In late September, the Ministry of Finance of Vietnam (MOF) released a new draft decree on corporate governance (“Draft Decree”). The purpose of this Draft Decree is to replace Decree No. 711 – the existing regulation on corporate governance for public companies in Vietnam. The replacement is necessary for the context where new Law on Securities2 and Law on Enterprises3 were issued and will take effect from 01 January 2020.
In general, the Draft Decree keeps the nature and spirit of Decree No. 71. However, given that the new Law on Securities and new Law on Enterprises both have new provisions and updates on corporate governance, the MOF proposed some new changes to make the decree consistent with those new legislations.
I list out below three key proposed points in the Draft Decree compared against the current Decree No. 71:
1. Right of Shareholders to nominate a member(s) of the Board of Management
The Board of Management (BOM) under Vietnamese law is known as the Board of Directors in several jurisdictions. Members of BOM will be nominated by shareholders of the companies.
Under Decree No. 71, shareholders or group of shareholders must meet the requirements of holding common shares in at least six consecutive months to eligible to nominate members of BOM. In certain cases, it may limit the right of shareholders in the companies.
Therefore, the MOF proposed a new change, of which the shareholders or group of shareholders that hold 10% or more (or a smaller percentage under the Charter of the company) have the right to nominate the member of BOM.
With this new proposal, the right of shareholders will be secured. They will have the right to nominate the candidate to the BOM no matter how long they are holding the shares.
2. Requirements of Chief Controller
A company in Vietnam can choose to have whether to have a Board of Controller (BOC). If it has, the Chief Controller of the BOC must meet a certain requirement under the Vietnamese law.
The existing regulation requires that the Chief Controller need to be a professional accountant or auditor and must work in a specialized manner in the company. In practice, these requirements have created hurdle to several companies because they said it was difficult for them to find a suitable candidate to take charge of this position.
The MOF acknowledged the difficulties of the companies in relation to these requirements. Therefore, in the Draft Decree, the MOF has removed these requirements and replaced with the following:
“The Chief Controller must obtain the bachelor’s degree or higher in the specialization of economy, finance, auditing, law, business administration or the one relating to the business of the company unless the Charter of the company provided other higher standards”.
The Draft Decree has loosened the requirements of the Chief Controller to facilitate the operation and management of the company. The proposed requirements would help the company to be easier to look for a suitable Chief Controller for the company.
3. Specific number of independent members of BOM
Under Vietnamese law, the number of BOM members of a company can be in a range from 3 to 11 members. For a public company, it is currently required that the BOM must have at least one-third of its members who are independent members4.
Nevertheless, in accordance with the statistic of the MOF, only 52.39% of companies listed in the Hanoi Stock Exchange and 58.52% of companies listed in the Ho Chi Minh Stock Exchange satisfy the above requirement. It leads to that the MOF need to amend the current regulations to make sure the enforceability in practice.
Therefore, the MOF has proposed the specific number of independent members of the BOM depending on the number of BOM members as below:
- A BOM having from three to five members must have at least one independent member;
- A BOM having from six to eight members must have at least two independent members; and
- A BOM having from nine to eleven members must have at least three independent members.
This proposal will help the public companies to easier appoint independent member(s) in its BOM rather than provision on a fraction.
The above are three key proposals that the MOF has made in relation to the corporate governance of public companies. The Draft Decree, however, has not been finalized yet, and these proposals may be amended later. Nevertheless, the change (if any) may be minimal because the MOF aimed to have the new decree to be effective from 01 January 2021, the same day with the new Law on Securities and the new Law on Enterprises.
1 Decree No. 71/2017/ND-CP issued by the Government of Vietnam dated 06 June 2017 on Corporate Governance for Public Companies
2 Law No. 54/2019/QH14 passed by the National Assembly of Vietnam on 26 November 2019 on Securities
3 Law No. 59/2020/QH14 passed by the National Assembly of Vietnam on 17 June 2020 on Enterprises
4 “Independent members” of a company must satisfy the following criteria:
- He/she is not working for the company or its parent company or a subsidiary company; did not work for the company or its parent company or subsidiary company within at least three preceding consecutive years;
- He/she is not receiving a salary from the company, except the allowances to which members of the BOM are entitled as per regulations;
- His/her spouse, biological parents, adoptive parents, biological children, adopted children and siblings are not major shareholders of the company; not executives of the company or its subsidiary companies;
- He/she is not directly or indirectly holding at least 1% of voting shares of the company;
- He/she did not hold the position of member of the BOM or the Board of Controllers of the company within five preceding consecutive years unless he/she was designated in two consecutive terms of office.