A joint stock company is a model that individuals and organizations doing business in Vietnam often choose to establish. This comes from the flexibility in the transfer of shares as well as the acceptance of new shareholders.  This model also provides diversity in capital-calling tools. However, this flexibility, specifically the freedom to transfer shares, also indirectly causes some difficulties for shareholders in the process of share transactions. We can see that, if the enterprise operates under the LLC model, the transfer of capital between members will need to be done with one more extra step, which is changing the member’s information at the business registration agency. However, with the joint stock company model, after 3 years from the date of establishment, shareholders are free to transfer shares and the transferee will only become a shareholder of the company when their information is recorded in the Shareholder Register. In this method, it is not a requirement to carry out extra procedures to change information at the business registration agency (the exception is cases where the shareholder is a foreign investor).

Many individuals and organizations do not pay attention to whether their information has been recorded in the Shareholder Register or not. There are often cases where the company does not fulfil its responsibility to record the shareholder status of the transferee of shares. This results in the loss of benefits that the transferee should have received according to the relevant provisions of Vietnamese law. Therefore, through this article, we would like to inform you of some of the issues that arise in relation to the Shareholder Register as well as the right shareholders have to request enterprises to record their names in the Shareholder Register.

1. Shareholder Register and the impact on the rights of the transferee

The shareholder register is a document that records information about the share ownership of shareholders in the company. All changes in shareholder’s information, number of shares held, type of shares, etc. will be recorded in the shareholder register and updated if any content changes. The shareholder register can be prepared in the form of a paper document or an electronic data set.

For founding shareholders, their information is recorded on the Enterprise Registration Certificate. However, as we see changes in shareholders after 03 years from the date of establishment, these changes will not be updated on the Enterprise Registration Certificate but will be recorded in the shareholder register according to regulations. We can see that we should not take lightly whether a shareholder’s information has been recorded in the shareholder register or not. Corporate law states that the transferee is only considered a shareholder of the company when the information of the transfer of shares is recorded in the shareholder register as prescribed in Clause 6, Article 127 of the Law on Enterprise 2020, specifically:

“Article 127. Transfer of shares

……

6. Individuals and organizations receiving shares in the cases specified in this Article only become shareholders of the company from the time their information specified in Clause 2, Article 122 of this Law is fully recorded in the shareholder register.”

Regarding the above regulations, it can be seen that even when the parties in the transfer transaction have established the contract and completed the payment, the shareholder status of the transferee can only be established when it is recorded in the company’s shareholder register. When the shareholder status of the transferee arises, the rights of shareholders (such as the right to participate in the General Meeting of Shareholders, receive dividends, inspect books, etc.) arise. It is common for companies with many shareholders to have their shareholders forget to request the company to record their status as shareholders, which often leads to shareholders losing their rights.

2. What are the responsibilities of enterprises when they are recording shareholder’s information?

The shareholder register is managed by the company and the company is responsible for recording the shareholder status of the transferee within 24 hours from the time the shareholder requests. Share transfer transactions after 03 years are considered freely conducted regardless of the company’s consent. Therefore, in reality, there will be many cases where the company does not have goodwill or because of any personal conflicts, the company refuses to record the status of the individual or organization receiving the transfer.

As soon as you realize that your information has not been recorded in the Shareholder Register, the transferee needs to immediately notify the company in writing to request the company to update the transferee’s information in the Shareholder Register. The transferee needs to set a time limit in which the company must complete recording information in the Shareholder Register. After this time, the transferee can choose to have a written request for support from the business registration agency or file a lawsuit in court. Procedures for filing a lawsuit in Court comply with the provisions of civil procedure law.

3. Actual settlement at litigation agencies and advice for shareholders

The cases that the court has adjudicated, show that the Court not only relies on documents provided by the company but also on the nature of the transactions.  This is to consider the interests of the parties in the share transfer transaction as well as the shareholders’ rights. We can refer to the Court’s opinion in Judgment No. 11/2022/KDTM-PT dated February 28, 2022, of the High People’s Court when reviewing first-instance Judgment No. 01/2021 /KDTM -ST dated January 8, 2021, of the People’s Court of Binh Duong province that was appealed.  This is related to “Dispute between a person who is not a member of the company but has a transaction on transfer of contributed capital with the company”. Accordingly, the High People’s Court, after reviewing the case, agreed with the first instance Court’s resolution in determining the status of shareholders and the rights of shareholders and at the same time forcing the company to record the status of the transferee in the shareholder register, quoting the judgment of the Court of Appeal as follows:

“1. Suspension of the trial of the following requests of plaintiff Ms. Vuong Le X against T1 Joint Stock Company:

 – Force T1 Joint Stock Company to pay dividends to Ms. Vuong Le X at the level decided by the General Meeting of Shareholders;

– Force T1 Joint Stock Company to let Ms. Vuong Le X review, look and extract information in the List of shareholders with voting rights; Review, look, extract and copy the Company Charter, minutes of the General Meeting of Shareholders and resolutions of the General Meeting of Shareholders from December 5th, 2017 to present.

– Convene a general meeting of shareholders to re-elect members of the company’s Board of Directors per the law.

– Request to provide Shareholders of T1 Joint Stock Company with the company’s financial statements from 2017 to the present.

2. Accepting the request of plaintiff Ms. Vuong Le X to sue T1 Joint Stock Company regarding recognition of shareholder status as follows:

– Recognizing Ms. Vuong Le X as a shareholder of T1 Joint Stock Company with 782,180 shares in T1 Joint Stock Company.

– Force T1 Joint Stock Company to hand over shares or record information of Ms. Vuong Le X in the shareholder register following the corporate law and the Company Charter with 782,180 shares.”

The above issues related to the Shareholder Register often arise in small-scale joint stock companies and between shareholders or parties in transfer transactions who have close relationships. This has led to some cases where the transferee of shares has neglected to check their information on the Shareholder Register and assumes that they are a shareholder owning shares in the company. The transferee also relied on this understanding to carry out share transfer transactions to other third parties but did not understand that at the time of transfer to the third party, they had not fully met the conditions to be considered a shareholder of the company. Only when a dispute occurs, the issues related to whether the share transfer contract is invalid, the rights of shareholders not recorded in the shareholder register, and the rights of the third party transferee, are discussed by the parties and requested to be resolved by the prosecution agency (when they cannot reach a consensus with the company).

Therefore, advice for parties in a share transfer transaction is to check the shareholder status of the transferor. After establishing a share transfer contract, the transferee also needs to supervise the company’s recording of the transferee’s shareholder status in the Shareholder Register as well as in the company’s internal documents.

Legal basis:

• Clause 6, Article 127 of the Law on Enterprise 2020

Reference source:

• Judgment No. 11/2022/KDTM-PT dated February 28, 2022 of the High People’s Court

Time of writing: 16/01/2024

The article contains general information which is of reference value, in case you want to receive legal opinions on issues you need clarification on, please get in touch with our Lawyer  at  info@cdlaf.vn

You can refer for more information:

• Procedures for Vietnamese Enterprises Regarding Outward Investment
• Transferring Profits to Vietnam and  how to handle Violations in Outward Investment Activities
• Conditions for Establishing a Travel Company in Vietnam for Foreign Investors