CorporateGovernanceInVietnam DTD 130907

8/11/2019 CorporateGovernanceInVietnam DTD 130907

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Corporate Governance in Vietnam

Foreign Direct Investment in Vietnam Tax, Legal &

Business Updates13th September 2007, Sheraton Towers, Singapore

By Dang The Duc

Managing Partner, Indochine Counsel

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Agenda

Introduction

Status of Corporate Governance in Vietnam

Legal Framework for Corporate Governance in Vietnam Enterprise Law 2005 and Corporate Types

Corporate Governance Requirements in Vietnam

Future of Corporate Governance in Vietnam

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Definit ion of Corporate Governance

OECD: Corporate governance involves a set of relationships betweena companys management, its board, its shareholders and otherstakeholders. Corporate governance also provides the structurethrough which the objectives of the company are set, and the means ofattaining those objectives and monitoring performance are determined(OECD Principles of Corporate Governance, 2004).

A key objective of corporate governance is to adequately protect thebest interests and fair treatment of the shareholders in a company, asa companys objective should be maximized the shareholder value forall its shareholders, both local and foreign.

OECD Principles of CG focus on five key elements:o the rights of shareholders

o the equitable treatment of shareholderso the role of stakeholders in corporate governanceo the disclosure and transparency, ando the responsibilities of the board of management

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The Overview of Economic Growth in Vietnam

Continued and high economic growth: GDP growth of 7.5-8.5% overthe past 5 years, and expected between 8-8.5% for the next 5 years

The private / corporate sector is fast growing:

o A large number of new companies established after the launch

of 1999 Enterprise Law (revised in 2005): As of August 2006,there were about 200,000 registered private firms

o Equitization/privatisation of SOEs is accelerated: So far, morethan 3,200 SOEs have been equitized, and more 1,500(especially large ones) to be equitized for the next few years.

The number of SOEs has been reduced to about 2,000 from12,000 in 1993

o Enterprises are becoming larger with complicated ownershipstructure

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The Overview of Economic Growth in Vietnam (Contd)

Stock market is developing fast:

o In June 2006, only 47 companies listed with marketcapitalization of 3% of 2005 GDP

o At present, more than 200 companies listed withmarket capitalization of more than 30% of 2006 GDP

o Large informal market (OTC): more than 3,000 stocks

Increased and continued FDI inflow into Vietnam: FDIreached $10.2 in 2006 and is expected to reach $15 thisyear

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Status of Corporate Governance in Vietnam

Corporate governance is still a new concept in Vietnam, and the CGframework is in the early stage of development:

o Just introduced in the Enterprise Law 1999 and the formation ofthe stock market in 2000

o The business community is not yet familiar with the term

o Improvements are being made especially when Vietnam is aWTO member (11 January 2007)

Vietnam ranked 170 out of 175 countries in terms of protectioninvestors (IFC/WB Doing Business Report 2007)

According to the recent IFC-MPDF survey in Vietnam, only 23% of

the companies surveyed understand the basic concept of CG, andthere remains a confusion between governance and managementbetween company directors

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Status of Corporate Governance in Vietnam (Contd)

A high decree of informality still exists in the corporate sector, with anunofficial stock market which is substantially bigger than the formalmarket.

There remains a large presence of State ownership in enterpriseseven in equitized/privatised SOEs, though this is being improved.

Key issues to be improved: investor protection is inadequate; related-

party transactions are pervasive; compliance with accountingstandards is insufficient; and disclosure and transparency are limited(World Bank Assessment, ROSC, June 2006)

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Legal Framework for Corporate Governance in Vietnam

Enterprise Law 2005, effective as of 01 July 2006 Securities Law 2006, effective as of 01 January 2007

Decision 12/2007/QD-BTC of March 2007 of the Ministry ofFinance (MOF) on Regulations of corporate governance

applied to companies listed in Stock Exchange / SecuritiesTrading Centers

Model Charter 2007 issued under Decision 15/2007/QD-BTCin March 2007 applied to companies listed in Stock

Exchange / Securities Trading Centers For credit institutions: Law on Credit Institutions 1997

(revised 2004), Decisions 36/2006/QD-NHNN and37/2006/QD-NHHH of the State Bank of Vietnam (SBV)

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Regulatory Authorities

Business Registrars / Provincial Department of Planning andInvestments (DPIs)

