minority shareholders protection in shareholding companies a comparison between vietnamese enterprises law and the united kingdom company law

Joint Swedish-Vietnamese Master’s Programme MASTER’S THESIS MINORITY SHAREHOLDERS PROTECTION IN SHAREHOLDING COMPANIES A COMPARISON BETWEEN VIETNAMESE ENTERPRISES LAW AND THE UNITED KINGDOM COMPANY LAW SUPERVISORS: Supervisor 1: Professor Christina Moell Supervisor 2: Professor Bui Xuan Hai Acknowledgements First of all, I would like to thank my supervisors, Professor Christina Moell and Professor Bui Xuan Hai, for saving the time in their very busy work to supervise my thesis as well as instruct me for further studying. I am grateful to Professor Christopher Wong for his continuous support and guidance during the course. I would like to acknowledge the generous support from Ho Chi Minh City University of Law and the Faculty of Law, Lund University. I would like to thank to Sida (the Swedish International Development Agency) for its fund in the project. Last but not least, I am always indebted to my parents and my husband for their wholehearted support during the years of my studies. Table of Content ACKNOWLEDGEMENTS TABLE OF CONTENT ABBREVIATION PART 1. INTRODUCTION 1. 1 The need for this research 1. 2. The situation of the research 1. 3. Purposes 1.4. Methodology 1. 5. Delimitation 1. 6. The structure of the thesis PART 2. THEORETICAL ISSUES ON MINORITY SHAREHOLDERS PROTECTION 2.1 Who is a minority shareholder? 2.2 Why minority shareholders should be protected 1 2 3 4 4 4 5 5 6 6 7 7 10 2.2.1 Minority shareholders suffer from actual and potential oppression caused by managerial power and majority rule 11 2.2.2 Minority shareholder protection is a significant factor that can encourage investment and support the development of financial markets and economic growth 14 2.3 Principles of minority shareholder protection 2.3.1 Maintaining the effect of majority rule 2.3.2 Equitable treatment of shareholders PART 3. COMPARATIVE STUDY OF MINORITY SHAREHOLDERS PROTECTION IN VIETNAMESE AND UNITED KINGDOM COMPANY LAW 3.1 Sources of law 3.2 The rights of minority shareholders regarding the general meeting 3.2.1 Calling for a general meeting 3.2.2 Attending the general meeting 3.2.3 Getting items on the agenda 3.2.4 Raising a motion at the general meeting 15 15 16 18 19 20 20 22 24 25 3.2.5 The right to challenge resolutions adopted at the general meeting 26 3.3 The right to appoint directors 3.4 Shareholders’ remedies 28 31 2 3.4.1 Derivative actions 3.4.2 Unfair prejudice 3.4.3 Action to enforce the constitution of the company 31 35 36 3 . 5 T h e a b i l i t y o f m i n o r i t y s h a r e h o l d e r s to access company’s information 39 3.6 The ability to control related party transactions and major transactions 3.6.1 Major transactions 3.6.2 Related party transactions 3.7 Pre-emptive right PART 4. CONCLUSION TABLE OF STATUES AND OTHER LEGAL INSTRUMENTS National legislations The United Kingdom Vietnam TABLE OF CASES BIBLIOGRAPHY Official Reports and other Documents The United Kingdom Vietnam Monographs In English In Vietnamese Articles in Journals, Anthologies, and others In English In Vietnamese 40 40 41 42 46 47 47 47 47 48 49 49 49 49 49 49 49 50 50 51 3 Abbreviation 3 AGM Annual general meeting EGM Extraordinary general meeting CA Part 1. Introduction 1. 1 The need for this research Minority shareholder protection is one of the fundamental concepts within the domain corporate governance. It has also become in recent years an important indicator for the World Bank when it evaluate a country’s business environment1. Among many types of business, shareholding company is typically characterized by the separation between the ownership evidenced by the possession of shares and the management of the company. Depriving from separation above, no shareholder especially a minority shareholder, is capable of directly participating in the managerial activities and supervision of the company in a significant and effective way. The minority shareholders are however investors in and also co-owners of the company and they do reserve the right to perform their rights and duties as shareholders. However, because of the typical characteristics of the corporate governance of a shareholding company, minority shareholders often challenge with the potentials of dual oppression and face unfair treatment from both the majority shareholders and the management. Consequently, their rights become unsubstantial and the position of their capital, too, is often abused by majority shareholders and damaged consequentially. Owing to their inherently weak position, the laws of most countries provide some protection for them. However, these provisions are not perfect and the more important point in the protection of minority shareholders is the mechanism for enforcing them. The reality in Vietnam has, in recent years indicated two concerns and problems: first, the legal provisions on minority shareholders protection are themselves defective and the enforcement is ineffective which also lead to negative results for such investors in particular and the business environment in general. From the totality of issues relating to minority shareholders, the author selects the topic “MINORITY SHAREHOLDERS PROTECTION IN SHAREHOLDING COMPANY – A COMPARISON BETWEEN VIETNAMESE ENTERPRISES LAW AND THE UNITED KINGDOM COMPANY LAW” for her master thesis. 