Shareholder agreements (SHAs) play a crucial role in the management and operation of companies with multiple shareholders, whether they are limited liability companies or joint stock companies. This comprehensive guide will provide you with valuable insights on drafting shareholder agreements for foreign invested companies in Vietnam, taking into account both Vietnamese and English law.

It bears noting that under Vietnamese law, a contract can be governed by foreign law as long as it does not contradict the fundamental principles of Vietnamese law. This allows for flexibility in choosing the governing law for an SHA.

The previous foreign investment legislation of Vietnam did include a concept of “joint venture agreement” between a Vietnamese party and a foreign party when establishing a joint venture company. However, this concept is no longer present in the current legal framework.

While neither English nor Vietnamese law provides a specific definition of an SHA, both jurisdictions recognize it as a private contract among shareholders. It can be entered into at any time during the company’s existence, and there is no requirement for registration or certification for it to be legally binding.

Importance of Shareholder Agreements

While not mandatory, shareholders often choose to enter into an SHA for several reasons:

  1. Freedom of Contract: The Vietnam Law on Enterprises 2020 and the UK Companies Act 2006 outline the fundamental rights and obligations of shareholders for company management and operation. Shareholders can utilize the “freedom of contract” principle to agree on terms governing their relationship in the company, as long as they do not contradict statutory provisions.
  2. Confidentiality: Non-public companies and their shareholders are not required to publicly disclose the terms of SHAs. Therefore, shareholders often prefer to include their rights and obligations in an SHA instead of the company’s charter or constitution.
  3. Protection of Minority Shareholders: Any changes to an SHA require the consent of all shareholders, whereas amendments to the company charter or constitution can be approved by a majority of voting shares. This means that an SHA can protect minority shareholders.
  4. Enforceability: While an SHA may not be enforceable against a company for some reason, it is enforceable against the shareholders as long as the terms remain valid. However, if the company is a party to the SH there are certain legal implications to consider.

Including the Company as a Party to the SHA

In certain situations, it may be advisable for the company to be a party to the SHA. This is particularly relevant in acquisition scenarios where the acquiring shareholder requires obligations, undertakings, or warranties from both the existing shareholders and the company regarding the company’s operations. Failing to include the company as a party to the SHA in such cases would render those obligations or warranties unenforceable against the company.

However, there are a few important considerations when including the company as a party to the SHA:

  1. Corporate Approval: An SHA can be seen as a transaction between the company and its shareholders, and therefore requires approval from the appropriate corporate body of each party to ensure its validity..
  2. Inconsistencies with the Company Charter: In cases where there are inconsistencies between the terms of the SHA and the company charter, Vietnam regulators and courts usually rely on the company charter. Under English law, a SHA may be deemed void if it allows the company to contravene its statutory powers or constitution.
  3. Amendment Restrictions: If the terms of the SHA have been incorporated into the company charter or constitution, attempting to amend those terms without the unanimous consent of the shareholders would violate the SHA.

It is important to consult with local legal counsel to determine which provisions of the SHA should be included in the company charter according to relevant local law.

Form and Substance of a Shareholder Agreement

There are no legally required provisions for an SHA in Vietnam and the UK. However, there are several key terms that shareholders may want to discuss and tailor in the SHA, such as:

  • Restrictions on share transfers
  • Tag-along rights
  • Drag-along rights
  • Call options
  • Put options
  • Pre-emptive rights
  • Rights of first offer
  • Rights of first refusal
  • Non-compete and non-solicitation clauses
  • Dispute resolution

The exact form and substance of an SHA may vary depending on the shareholder’s position, whether they are a majority or minority shareholder. Legal advisors may propose or object to certain terms based on their clients’ interests.

Remedies for Breach of SHA Terms

In the event of a breach of the terms outlined in the SHA, any party harmed by the breach has the right to seek remedies under both the law and the SHA. The question arises whether shareholders can agree to exclude certain statutory remedies and rely solely on the remedies outlined in the SHA.

Under English law, parties have more freedom to contract out of their statutory rights, as long as there is no undue influence involved. In Vietnam, the legal position is less clear, but prevailing practice suggests that Vietnamese courts are likely to disregard any waiver of statutory rights and rely on the claimant’s position as outlined in the statutes.

It is also noteworthy that there are certain English law remedies that do not exist under Vietnamese law such as indemnity and liquidated damages. In contrast, English law does not allow the parties to agree on remedies that unduly punish the breaching party such as a penalty. Therefore, while a penalty clause is widely accepted under Vietnamese law, it may become enforceable should the SHA is governed by English law.

Conclusion

Drafting a comprehensive shareholder agreement for foreign invested companies in Vietnam requires a deep understanding of both Vietnamese law and the relevant foreign law that the sharreholders are considering for the governing law of the SHA. By utilizing the “freedom of contract” principle, shareholders may the terms of the SHA to meet their specific needs and protect their rights. While including the company as a party to the SHA may provide additional enforceability, it is essential to consider the corporate approval process and potential inconsistencies with the company charter. Ultimately, a well-drafted SHA can provide clarity and protection for all shareholders involved.