Vietnam's new regulations on corporate governance for public companies

In brief

A decree that aims to improve the corporate governance regime for public companies in Vietnam has been issued, and comes into effect August 2017. Our team reports on the key changes.

Background

As well as seeking to improve the corporate governance regime, Decree 71/2017/ND-CP (Decree 71) aims to ensure it reflects the current Law on Enterprises 2014. Decree 71 will replace Circular 121/2012/ND-CP, 26 July 2012 of the Ministry of Finance (Circular 121), from 1 August 2017.

Clarity on intercompany/group loans and guarantees

Circular 121 contained an ambiguous provision that, on its face, prohibited public companies from providing loans and guarantees to its subsidiaries, as they were covered by the general prohibition applicable to related persons.

Under Decree 71, this has been clarified, and it is now clear that the restriction on the provision of loans and guarantees by a public company only applies to the company's shareholders and the shareholders' related persons, and not to the public company's related persons (including subsidiaries).

Decree 71 additionally introduces certain exceptions to this restriction, including:

if the public company is a credit institution;

• if the shareholder is also the public company's subsidiary, whose cross-ownership was established before 1 July 2015, ie before the restriction on cross-ownership under the Law on Enterprises 2014; or
• if the public company and the related person of the shareholder are in the same group of companies, provided that appropriate approval is obtained from the general meeting of shareholders (GMS) or the board of the public company.

Tighter regulations for management positions, to prevent conflicts of interest

The responsibilities of, and restrictions applicable to, persons holding management positions in a public company have been tightened under Decree 71. 

In particular, from 1 August 2020, the chairman of the board of a public company is no longer allowed to concurrently be the general director of that public company. At present, under Circular 121, such an arrangement could be approved by the company's GMS.

Additionally, from 1 August 2019, members of the board of any public companies cannot sit on the board of more than five other companies under any circumstances. Under Circular 121, this restriction did not apply to non-large scale public companies, and companies in the same group were not counted.

Decree 71 now requires transactions between, on the one hand, a public company and, on the other hand, its inspectors, any management personnel and their related persons to be approved by the GMS or the board. Before Decree 71, not all management personnel were covered by this requirement – only members of the board, the general director and their related persons.

Finally, Decree 71 will require the board of a public company to hold a meeting at least once every quarter, whereas both Circular 121 and the Law on Enterprises 2014 are silent on the minimum number of board meetings.

Two options for management structure of a public company

For consistency with the Law on Enterprises 2014, Decree 71 permits public companies to adopt one of two options for its management structure:

• Option 1: if the public company has an inspection committee, at least one third of the board must be 'non-executive Board members'; or
• Option 2: if the public company has an internal audit committee under the board and no Inspection committee, at least one third of the board must be 'non-executive Board members' and one fifth of the board must be 'independent Board members'.

Please note that, notwithstanding the above, if a public company has been listed, at least one third of the board must be 'independent Board members' under both options.

The selected management structure (and any change thereof) must be disclosed to the State Securities Commission within 24 hours of such a change.

Greater emphasis on importance of internal management rules

Decree 71 places a greater emphasis on the importance of a public company's internal management rules, by requiring all such companies to actually issue them, with a responsibility imposed on the board to prepare and submit the rules to the GMS for approval.

In addition to a new model charter for public companies (which was first issued under Circular 121), the Ministry of Finance will also now issue the model Internal Management Rules, to be used as a reference by public companies in formulating their own internal management rules. However, the revised model Charter and the new model Internal Management Rules are not yet available.

Certain changes to disclosure requirements

In an attempt to improve compliance with disclosure obligations by public companies, Decree 71 has introduced new requirements for public companies to adopt Information disclosure rules and to appoint a specific person to be in charge of information disclosure on behalf of the public company.

In addition, there are some other changes to the actual information disclosure requirements, including:

• disclosure of the salaries of directors and other managers is now required in the annual financial report of the public company;
• in relation to the existing requirement for disclosure by a board member and other managerial personnel of transactions between themselves and any company 'controlled' by the public company, the term 'control' has now been clarified as 'more than 50% control of the charter capital'; and
• changes on timing for disclosure on preparation of the list of shareholders eligible to attend a GMS meeting (from five days to 20 days before the deadline for registration for the meeting) and timing for disclosure regarding candidates to be nominated for election to the board (from seven days to 20 days before the date of the relevant GMS meeting).

What's next?

Allens is a leading international law firm in Corporate and M&A in Vietnam, with a strong track record of advising on investment in both private and public companies. If you would like to discuss your plans to invest in the country and how we can assist, please contact any of the people below.