Mechanism For Disputes Settlement, Protection Of Interests And Divestment Of Minority Shareholders

Authors: Nguyen Thi Huyen Anh – Senior Associate, Tran Trung Hieu – Paralegal.

In a joint-stock company, the principle of voting according to the proportion of capital ownership helps enterprises operate flexibly, but it can also create a power gap between the dominant shareholder and the minority shareholder. Although only owning a small percentage of shares, minority shareholders still play an important role in supervising governance activities and ensuring the transparency of the enterprise. In order to limit the abuse of power and protect the legitimate rights and interests of this group of shareholders, the Law on Enterprises 2020 has stipulated many mechanisms for handling disputes and creating a legal exit when the interests of shareholders are affected.

1. Who is a Minority Shareholder?

Currently, the Law on Enterprises 2020 and current legal regulations have not given the concept or fixed a specific ownership ratio to identify minority shareholders (MS). However, the identification of MS can be considered through the thresholds of share ownership ratio prescribed by law for major shareholders and the rights of shareholders according to the total number of shares owned.

Specifically, according to Clause 18, Article 4 of the Law on Securities 2019, a major shareholder is a shareholder who owns 5% or more of the issuing organisation’s voting shares. In addition, Clauses 2 and 5, Article 115 of the Law on Enterprises 2020 stipulate that shareholders or groups of shareholders owning 5% or 10% of the total ordinary shares, or a lower percentage according to the company’s charter, are entitled to exercise certain rights in corporate governance.

From the above provisions, it can be seen that the law does not directly define MS but indirectly establishes the ownership thresholds of 5% and 10% as a basis for discriminating some rights of shareholders. Therefore, MS are often understood as shareholders who hold insufficient shares ratio to govern the adoption of company decisions and are only entitled to have rights in accordance with the ownership threshold prescribed by law or the company’s charter.

2. Mechanisms for the protection and settlement of disputes of minority shareholders

Due to the General Meeting of Shareholders operates on the principle of majority voting, shareholders who own a large percentage of shares have an advantage in deciding the company’s affairs. In practice, disputes between dominant shareholders and minority shareholders often arise from three main reasons:

• Not being provided with sufficient information about the company’s activities;
• Restricted right to attend and vote at the General Meeting of Shareholders; and
• The domination and abuse of power of shareholders holding large shareholding ratios or the Board of Directors when issuing decisions in contravention of regulations, affecting the legitimate rights and interests of minority shareholders.

In order to protect the legitimate rights and interests of MS when their rights are infringed, the Law on Enterprises 2020 stipulates many protection mechanisms corresponding to each threshold of share ownership ratio, including:

(i) Right to attend and vote at the General Meeting of Shareholders

According to Clause 1, Article 115 of the Law on Enterprises 2020, ordinary shareholders have the right to attend and speak at the General Meeting of Shareholders and exercise the right to directly vote, through an authorized representative or in other forms prescribed by the company’s Charter. Each ordinary share corresponds to one vote.

In addition, Article 16 of the Law on Enterprises 2020 prohibits acts of obstructing shareholders from exercising their right to attend meetings and right to vote. This regulation creates an important legal basis for minority shareholders to participate in the company’s decision-making process and limits the situation of being excluded from meetings or deprived of right to vote in contravention of regulations.

(ii) Right to access information and supervise the enterprise

Clause 1, Article 115 of the Law on Enterprises 2020 stipulates that ordinary shareholders have the right to consider, look up and extract the company’s charter, the list of shareholders with the right to vote, the minutes of the meeting and the resolution of the General Meeting of Shareholders.

For shareholders or groups of shareholders owning 5% or more of the total ordinary shares (or a lower ratio according to the Charter), Clause 2 of Article 115 also expands the right to access information, including the right to review the minutes book, resolutions of the Board of Directors, financial statements and request the Supervisory Board to examine each specific issue related to the management and government of the company when deemed necessary.

This is an important mechanism to help minority shareholders supervise governance activities, promptly detect signs of violations and protect their interests.

(iii) Right to request the convening of the General Meeting of Shareholders

Shareholders or groups of shareholders owning 5% or more of the total ordinary shares or a lower ratio according to the company’s charter have the right to request the convening of the General Meeting of Shareholders in statutory cases.

According to Clause 3, Article 115, this right is exercised when the Board of Directors seriously violates the rights of shareholders, the obligations of managers or makes decisions that exceed the assigned authority; or in other cases according to the company’s charter.

The request for convening must be made in writing and must clearly state the information prescribed by law, and at the same time be accompanied by documents and evidences of the violations of the Board of Directors or decisions beyond its jurisdiction.

This mechanism is meaningful in case the minority shareholder thinks that important issues of the company should be brought before the General Meeting of Shareholders but the Board of Directors does not conduct the convening as prescribed.

