Corporate Governance in Vietnam

Foreign Direct Investment in Vietnam Tax, Legal &

Business Updates
13th 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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Definition of Corporate Governance
OECD: Corporate governance involves a set of relationships between
a companys management, its board, its shareholders and other
stakeholders. Corporate governance also provides the structure
through which the objectives of the company are set, and the means of
attaining those objectives and monitoring performance are determined
(OECD Principles of Corporate Governance, 2004).
A key objective of corporate governance is to adequately protect the
best interests and fair treatment of the shareholders in a company, as
a companys objective should be maximized the shareholder value for
all 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 shareholders
o the role of stakeholders in corporate governance
o the disclosure and transparency, and
o 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% over
the 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, more
than 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 from
12,000 in 1993
o Enterprises are becoming larger with complicated ownership
structure
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The Overview of Economic Growth in Vietnam (Contd)
Stock market is developing fast:
o In J une 2006, only 47 companies listed with market
capitalization of 3% of 2005 GDP
o At present, more than 200 companies listed with
market 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: FDI
reached $10.2 in 2006 and is expected to reach $15 this
year
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Status of Corporate Governance in Vietnam
Corporate governance is still a new concept in Vietnam, and the CG
framework is in the early stage of development:
o J ust introduced in the Enterprise Law 1999 and the formation of
the stock market in 2000
o The business community is not yet familiar with the term
o Improvements are being made especially when Vietnam is a
WTO member (11 J anuary 2007)
Vietnam ranked 170 out of 175 countries in terms of protection
investors (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, and
there remains a confusion between governanceand management
between 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 an
unofficial stock market which is substantially bigger than the formal
market.
There remains a large presence of State ownership in enterprises
even 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 accounting
standards is insufficient; and disclosure and transparency are limited
(World Bank Assessment, ROSC, J une 2006)
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Legal Framework for Corporate Governance in Vietnam
Enterprise Law 2005, effective as of 01 J uly 2006
Securities Law 2006, effective as of 01 J anuary 2007
Decision 12/2007/QD-BTC of March 2007 of the Ministry of
Finance (MOF) on Regulations of corporate governance
applied to companies listed in Stock Exchange / Securities
Trading Centers
Model Charter 2007 issued under Decision 15/2007/QD-BTC
in 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 and
37/2006/QD-NHHH of the State Bank of Vietnam (SBV)
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Regulatory Authorities
Business Registrars / Provincial Department of Planning and
Investments (DPIs)
Ministry of Finance (MOF)
The State Securities Commission (SSC), the securities regulator. It
was established in 1996 as a Government agency reporting directly
to 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 J uly 2000 and recently converted into Ho Chi
Minh City Stock Exchange, an one member limited liability
company with the total chartered capital of VND1tril ($62.5mil)
o Hanoi Securities Trading Center (HASTC), established in March
2005
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-Member
LLCs (SM-LLCs, with one member/investor only) and Multiple-
Member LLCs (MM-LLCs, with from two members/investors)
o J oint Stock Companies or Shareholding Companies (J SCs)
o Partnerships
o Private Enterprises / Sole Proprietorships
For the CG issues, we will focus on LLCs and J SCs 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 capital
contribution 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 more
than 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 maximum
o Ownership is divided into ordinary shares and several types of
classes of preferential shares
o May issue securities for fund raising and go listed if satisfying
listing requirements
o Each shareholders liability is limited to the value of its shares
held in the company
o 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 than
50% 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 members
and shareholders: secure methods of ownership
registration; convey or transfer shares; obtain relevant and
material information on the company on a timely and
regular basis; participate and vote in member/shareholder
meetings; and share in the profits of the company
o Secure methods of ownership registration: Under the Enterprise
Law 2005, LLCs and J SCs are registered at the Business
Registrar (Provincial Departments of Planning and Investment
DPI). All changes in the members of a LLC are subject to
registration. For J SCs, legal proof of ownership is the recordal
of the shareholders details in the shareholders register. Any
shareholder holding from 5% or more of the total shares of a
J SC 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 member
meetings and General Shareholders Meeting (GSMs):
Major important decisions require approval of 75% of
shareholders / members present, such as: sales of assets
equal to or more than 50% of the value of the companys
total assets; amendment of the Charter; and
reorganization, liquidation of the company
Other decisions require approval of at least 65% of the
members / shareholders present (charter may not provide
for a lower %): An improvement compared with the former
Foreign Investment Law 1996 (unanimous approval
required for certain issues)
Written resolutions require 75% approval