1. 2. The situation of the research In Vietnam, the issue of minority shareholder protection has been discussed by the following authors in the following studies and articles: According to Report on Business Environment 2008 by World Bank (WB) and International Finance Corporation (IFC), Vietnam was ranked 91 among 178 countries in the world (this rank in 2007 was 104/175). Among 10 investigated criteria, 4 of them were dropped back, including: issuing business license; investors protection which comprises transparency, directors’ liability and shareholders’ ability to bring suits against directors and managers; business dissolving and paying taxes. See ”Nhà đầu tư nhỏ chưa được bảo vệ.” (Small investors have not been protected). http://www.ktdt.com.vn/newsdetail.asp? CatId=11&NewsId=25760 , accessed on 12 December 2008. 4 - - - - - - - Chau Quoc An (2006), Chế độ pháp lý về quản trị công ty theo quy định của Luật doanh nghiệp, (The legal regime on corporate governance under Enterprise Law) Master thesis; Nguyen Ngoc Bich (2004), Luật doanh nghiệp – Vốn và quản lý trong công ty cổ phần, (Enterprise Law – Capital and management in shareholding companies), Young Publisher; Cao Đinh Lanh, ”Xung đột các nhóm lợi ích trong công ty cổ phần” (Conflicts between interest groups in shareholding companies), The Journal of Democracy and Law, No 3/2007; Tran Quoc Hoai, (2006), Pháp luật về bảo vệ nhà đầu tư trên thị trường chứng khoán, (Law on protection of investors’ interest in security market), Master thesis; Tran Viet Khoa (2007), Luật Doanh nghiệp Việt Nam trong xu thế hội nhập kinh tế quốc tế, (Vietnamese Enterprise Law in the tendency of internationally economic integration), Master thesis; The Institute of international economy (1991), Công ty cổ phần ở các nước phát triển – Quá trình thành lập, tổ chức và quản lý, (Shareholding companies in developed countries – The process of establishment, organization and management, Social Science Publisher, Hanoi; Farrukh Iqbal and Jong – II You (2002), Kinh tế thị trường dân chủ và phát triển – Từ góc nhìn Châu Á, (Democratic market economy and development – From the Asia view), The World Publisher. However, these works above mainly focus on corporate governance. The issue of minority shareholders protection was only mentioned to the extent of listing some legal provisions and pointing out the rights of minority shareholders under them. Up to now, there has been no independent and specialized research on minority shareholders protection in Vietnam, especially from the comparative perspective. 1. 3. Purposes My research has two main purposes: (i) studying theoretical issues on minority shareholders protection and, (ii) making a comparative study of minority shareholders protection under the UK and Vietnamese Company law which leads to conclusions on minority shareholders protection in Vietnam. My research first intends determine who are the minority shareholders and the reasons why they should be protected. As to the second purpose, the comparative study of minority shareholders protection in the UK and in Vietnam aims at drawing conclusions about the merits and demerits of the Vietnamese treatment of such protection. 1.4. Methodology To carry out the research, the following methods will be used in the thesi s: -Comparative method: this method will be used to compare and collate the issues arising in the UK and Vietnamese company law with the aim of establishing their similarities and differenties and explaining the reason for them. The result of this method will serve the purposes of the thesis. Particularly, this method will be mainly used in part 3 of the thesis to support the comparative study between the UK and Vietnamese company law on minority shareholders protection. 5 - Analytical method: this method will be used mainly for part 2 of the thesis where accessing various opinions about minority shareholders. By using the analytical method, this part point out the concept of minority shareholders; the reasons for which minority shareholders should receive protection, and principles on minority shareholders protection. 1. 5. Delimitation Pursuant to the aims stated above, my research will not cover all issues relating to minority shareholders protection but will be limited to company law matters. Within company law, the comparative research concentrates on the typical tools which minority shareholders could actively employ to protect themselves. Beside, because investor protection in general and minority shareholders protection in particular is not confined to company law, but also to securities regulation2, thus, securities law will be mentioned if particularly relevant. The research on minority shareholders protection also will be limited in shareholding company (công ty cổ phần). In the UK, a company can be classified as limited by shares, limited by quaramtee, or unlimited. Shareholders in a company limited by shares will hold liability to the amount which they contributed to the company’s assets. Any limited company with a share capital may be a private company or a public company. The key difference between these two kinds of company are a private company can not offer its securities to the public as a public company3. In Vietnam, a shareholding company also has it chater capital in shares; its shareholders shall be liable for the debts and other property obligations of the company to the extent of the amount of capital contributed to the company, its shares may be tranferred freely, and it can issue all types of securities to the public4. Because of the similarities above, the comparative study on minority shareholders protection will be made between the shareholding company in Vietnam and the public company in the UK. 1. 