(iv) Right to nominate members of the Board of Directors and the Supervisory Board

According to Clause 5, Article 115 of the Law on Enterprises 2020, shareholders or groups of shareholders owning 10% or more of the total ordinary shares (or a lower percentage according to the company’s charter) have the right to nominate persons to the Board of Directors and the Supervisory Board.

This right creates conditions for minority shareholders to have a voice in the enterprise governance structure, contributing to strengthening supervision activities and limiting the absolute dominance of major shareholders.

(v) The right to initiate a lawsuit and request the cancellation of an unlawful resolution

One of the most effective protection mechanisms for minority shareholders is the right to sue under the Enterprise Law 2020.

According to Article 151, within 90 days from the date of receipt of the resolution or the minutes of the General Meeting of Shareholders or the minutes of counting of vote regarding the solicitation of opinions from the General Meeting of Shareholders, shareholders owning 05% or more of the total ordinary shares or a group of shareholders owning 05% or more of the total ordinary shares (or a lower ratio according to the company’s charter) have the right to request the Court or Arbitrator to cancel the resolution of the General Meeting of Shareholders if the resolution is approved in contravention of the order and procedures or contains contents that violate the law or the company’s charter.

In addition, Article 166 allows shareholders or groups of shareholders who meet the statutory conditions to sue members of the Board of Directors, Directors, General Directors or other managers when these persons violate their obligations, abuse their positions and powers or cause damage to the company.

The above provisions create a legal basis for minority shareholders to use litigation procedure measures to protect their legitimate rights and interests, and at the same time contribute to ensuring transparency and accountability in corporate governance.

3. Capital withdrawal mechanism

Pursuant to Article 119 of the Law on Enterprises 2020, shareholders in a joint-stock company are not allowed to withdraw capital contributed in ordinary shares from the company in any form, except for the case of being repurchased by the company or another person. Specifically:

(i) Request the company to repurchase the contributed shares (Article 132 of the Law on Enterprises 2020)

The company’s shareholders may request the company to repurchase their contributed shares in case the shareholders have voted not to approve the resolution on the reorganization of the company or change the rights and obligations of the shareholders specified in the company’s charter.

(ii) Transfer of shares (Clause 1, Article 127 of the Law on Enterprises 2020)

According to Clause 1, Article 127 of the Law on Enterprises 2020, shareholders’ shares are freely transferable, regardless of the ownership ratio, except for the case of ordinary shares of founding shareholders within 03 years from the date of establishment of the company according to Clause 1, Article 120 or in case the company’s charter restricts the transfer of shares.

For minority shareholders, the above regulations contribute to protecting legal rights and interests by creating a legal divestment mechanism when they no longer want to continue to be attached to the company. Through the right to request the company to repurchase shares in statutory cases or the freedom to transfer shares, investors can proactively protect the termination of shareholder status when their legitimate rights and interests are affected.

4. Some practical notes for minority shareholders

Firstly, the exercise of shareholders’ rights depends not only on the ownership ratio but also on the type of shares, the company’s charter and statutory conditions. Therefore, before exercising the rights, shareholders need to accurately determine the legal basis and conditions applicable to their case.

Secondly, shareholders need to pay attention to the order, procedures, time limit and evidence when exercising their rights, especially for requirements related to the convening of the General Meeting of Shareholders, inspection of management and government activities or requests for cancellation of resolutions. Failure to properly meet these requirements may affect the ability to protect the rights and interests of shareholders.

Thirdly, when a dispute arises, shareholders should fully evaluate the dossier, the company’s charter, resolutions and behaviors of related parties before choosing a settlement plan. Identifying the right subjects, requirements and legal mechanisms from the beginning is important in limiting risks and ensuring the efficiency of the dispute settlement process.

In practice, for disputes or management issues of a complex nature, shareholders can consider having a consultation with a lawyer for assistance in assessing the legal position, reviewing records and the company’s charter, determining the settlement plan, assisting in negotiation or carrying out legal procedures, resolving disputes in accordance with the law.

📩 BOOK A CONSULTATION WITH CDLAF’S LEGAL TEAM

Do not let procedural errors disrupt your business plans. Contact CDLAF today to receive a preliminary risk assessment from our team of Lawyers:

Hotline/Zalo: [+84 909 668 216]

Email: info@cdlaf.vn

You can refer for more information:

• • Arbitrability: Notes For Enterprises When Choosing Arbitration As A Dispute Resolution Mechanism
  • Defective Arbitration Clause: Handling Guidelines And Solutions For Enterprises
  • Validity of Arbitration Agreements: Notes for Enterprises
  • Estimating the Cost of Closing an FDI Enterprise – Why a Legal & Tax Health Check Is Needed Before Filing for Dissolution
  • Handling Capital After Dissolution for FDI Enterprises: Conditions for Closing the DICA Account and Legally Remitting Funds Abroad