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Corporate Governance Requirements in Vietnam (Contd)
Investor Protection / Shareholder Rights (Contd)
o Transfer of shares: In general, shares of listed companies are
freely transferable. The Enterprise Law 2005 ensures that shares
are freely transferable except for some exemptions (such for
voting preferred shares and transfer of ordinary shares held by
the founding shareholders in the first 3 years). However, in
practice, the management of non-listed companies may interfere
or block transfer of shares by way of delay or rejection in
registration of new shareholders in the shareholders register
o Right to obtain relevant and material company information on a
timely and regular basis: Listed companies are subject to the
strict disclosure and reporting requirements (to the regulatory
bodies and the public). However, the information available to
shareholders in a non-listed company is of poor quality as
compared with listed ones. Under the Enterprise Law 2005, only
shareholder (s) holding more than 10% of the total share capital
have the right to obtain the half-yearly and yearly financial reports
of the company
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Corporate Governance Requirements in Vietnam (Contd)
Investor Protection / Shareholder Rights (Contd)
o Elect and remove board members: A shareholder or a group of
shareholders holding at leats 10% of the total voting shares (or
a lower % under the charter) have the right to nominate a
member 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 of
the board members. The concept of cumulative voting has been
introduced 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 on
the pay-out ratio for each class of shares. However, the board
may decide on the timing of dividend payment and how
dividends will be paid to shareholders (e.g. temporary
payments)
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Corporate Governance Requirements in Vietnam (Contd)
Equitable Treatment of Shareholders
o The corporate governance framework should ensure the
equitable treatment of all shareholders, including minority
and foreign shareholders. All shareholders should have the
opportunity to obtain effective redress for violation of their
rights.
o Generally speaking, the Enterprise Law is consistent with the
international practices. Within any class of shares, all the
shares shall be accorded with the same rights. However, some
weaknesses remain especially for protection of minority
shareholders
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Corporate Governance Requirements in Vietnam (Contd)
Equitable Treatment of Shareholders (Contd)
o Fundamental rights are only available to a shareholder or a
group of shareholders holding more than 10% of the total
ordinary shares, including the rights to nominate the candidates
to the board, the Inspection Committee; to inspect the minutes
and resolutions of the board, financial statements, company
books; to call a general meeting; and request the Inspection
Committee to check on the issues of the management of the
company.
o Quorum for a general meeting may be also an issue for minority
shareholders: 75% (first meeting), 50% (second meeting), and
% (third meeting)
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Corporate Governance Requirements in Vietnam (Contd)
Equitable Treatment of Shareholders (Contd)
o The Enterprise Law 2005 introduces the provisions on related-
party transactions and conflicts of interest, however
implementing rules are not yet issued especially for non-listed
companies:
Board members, members of the Inspection Committee,
executive officers (general director/director, managers)
have to disclose to the company within 7 days any
transaction that may cause a conflict of interests with the
company.
Related-party transactions must be approved by
shareholders (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 specific
regulation for providing loans to senior executives in non-
listed companies
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Corporate Governance Requirements in Vietnam (Contd)
Equitable Treatment of Shareholders (Contd)
o The Securities Law 2006 and Enterprise Law 2005
provides for general provisions on insider trading.
Transactions by insiders are allowed provided that
they are reported to SSC, STC and the listed
company.
o However, enforcement of these provisions has not
yet started. There is not any criminal offence for the
insider trading under the Penal Code 1999. So far,
the SSC only imposed certain administrative
penalties (e.g. monetary fines)
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Corporate Governance Requirements in Vietnam (Contd)
Role of Stakeholders in Corporate Governance
o The corporate governance framework should recognize the
rights of stakeholders established by law or through
mutual agreements, and encourage active cooperation
between 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 making
process
o For equitized SOEs (even listed companies) some stakeholders
as party organizations, former line ministries and peoples
committees (local governments) have certain influence on the
corporate decisions
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Corporate Governance Requirements in Vietnam (Contd)
Role of Stakeholders in Corporate Governance (Contd)
o Not any specific codes of practice for the treatment of stakeholders
have been developed in Vietnam. Awareness of the corporate
social responsibility is low.
o Employees and creditors can seek remedies through the courts.
Employees are protected by the Labour Code and the Law on
Bankruptcy, 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 listed
companies regarding bonus stocks
o Stakeholders have very limited and not-reliable information of
companies and this is not yet regulated. Creditors may have
access to the corporate information but under loan arrangements
o Law on Bankruptcy has been issued in Vietnam for more than 10
years (first in 1993 and amended in 2004), but creditors rarely use
the law to enforce their rights as the process is time consuming
and not effective.