Ministry of Finance (MOF) The State Securities Commission (SSC), the securities regulator. It

was established in 1996 as a Government agency reporting directlyto the Prime Minister, but then reorganized in 2004 as an agency

under the MOF Securities Trading Centers (STCs):

o Ho Chi Minh City Securities Trading Center (HOSTC),established in July 2000 and recently converted into Ho ChiMinh City Stock Exchange, an one member limited liabilitycompany with the total chartered capital of VND1tril ($62.5mil)

o Hanoi Securities Trading Center (HASTC), established in March2005

Vietnam Securities Depository (VSD), established in May 2006 State Bank of Vietnam (SBV), the regulator for commercial banks and

credit institutions

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Enterprise Law and Corporate Types

Enterprise Law 2005 provides for four major legal forms of business:

o Limited Liability Companies (LLCs) including Single-MemberLLCs (SM-LLCs, with one member/investor only) and Multiple-

Member LLCs (MM-LLCs, with from two members/investors)o Joint Stock Companies or Shareholding Companies (JSCs)

o Partnerships

o Private Enterprises / Sole Proprietorships

For the CG issues, we will focus on LLCs and JSCs only.

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Enterprise Law and Corporate Types (Contd)

Limited Liability Companies (LLCs)

o Total members may not exceed 50

o May not issue shares and go listed

o Capital transfer is subject to right of first refusal

o Each members liability is limited to the amount of its capitalcontribution paid to the company

o Management structure:

Members Council

Chairman of the Members Council General Director / Director (CEO)

Inspection Committee (Control Board) if there are morethan 10 members

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Enterprise Law and Corporate Types (Contd)

Joint Stock Companies (JSCs)o Must have at least 3 shareholders but no maximumo Ownership is divided into ordinary shares and several types of

classes of preferential shareso May issue securities for fund raising and go listed if satisfying

listing requirementso Each shareholders liability is limited to the value of its shares

held in the companyo Management structure:

General Shareholders Meeting (GSM)

Board of Management / Board of Directors General Director / Director (CEO) Inspection Committee if there are more than 10 individual

shareholders or a corporate shareholder holds more than50% shares. Its members are between 3 5

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Corporate Governance Requirements in Vietnam

Investor Protection / Shareholder Rights

o Enterprise Law 2005 ensures the basic rights of the membersand shareholders: secure methods of ownershipregistration; convey or transfer shares; obtain relevant andmaterial information on the company on a timely and

regular basis; participate and vote in member/shareholdermeetings; and share in the profits of the company

o Secure methods of ownership registration: Under the EnterpriseLaw 2005, LLCs and JSCs are registered at the BusinessRegistrar (Provincial Departments of Planning and Investment

DPI). All changes in the members of a LLC are subject toregistration. For JSCs, legal proof of ownership is the recordalof the shareholders details in the shareholders register. Anyshareholder holding from 5% or more of the total shares of aJSC must report to and register with the Business Registrar.

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Corporate Governance Requirements in Vietnam (Contd)

Investor Protection / Shareholder Rights (Contd)

o Members and shareholders have the right to attend membermeetings and General Shareholders Meeting (GSMs):

Major important decisions require approval of 75% ofshareholders / members present, such as: sales of assetsequal to or more than 50% of the value of the companystotal assets; amendment of the Charter; andreorganization, liquidation of the company

Other decisions require approval of at least 65% of themembers / shareholders present (charter may not provide

for a lower %): An improvement compared with the formerForeign Investment Law 1996 (unanimous approvalrequired for certain issues)

Written resolutions require 75% approval

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Investor Protection / Shareholder Rights (Contd)o Transfer of shares: In general, shares of listed companies arefreely transferable. The Enterprise Law 2005 ensures that sharesare freely transferable except for some exemptions (such forvoting preferred shares and transfer of ordinary shares held bythe founding shareholders in the first 3 years). However, in

practice, the management of non-listed companies may interfereor block transfer of shares by way of delay or rejection inregistration of new shareholders in the shareholders register

o Right to obtain relevant and material company information on atimely and regular basis: Listed companies are subject to thestrict disclosure and reporting requirements (to the regulatory

bodies and the public). However, the information available toshareholders in a non-listed company is of poor quality ascompared with listed ones. Under the Enterprise Law 2005, onlyshareholder (s) holding more than 10% of the total share capitalhave the right to obtain the half-yearly and yearly financial reportsof the company

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Investor Protection / Shareholder Rights (Contd)

o Elect and remove board members: A shareholder or a group ofshareholders holding at leats 10% of the total voting shares (ora lower % under the charter) have the right to nominate amember of the board. For listed companies, at least one-third of

the board members must be non-executive. However, in fact,the majority shareholders control the election and removal ofthe board members. The concept of cumulative voting has beenintroduced in the Enterprise Law 2005.

