Protecting the rights of shareholders is always a crucial issue for both parties in a merging deal. Shareholders of the buyer may be adversely affected due to the company’s reduced profits after the merger. Specific agreements related to the interests of shareholders of the seller company are usually recognized in the merger contract, while the interests of shareholders of the buyer company are usually protected in accordance with the provisions of the Law on Enterprise in 2020. The concretization of shareholders’ rights and how to implement them is the legal basis for shareholders to protect their own rights.
Shareholders’ issues relating to:
- Payment of share dividends (distribution of after-tax profits as a percentage of shares owned);
- Capital contribution and capital mobilization.
1. Right to vote for merging company
In order to carry out a merger deal, both parties need resolutions of the General Meeting of Shareholders approving the merger of the company.
Article 148.1, article 148.4 and article 148.6 of the Law on Enterprises in 2020 stipulated that:
“1. A resolution on the following content shall be adopted if the number of shareholders representing 65% or more of the total number of votes of all shareholders attending and voting at the meeting approves, except for the case specified in Clauses 3, 4 and 6 of this Article;
- In case of approval by collecting written form, the resolution of the General Meeting of Shareholders shall be adopted if approved by the number of shareholders owning more than 50% of the total number of votes of all shareholders entitled to vote; specific rates prescribed in the Charter.
- The Resolution of the General Meeting of Shareholders on the content of adversely changing the rights and obligations of shareholders owning preferred shares shall only be adopted if approved by the number of preferential shareholders of the same type attending the meeting owning 75% of the total number of preferred shares of that type or more or preferred shareholders of the same type owning 75% or more of the total number of preferred shares of that type approve in case of passing a resolution in written form.”
Thus, depending on each case as well as the types of existing shares of the enterprise, the voting percentages are different, but normally 65% or more of the votes of all shareholders will be required.
This merger transaction may increase the interests of shareholders of the buyer company by increasing the share price and increasing the level of dividends payment or reducing the interests of the shareholders of the merging company when it lowers the share price and reduces the level of dividends payment. At the same time, for a merged company that has no business advantage and has large debts, the merger agreement bails out the company to protect creditors more than to protect shareholders. Therefore, the General Meeting of Shareholders will have the right to vote on whether or not to merge with another company.
2. The right to decide on share swaps or cash returns
One of the most important rights of shareholders in a joint-stock company is to pay dividends on shares, i.e. to distribute after-tax profits according to the decision of the General Meeting of Shareholders. Merging leads to swap the shares of the merged company into shares of the company receiving the swap, which may adversely affect the shareholders’ right to receive dividends.
Converting share is one of the contents of the merger contract, based on Article 201.2.a of the Law on Enterprises in 2020:
“2.The merger procedure is prescribed as follows:
a)The companies involved prepare the merger contract and draft the charter of the merging company. The merger contract must include the following principal contents: name and head office address of the merging company; name and head office address of the merged company; merger procedures and conditions; plan for using employees; methods, procedures, duration and conditions for converting assets, converting contributed capital, shares and bonds of the merged company into contributed capital, shares and bonds of the merged company; period of implementing the merger;”
The shareholders of both parties will have the right to decide on the converting share and conversion rate or pay in cash, thereby setting the stage for future merger negotiations.
Vietnamese law does not allow “cash-out mergers” where shares of some shareholders of the merged company can be converted to cash or other types of assets. However, this transaction is still carried out to eliminate the minority shareholders of the merged company.
- The right to decide on the continuation of capital contribution
In practice, shareholders of the merged company will have to decide to become shareholders of the merging company or withdraw from the merged company before the merger contract takes effect when the conversion rate does not satisfy the demand of the shareholders. This is one of the rights to protect the interests of minority shareholders, especially shareholders, groups of shareholders owning less than 5% of the shares in the company.
Article 119.2 of the Law on Enterprises in 2020 stipulated that:
“2. Capital contributed in ordinary shares may not be withdrawn from the company in any form, except in the case of share repurchase by the company or others. In case a shareholder withdraws part or all of the contributed share capital contrary to the provisions of this Clause, that shareholder and the person with related interests in the company must jointly take responsibility for debts and other property obligations of the company to the extent that the value of the shares has been withdrawn and damages occurred.”
Thus, if shareholders want to withdraw capital from the Company, they must do so in the form of transferring shares to other shareholders.
For further information, please contact:
APRA LAW FIRM
Address: 7th floor, 57 Tran Quoc Toan Street, Tran Hung Dao Ward, Hoan Kiem
District, Hanoi, Vietnam.
Hotline: 024.23486234 – 0948495885