6. The structure of the thesis [...]... company, minority shareholders only need an equitable and fair treatment protecting their rights as provided by law and the capital they have invested in the company In short, minority shareholder protection is an fundamental issue in corporate governance Minority shareholders are those who not only hold a small amount of shares but are also non-controlling parties in a company Shareholders' rights and. .. the directors' remuneration, and, if thought desirable, to remove and replace all or any of them 95 Both the UK CA 1985 and the Vietnamese Enterprises Acts 2005 provide for annual general meetings, which are mandatory for each company as well as for extraordinary general meetings in certain special circumstances96 As to the AGM, the directors or the Chairman of the Board of Management have a general... However, it also empower the board to accept the content and supplementary materials intended for the meeting119 Consequently, minority shareholders may convene an EGM and find the Board intentionally setting aside documents relating to it This was the case in disputes between the Board of Management and a group of shareholders holding 53,04% of the voting shares in Bach Dang Shareholding company (Hai Phong)... 2.3.1 Maintaining the effect of majority rule The majority rule means that those who control more than half of the votes on the board or at a shareholders meeting – and indeed, those who command a good deal less than a majority 67 shareholders normally vote according to the capital that they have invested in the company One share equals one vote Under common law, the governance of companies is generally... lead to unfair consequences that will violate reasonable shareholders expectations”71 In other words, the law has to strike a delicate balance between safeguarding the company s legitimate business from being obstructed by tiresome complaining minorities on the one hand, and restraining unfair and wrongful acts which the majority can exploit to its own advantage thereby prejudicing the legitimate interests... total voting rights much larger than their ownership (and therefore dividend) rights have an incentive to extract value from the company at the expense of non-controlling shareholders4 1 Beside the managerial power, the relations between majority shareholders and minority shareholders have always been a thorny issue in corporate law 42 The minority shareholders tend to claim that the majority shareholders. .. protection in UK and US has shown that “common accusations are that the majority has excluded the minority from active participation in the business or has mismanaged or misappropriated assets.”50 In other words, the dominant shareholder has greater ability to extract resources that otherwise would have been shared with minority investors”51 In addition, the reality that minority shareholders maintain... for minority shareholders if the management and the majority shareholders collude After an examination of 2658 companies in East Asia, Claessens and his colleagues found that if majority shareholders effectively control companies, “their policies may result in the expropriation of minority shareholders 53 Through their empirical research, La Porta and his co-authors share this view and propose that all... on the other hand, the typical outcome is that minority shareholders lose because they are unable or unwilling to challenge decisions by the board and are also outvoted at general meetings48 Moreover, as Davies and Banks both claim, the interests of minority shareholders may be ignored by majority shareholders in general meetings when passing the company s decisions”49 The study of minority shareholders. .. holding the majority of voting rights capable of being cast at general meetings8 In other word, the label "minority" is based on shareholding and power relations within the corporation 9 The questions that may come to mind are whether a shareholder who provides a majority of the capital of a company must escape being a minority shareholder? Or will a shareholder who holds a very small percentage of the . MINORITY SHAREHOLDERS PROTECTION IN SHAREHOLDING COMPANY – A COMPARISON BETWEEN VIETNAMESE ENTERPRISES LAW AND THE UNITED KINGDOM COMPANY LAW for her master thesis. 1. 2. The situation of the. Joint Swedish -Vietnamese Master’s Programme MASTER’S THESIS MINORITY SHAREHOLDERS PROTECTION IN SHAREHOLDING COMPANIES A COMPARISON BETWEEN VIETNAMESE ENTERPRISES LAW AND THE UNITED KINGDOM COMPANY. is capable of directly participating in the managerial activities and supervision of the company in a significant and effective way. The minority shareholders are however investors in and also