o Share in profits of the company: Pursuant to the Enterprise Law

2005, the board makes a proposal to the GSM for approval onthe pay-out ratio for each class of shares. However, the boardmay decide on the timing of dividend payment and howdividends will be paid to shareholders (e.g. temporarypayments)

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Equitable Treatment of Shareholders

o The corporate governance framework should ensure theequitable treatment of all shareholders, including minorityand foreign shareholders. All shareholders should have the

opportunity to obtain effective redress for violation of theirrights.

o Generally speaking, the Enterprise Law is consistent with theinternational practices. Within any class of shares, all theshares shall be accorded with the same rights. However, some

weaknesses remain especially for protection of minorityshareholders

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Equitable Treatment of Shareholders (Contd)

o Fundamental rights are only available to a shareholder or agroup of shareholders holding more than 10% of the totalordinary shares, including the rights to nominate the candidatesto the board, the Inspection Committee; to inspect the minutes

and resolutions of the board, financial statements, companybooks; to call a general meeting; and request the InspectionCommittee to check on the issues of the management of thecompany.

o Quorum for a general meeting may be also an issue for minorityshareholders: 75% (first meeting), 50% (second meeting), and

% (third meeting)

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o The Enterprise Law 2005 introduces the provisions on related-party transactions and conflicts of interest, howeverimplementing rules are not yet issued especially for non-listedcompanies:

Board members, members of the Inspection Committee,

executive officers (general director/director, managers)have to disclose to the company within 7 days anytransaction that may cause a conflict of interests with thecompany.

Related-party transactions must be approved byshareholders (GSMs) if their value exceeds 50% of the

companys total assets for non-listed companies and 20%for listed companies. However, there is not any specificregulation for providing loans to senior executives in non-listed companies

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o The Securities Law 2006 and Enterprise Law 2005provides for general provisions on insider trading.

Transactions by insiders are allowed provided thatthey are reported to SSC, STC and the listedcompany.

o However, enforcement of these provisions has notyet started. There is not any criminal offence for the

insider trading under the Penal Code 1999. So far,the SSC only imposed certain administrativepenalties (e.g. monetary fines)

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Role of Stakeholders in Corporate Governance

o The corporate governance framework should recognize therights of stakeholders established by law or throughmutual agreements, and encourage active cooperationbetween corporations and stakeholders in creating wealth,

jobs and sustainability of financially sound enterprises

o Under the Enterprise Law 2005 and Securities Law 2006,stakeholders (e.g. employees, labour unions, suppliers,creditors) do not participate in the internal corporate makingprocess

o For equitized SOEs (even listed companies) some stakeholdersas party organizations, former line ministries and peoplescommittees (local governments) have certain influence on thecorporate decisions

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Role of Stakeholders in Corporate Governance (Contd)

o Not any specific codes of practice for the treatment of stakeholdershave been developed in Vietnam. Awareness of the corporatesocial responsibility is low.

o Employees and creditors can seek remedies through the courts.Employees are protected by the Labour Code and the Law onBankruptcy, and creditors are protected by the contract laws, the

Civil Procedure Code and the Law on Bankruptcy.o So far, there is not any specific regulations on the employee stock

option plans expect for general guidelines from the MOF for listedcompanies regarding bonus stocks

o Stakeholders have very limited and not-reliable information ofcompanies and this is not yet regulated. Creditors may haveaccess to the corporate information but under loan arrangements

o Law on Bankruptcy has been issued in Vietnam for more than 10years (first in 1993 and amended in 2004), but creditors rarely usethe law to enforce their rights as the process is time consumingand not effective.

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Disclosure and Transparency

o The corporate governance framework should ensure thattimely and accurate disclosure is made on all materialmatters regarding the company, including the financialsituation, performance, ownership and governance of thecompany

o Enterprise Law 2005 provides for basic disclosure requirementsfor companies. However, disclosure for non-listed companiesare still poor:

There is not any uniform disclosure of financial and non-financial information for non-listed companies. Quality ofthe information is poor

Non-listed companies are not subject to compulsoryauditing for annual financial statements (except for foreigninvested enterprises, financial institutions and SOEs)

Enforcement in case of non-compliance is weak. Only asmall number of companies fulfills the obligation to reportto the Business Registrar

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Disclosure and Transparency (Contd)

o Securities Law 2006 and Decision 12 contain relativelycomprehensive disclosure requirements for listed companies.

