decisions of Shareholders’ Meeting, summary of financial statement and

notice about dividend payment.

1.2. State shareholders’ abuse of power in shareholding companies

When being State corporation, State owner’s behavior is far away different from the use of

ownership of the State with the role of shareholder in shareholding company after conversion

process.

1.3. Violation of minority shareholder’s right in reality

In fact, the progress of building legal corridor to protect minority shareholder seems to

happen slowly. If each shareholder is regraded as a part of ownership in the corporation,

minority shareholders are owners not having right to raise their voice, therefore, there is no

essential respect for them.

Minority shareholders also invest finance in corporation. Nevertheless, their rights have not

been completely secured, which makes them suffer a lot of loss from majority shareholers’

creating pressure.

1.4. Conflicts in the way of carrying out shareholders’ right

Shareholders’ lack of awareness is also one of the reasons leading to long-term confilcts

inside the company. Once Board of Management violates regulations and do not complete

their missions, shareholders who do not have alternative rights for their BOM and write

denounment paper requiring interference of the State as the company shows the sign of

violating financial management regime, shareholders do not request Board of Supervision’s

solution but for inspection and control of the State organs.

2. Shortcoming regulations

As we have seen above there are several protections offered to the minority

shareholders. However, these provisions are not adequate in the sense of the word as

they have many loopholes that put the minority shareholders at a disadvantage.

First, minority shareholders cannot supervise the management because they have no

powers to call for a general meeting of shareholder as well as their inability to raise

motions at such meetings. The right to vote can be exercised at the shareholders

meeting that have bee convened legally, otherwise, any resolution arising from irregular

meetings will not be bidding on the company, the management or any other

shareholder. It divide the meetings into regular (closely held companies) and annual

(public held companies), and interim meetings. The power to convene a shareholders

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meeting therefore lies solely on the hands of the management. There is no way that the

minority shareholders can participate in this decision.

Secondly, minority shareholders operate in a delicate situation because of the rule of

absolute majority. Article 79 (shareholding company) grant broad powers to the

shareholders general meetings, since they are authoritative in providing directions.. The

majority rule is the one that gives powers to the shareholders to exercise their rights at

a general meeting. In most of company, the powers of the shareholders to supervise the

management are mainly controlled by the majority shareholders. Majority shareholders

can express their wishes with through voting, unlike the minority shareholders. One

share equals one vote. If you have 90% of the shares in a company, you have 90% of the

votes. This rule also applies to the shareholders general meeting, ranging from selecting

directors or passing of important issues.

Thirdly, in circumstances where the positive resolution mechanisms have failed to

protect the minority shareholders, it is quite impossible for to raise personal suits for

compensation. In addition, it is also not possible to bring derivative action. In

circumstances where the directors or majority shareholders are doing things that are

technically legal but which harm the minority shareholders in one way, the minority

shareholders can do nothing. Once more, we encounter another situation that

specifically works to the disadvantage of the minority shareholders. Article 80 gives the

minority shareholders a right to raise direct suits. It states that a director or supervisor

shall be liable to damages in case where his actions violate the law.

REFERENCES

http://text.123doc.vn/document/260569-nhu-ng-ba-t-ca-p-trong-vie-c-ba-o-ve-co-dong-thie-u-so-va-mo-t-so-kie-n-nghi.htm

http://luanvan.net.vn/luan-van/khoa-luan-bao-ve-co-dong-thieu-so-30656/

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http://luanvan.net.vn/luan-van/khoa-luan-bao-ve-co-dong-thieu-so-30656/



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