Managers Duties in Vietnamese Companies

I've recently written a couple of articles about derivative law suits in Vietnam and I've rediscovered the broad liability potentially imposed on members of management of companies.

A derivative law suit is litigation brought by a shareholder or group of sharehoders on behalf of the company against third parties, usually management. In the United States and England, derivative lawsuits are difficult to bring and are only allowed in narrow circumstances. In Europe and most civil law jurisdictions they're nonexistent or nearly impossible to file. In Vietnam, however, things are different.

Not only has Vietnam enacted legislation allowing for derivative law suits that are easy to file and require passage through few obstacles, but the breadth of acts susceptible is nearly limitless. Vietnam has, in the passage of approximately fifteen years, gone from ignorance of the concept to one of the slackest and most easily accessible mechanisms for suing management in the world.

First off, derivative suits can be filed by any shareholder or group of shareholders holding at least 1% of the ordinary shares of the company for at least 6 months. There are no requirements that a board of supervisors or management must investigate first, or be given the opportunity to bring suit against the third party. There are no court orders necessary. Only a 1% shareholding and the shareholder can sue management. By management I mean not only the general director and the vice general director, but the board of management as well.

Once suit has been accepted by the courts, one must examine what liabilities management has. First, there is a duty of strict compliance. If the manager fails to comply "strictly" with the law, the charter of the company, or decisions of the general meeting of shareholders than she can be held liable under civil action by derivative suit. This is a little like statutory rape. It doesn't matter what the perpetrator knew or suspected, the fact that he had sex with an underage victim means he committed rape. There is no interpretation here, it's zero-sum. Either you complied strictly with the relevant rule, or you didn't.

Second, there is a duty of honesty and prudency. This duty essentially lifts phrases from common law jurisdictions like England and the United States and leaves much of the duty undefined. While jurisprudence is allowed to define terms, there has been little movement so far in the courts, and this duty could be interpreted broadly to include most any defect on the part of management.

Finally, there is a duty of loyalty. This includes a prohibition against insider trading and a requirement of notice should the manager, or related persons, own part of a third party enterprise.

The only saving grace for management is that Vietnamese are unfamiliar with these provisions and there has been only one lawsuit involving a shareholding corporation. That means the courts, and local businesses, aren't aware of the potential to hold management responsible for losses, or for any decision they disagree with.

But what to do about this seeming bias against management on the part of the law?

There are three sources of duties imposed on management of a company. The law, the charter of the company, and the decisions of the general meeting of shareholders. The first, the law, is immutable. You can't change much about it. The only way to really avoid derivative suits under the law is to become familiar with it and abide by it. That said, it is helpful to understand something I learned long ago.

In Vietnam, and in other developing countries, there is a predilection towards overkill when it comes to legislation. By promulgating so many laws, some of them contradicting, the government authorities have a choice as to what law they want to enforce and when. This is part and parcel of the risk involved when managing businesses in developing countries. There is little to be done about this except to be aware of it and to be prepared to deal with the consequences if or when they arise.

The second, the charter, is more amenable to alteration. While there are certain requirements that must be included in the charter, and some of those requirements can't be altered from what is written in the law, much of it is able to be changed. Though this may not mean anything to the executive manager hired on, or the board of management after the fact, for startups and foreign invested companies that have the chance to author the charter from founding, things are different.

There is a sample charter that is published with the laws. This once was seen as de riguer and any alterations to it required a brigade of soldiers just to get past the DPI. That has changed over the years, however, and now alterations are seen as more permissible, though law firms tend to default to the model charter when incorporating.

Don't allow that. Take some time and review the charter. Pay the extra money to modify the charter. Don't go forward blindly at the risk of imposing on the manager more duties and liabilities than necessary. Without thought it can cause problems down the road, but with consideration those problems can be mitigated from the outset, especially for investors setting up their own companies.

The third source, decisions of the general meeting of shareholders, is amenable to suasion, but could be difficult to change if the management isn't also the majority shareholder. The law grants certain rights to the general meeting of shareholders, and those rights are equally enumerated in the charter. Those rights include one vote per share, unless that share happens to be a voting-preference share.

Whether through different classes of shares, or through ownership ratios, owners who set up their own companies and control management, should also seek to control the general meeting of shareholders. Without this control they run the risk of imposing more duties and liabilities on management than the law or the charter of the company already do.

Management in the United States is filled with risks. Management in Vietnam is a minefield. For those hiring on as new executives, make sure your compensation package is sufficient to warrant the potential downside, and make sure the company pays for directors' insurance. That is available in Vietnam, and should be utilized by every member of management no matter how aware of the risks they may be.