o Listed companies are subject to stricter disclosure requirementsthan non-listed ones. They are subject to annual report to theSSC and STC (audited financial statements filed within 90 daysfrom the end of fiscal year); and semi-annual and quarterlyreports (within 20 days from the end of the period). In addition,they disclosure is required when a material fact arises:

the company suffers a loss greater than 10% of its equity any of its managers are prosecuted in a court of law any investigation is conducted by the tax authorities on the

company the company signs a loan agreement or issues bonds with

a value equal to or more than 30% of its equity, and any information concerning the company that may seriously

affect the interests of the investors or the share price

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Disclosure and Transparency (Contd)

o Disclosure of related-party transactions: Disclosure of related-party transactions is required on financial reports in accordancewith VAS which are being developed and issued consistent withInternational Financial Reporting Standards (IFRS). However,the current disclosure requirements need to be improved

consistent with the IAS, and the definition of related-partytransaction should be broadened and clarified.

o There remain differences in the reporting requirements forvarious types of companies even among listed companies.

o The laws of Vietnam do not mandate for setting up an audit

committee of the board of management (board of directors).Under the law, the Inspection Committee is also required tooversee the audit functions, however in practice most ofexternal auditors often work exclusively with the management ofthe company.

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Responsibilities of the Board

o The corporate governance framework should ensure thestrategic guidance of the company, the effectivemonitoring of management by the board, and the boardsaccountabil ity to the company and the shareholders

o For a JSC, the corporate management include the Board ofManagement (Hoi dong Quan tri), the General Director /Director (CEO), and the Inspection Committee with certaininternal control function. The Board and the InspectionCommittee are subordinated to the GSM, and the CEO is

accountable to the Board. The Board consists of no less than 3(5 for listed companies, of which 1/3 must be non-executivemembers) and no more than 11 members. Board members areelected by shareholders at GSMs for a term of less than 5 years

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Responsibilit ies of the Board (Contd)

o In Vietnam, the Board has a more direct role in theactivities of the company, rather than the supervisory rolein other countries, and is therefore much more influential

in respect of the day-to-day operations of the company.The Board appoints one person among its members oran outsider to act as General Director / Director which isthe legal representative of the company (or this post maybe held by the Chairman of the Board if the charter

provides otherwise)o Under the Enterprise Law 2005, directors of a company

have the duties of care, loyalty and diligence to thecompany and shareholders

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Responsibilities of the Board (Contd)

o In reality, the Boards are often dominated by the majorityshareholders, which are represented by the Chairman of theBoard or the CEO. And in general, the Inspection Committee isweak

o Concept of non-executive and independent directors is newo Companies in Vietnam rarely have a code of ethics. Also, as a

legal entity, a company may not be held criminal liabilityo Though not compulsory, Decision 12 recommends that listed

companies may set up committees of the Board, such as auditcommittee, remuneration committee, etc. In practice, somelisted companies have established remuneration or strategicplanning committees but the subordinated committees of theBoard is not common and still is new concept.

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Over the past years, Vietnam has taken important steps to establish itscorporate governance framework. This started with the Enterprise Law1999 and the followed by series of business laws issued recentlyincluding the Enterprise Law 2005 and Securities Law as mentioned.

Though significant challenges remain, the Government of Vietnam hasmade firm commitments for effective corporate governance which isvital for the countrys economic development especially for thedevelopment of the capital markets and the private sector. Severalefforts are being made towards this end, including improvement of the

legal system, acceleration of SOE equitization, further institutionalreforms, establishment of State Capital Investment Corporation (SCIC,starting operations in June 2006), etc.

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A few areas of improvement to develop a strong corporate

governance culture and framework in Vietnam will be:

o Further improvement of the market-oriented legal system

o Strengthening the capacity and independence of the

securities regulatoro Improving the enforcement of regulatory compliance

o Setting the framework and formalizing the unofficialsecurities market

o Promoting awareness and training of corporate directorson CG

Improving the disclosure of information, quality andaccessibility of information

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Q&A

Thank you for your attention!

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Contacts

For any addit ional inquiries, please contact us at:

Dang The DucManaging PartnerIndochine CounselUnit 4A2, 4th Floor, Han Nam Office Bldg.65 Nguyen Du, Distr ict 1Ho Chi Minh City

VietnamT +848 823 9640 | F +848 823 9641E [email protected] www.indochinecounsel.com

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CorporateGovernanceInVietnam DTD 130907

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