On 6 June 2017, the Government issued Decree No. 71/2017/ND-CP providing guidelines on corporate governance applicable to public companies (Decree 71). Decree 71 took effect on 01 August 2017 and replaced Circular No. 121/2012/TT-BTC issued by the Ministry of Finance on 26 July 2012 (Circular 121), which had set the corporate governance regime for public companies in Vietnam for the past five years.
Overall, Decree 71 reflects the provisions of the current Law on Enterprises. However, it introduces stricter regulations on transactions with related persons, conflict of interests, organizational structure and disclosure obligations for public companies. We highlight the key provisions of Decree 71 below.
Clarity on intercompany loans and guarantees
Circular 121 prohibited public companies from providing loans and guarantees to its shareholders and "related persons", with no clarification on whether it meant "related persons" to the public company or to the shareholders. Such ambiguity created certain legal risks for intercompany loans and guarantees provided by a public company, as subsidiaries of the public company may be considered related persons.
Decree 71 clarifies that the restriction only applies to the company's shareholders and shareholders' related persons, and not to the public company's related persons (including subsidiaries). Decree 71 also stipulates three exceptions to this restriction:
- where the public company is a credit institution;
- where the shareholder is also the public company's subsidiary (without shareholding portions held by the State), whose cross-ownership was established before 1 July 2015 (when cross-ownership between a subsidiary and its parent company was still allowed); or
- where 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 management (BOM) of the public company in accordance with the public company's charter.
Options for organizational structure of public companies
In light of the Law on Enterprises, Decree 71 enables public companies to choose between two options for its organizational structure:
(a) Two-tier structure - GMS, BOM, Board of Controllers, and (General) Director
If the public company adopts the structure of having a Board of Controllers, at least 1/3 of the BOM members must be non-executive members (i.e. cannot concurrently be the (General) Director, Deputy (General) Director, chief accountant or other managers provided under the company's charter).
(b) One-tier structure - GMS, BOM, and (General) Director
If the public company adopts the one-tier structure, no Board of Controllers is required. In that case, an internal audit committee must be established under the BOM and the composition of the BOM members must satisfy that:
- at least 1/3 are non-executive members, and
- at least 1/5 are independent members.
Notwithstanding the above, if a public company is listed, at least 1/3 of the board must be independent members under both options.
Please refer to the table below, which summarizes the options available to a public company in choosing an organizational structure:
New criteria for BOM independent members
Decree 71 no longer applies the criteria for BOM independent members as set out in Circular 121. Instead, it refers to Article 151.2 of the Law on Enterprises, which provides that a BOM independent member must satisfy all of the following conditions:
- not a person currently working for the company or any subsidiary of the company; or not a person having worked for the company or any subsidiary of the company for at least three preceding years;
- not a person who is currently entitled to salary or remuneration from the company, except for allowances which members of the BOM are entitled to;
- not a person whose spouse, natural father, adoptive father, natural mother, adoptive mother, child, adopted child or sibling is a major shareholder of the company, or a manager of the company or its subsidiary;
- not a person directly or indirectly owning at least 1% of the total voting shares in the company; and
- not a person who was a member of the BOM or the Board of Controllers of the company for at least five preceding years.
Tighter regulations on prevention of conflict of interests
The responsibilities of, and restrictions applicable to, persons holding managerial positions in a public company have been tightened under Decree 71, in particular:
New disclosure requirements
To improve compliance with disclosure obligations by public companies, Decree 71 requires 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, Decree 71 introduces certain changes to the current disclosure requirements, including:
- disclosure of the salaries of the (General) Director and other managers in the annual financial report of the public company is now required;
- any change in the selection of an organizational structure must be reported to the State Securities Commission, relevant stock exchange, and publicly disclosed within 24 hours after the GMS approves the change;
- in relation to the existing requirement for disclosure by a BOM member and other managerial personnel of transactions between themselves and any company "controlled" by the public company, the term "controlled" has now been clarified as "more than 50% control of the charter capital"; and
- there are changes on timing for disclosure on preparation of the list of shareholders eligible to attend a GMS meeting (from 5 days to 20 days before the deadline for registration for the meeting) and timing for disclosure of nominees for BOM member election (from 7 days to 10 days before the date of the relevant GMS meeting).
New standard form of charter for public companies to be issued
Since Decree 71 wholly replaced Circular 121, the standard form attached to Circular 121 is no longer applicable for public companies. Furthermore, Article 6.2 of Decree 71 provides that the Ministry of Finance shall issue a (new) standard form of charter for public companies to refer to when drafting their own charters.