Luat Viet

:: Question :: Company A is a Shareholder (“Shareholder A”) owning less than 5% of the shares in Company B – a joint stock company (Company B). Under an agreement between Shareholder A and Company B, Shareholder A shall have the right to nominate one representative to be the Chief of the Inspection Committee (Inspection Committee) in the Company B. Then, Company B shall elect such representative to be Chief of Inspection Committee. From a legal point of view, does this agreement break the law? While all the decisions still waiting for the approval of the General Meeting of Shareholders (GMS), what will we have to do if the 2009 GMS does not approve this agreement because of subjective idea of the Company B? In the agreement between both parties, which terms and conditions (if any) should we offer to guarantee our interest?

Answer:

In principle, laws do not prohibit any agreements, transactions between a joint stock company and its shareholders on nomination, election removal and dismissal of members of the Inspection Committee. However, these agreements, transactions are valid only if they are approved by GMS or the Board of Management and comply with the company’s charter as well as applicable laws (the 2005 Law on Enterprises and other related regulations).
With regard to the nomination of candidates to the Inspection Committee, election of members as well the Chief of the Inspection Committee; the 2005 Law on Enterprises provides as follows:
Point a Clause 2 Article 79 of the 2005 Law on Enterprises says: “Shareholders or group of shareholders who hold, within at least six consecutive months, over 10% of ordinary shares or a smaller percentage as provided for in the company’s charter shall have the right to nominate candidates to the Board of Management and the Inspection Committee (if any)”.

Furthermore, Point c Clause 2 Article 96 of the 2005 Law on Enterprises provides that: “The GMS has the right to elect, remove from office and dismiss members of the Board of Management and of the Inspection Committee. Clause 2 Article 121 the 2005 Law on Enterprises stipulates that: “Members of the Inspection Committee shall elect one of them to be the Chief of the Inspection Committee”.
Thus, based on the candidates nominated by Shareholders or group of shareholders, GMS shall elect people who meet required standard and condition to be the Inspection Committee’s members. After that, members of the Inspection Committee shall elect one of them to be the Chief of the Inspection Committee. In other words, Company B has no right to make an agreement with Company A – one of its shareholder on electing Shareholder A’s representative to be the Chief of the Inspection Committee. Therefore, the above agreement between Company A and Company B does not comply with the laws and is invalid.
In case where Company A holds less than 5% of the share capital in Company B, if it is regulated in the Charter of Company B or the GMS of Company B has decided that: shareholders or group of shareholders holding such proportion shall have the right to nominate one or more candidates to the Inspection Committee of the Company, Shareholder A shall have that right.
In case it is regulated in the Charter of Company B or the GMS of Company B has stipulated on the proportion higher than 5% of the share capital in the Company B, Shareholders or group of shareholders shall not have the right to nominate one or more candidates to the Inspection Committee. For this reason, to ensure the interest of Company A in Company B, Company A should associate with other Shareholders in nominating candidates to the Inspection Committee. Subject to the decision of the GMS, the candidates nominated by Company A shall be the members of Inspection Committee or not. Such candidate shall be the Chief of the Inspection Committee only when he/she becomes its member and then elected by other members in accordance with laws and regulations.
 

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