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Corporate Governance Requirements in Vietnam (Contd)
Disclosure and Transparency
o The corporate governance framework should ensure that
timely and accurate disclosure is made on all material
matters regarding the company, including the financial
situation, performance, ownership and governance of the
company
o Enterprise Law 2005 provides for basic disclosure requirements
for companies. However, disclosure for non-listed companies
are still poor:
There is not any uniform disclosure of financial and non-
financial information for non-listed companies. Quality of
the information is poor
Non-listed companies are not subject to compulsory
auditing for annual financial statements (except for foreign
invested enterprises, financial institutions and SOEs)
Enforcement in case of non-compliance is weak. Only a
small number of companies fulfills the obligation to report
to the Business Registrar
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Corporate Governance Requirements in Vietnam (Contd)
Disclosure and Transparency (Contd)
o Securities Law 2006 and Decision 12 contain relatively
comprehensive disclosure requirements for listed companies.
o Listed companies are subject to stricter disclosure requirements
than non-listed ones. They are subject to annual report to the
SSC and STC (audited financial statements filed within 90 days
from the end of fiscal year); and semi-annual and quarterly
reports (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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Corporate Governance Requirements in Vietnam (Contd)
Disclosure and Transparency (Contd)
o Disclosure of related-party transactions: Disclosure of related-
party transactions is required on financial reports in accordance
with VAS which are being developed and issued consistent with
International Financial Reporting Standards (IFRS). However,
the current disclosure requirements need to be improved
consistent with the IAS, and the definition of related-party
transaction should be broadened and clarified.
o There remain differences in the reporting requirements for
various 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 to
oversee the audit functions, however in practice most of
external auditors often work exclusively with the management of
the company.
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Corporate Governance Requirements in Vietnam (Contd)
Responsibilities of the Board
o The corporate governance framework should ensure the
strategic guidance of the company, the effective
monitoring of management by the board, and the boards
accountability to the company and the shareholders
o For a J SC, the corporate management include the Board of
Management (Hoi dong Quan tri), the General Director /
Director (CEO), and the Inspection Committee with certain
internal control function. The Board and the Inspection
Committee 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-executive
members) and no more than 11 members. Board members are
elected by shareholders at GSMs for a term of less than 5 years
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Corporate Governance Requirements in Vietnam (Contd)
Responsibilities of the Board (Contd)
o In Vietnam, the Board has a more direct role in the
activities of the company, rather than the supervisory role
in 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 or
an outsider to act as General Director / Director which is
the legal representative of the company (or this post may
be 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 the
company and shareholders
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Corporate Governance Requirements in Vietnam (Contd)
Responsibilities of the Board (Contd)
o In reality, the Boards are often dominated by the majority
shareholders, which are represented by the Chairman of the
Board or the CEO. And in general, the Inspection Committee is
weak
o Concept of non-executive and independent directors is new
o Companies in Vietnam rarely have a code of ethics. Also, as a
legal entity, a company may not be held criminal liability
o Though not compulsory, Decision 12 recommends that listed
companies may set up committees of the Board, such as audit
committee, remuneration committee, etc. In practice, some
listed companies have established remuneration or strategic
planning committees but the subordinated committees of the
Board is not common and still is new concept.
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Future of Corporate Governance in Vietnam
Over the past years, Vietnam has taken important steps to establish its
corporate governance framework. This started with the Enterprise Law
1999 and the followed by series of business laws issued recently
including the Enterprise Law 2005 and Securities Law as mentioned.
Though significant challenges remain, the Government of Vietnam has
made firm commitments for effective corporate governance which is
vital for the countrys economic development especially for the
development of the capital markets and the private sector. Several
efforts are being made towards this end, including improvement of the
legal system, acceleration of SOE equitization, further institutional
reforms, establishment of State Capital Investment Corporation (SCIC,
starting operations in J une 2006), etc.
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Future of Corporate Governance in Vietnam
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 regulator
o Improving the enforcement of regulatory compliance
o Setting the framework and formalizing the unofficial
securities market
o Promoting awareness and training of corporate directors
on CG
Improving the disclosure of information, quality and
accessibility of information
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Q&A
Thank you for your attention!
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Contacts
For any additional inquiries, please contact us at:
Dang The Duc
Managing Partner
Indochine Counsel
Unit 4A2, 4th Floor, Han Nam Office Bldg.
65 Nguyen Du, District 1
Ho Chi Minh City
Vietnam
T +848 823 9640 | F +848 823 9641
E duc.dang@indochinecounsel.com
W www.indochinecounsel.com
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