Issue 010921 – Charge over shares of unlisted joint-stock company in Vietnam

1.  Civil Code No.91/2015/QH13 promulgated by the National Assembly on November 24, 2015 (“Civil Code 2015”);

2.  Law on Enterprises No.59/2020/QH14 promulgated by the National Assembly on June 17, 2020 (“Law on Enterprises 2020”);

3.  Decree No.102/2017/ND-CP dated September 1, 2017, on registration of security interest (“Decree 102”);

4.  Decree No.21/2021/ND-CP dated March 19, 2021, providing for the implementation of the Civil Code on assurance of performance of obligations (“Decree 21”).

OVERVIEW OF CHARGE OVER PROPERTY

According to Article 292 of the Civil Code 2015, a charge over property is one of nine measures to secure the performance of an obligation, which happens when one party (hereinafter referred to as chargor) of property under the ownership of the obligor as security for the performance of an obligation to the other party (hereinafter referred to as the chargee) without transferring such property to the chargee. In principle, civil law respects the right to freely agree and establish obligations between parties, as long as such commitments do not violate the law and are not contrary to social morality. Therefore, the parties may agree on the extent of the guaranteed obligation to be partial or full. In order to secure a part of an obligation, this part of the secured obligation must be specified in the contract corresponding to the security measure. In the event that the parties do not agree on the scope of the security and the law does not provide for it, that obligation will be fully secured, including the obligation to pay interest fines and compensation for damage.

In addition, the parties also have the right to freely agree on the nature of the secured obligation, which may be an obligation that was formed at the time the parties entered into the security transaction or a future obligation. Regarding a future obligation, the parties have the right to agree on the scope of the secured obligation and the time limit for the performance of that obligation, unless otherwise provided in accordance with Vietnamese law. When a future obligation is formed, the parties will not have to re-establish security against that obligation.

Regarding collateral in secured transactions in general and in charge in particular, Article 295 of the Civil Code 2015 provides as follows:

1.  Collateral must be owned by the securing party. This provision is intended to ensure that the realization of the collateral is feasible and helps to mitigate risks for the chargee.

2.  Collateral may be generally described but must be identifiable. The specific description will help to accurately identify the collateral, avoiding any disputes between parties.

3.  Collateral may be existing property or property to be formed in the future unless the Civil Code or other relevant laws prohibit the sale, purchase, transfer, or other means of ownership transfer at the time of the establishment of security contracts and security measures. Thus, parties can freely agree on the type of collateral that is available or formed in the future but must be aware of the provisions prohibiting the sale, transfer, and other means of transfer of this property to secure the interests of the chargee.

4.  The value of the collateral may be greater than, equal, or smaller than the value of the secured obligation. Normally, the chargee will require the secured assets property with a value greater than the value of the guaranteed obligation to ensure its interests after deducting other costs such as preservation, storage, and realization of the charged property. However, in case the amount of money obtained from the realization of the charged property (after deducting other costs mentioned above) is smaller or larger than the value of the secured obligation, the civil law also specifically stipulates the solution. Specifically, if the amount after realization is less than the value of the secured obligation, the chargee has the right to request the chargor to pay the difference, similarly, if the amount after realization is large than the value of the secured obligation, the chargor is entitled to receive back the difference amount.

Regarding the handling of secured assets, according to Article 299 of the Civil Code 2015, the secured assets in the charge transaction will be handled in the following cases:

1.  The chargor fails to perform or improperly performs the obligation when it falls due.

2.  The chargor must perform the secured obligation ahead of time due to his/her breach of the obligation as agreed upon or prescribed by law.

3.  Other cases as agreed by the parties or provided in accordance with Vietnamese law.

According to Article 327 of the Civil Code 2015, a charge over property shall terminate when one of the following cases occurs: the obligation secured by the charge has terminated, the charge over the property has been canceled or replaced by other security measures, the charged property has been realized or as agreed by the parties.

CHARGE OVER SHARES OF UNLISTED JOINT STOCK COMPANY

Shares are secured assets in charge contracts

Shares in a joint-stock company are assets owned by shareholders, which are presented with an identifiable value in the register of shareholders of the company. Thus, in accordance with the provisions on collateral in Article 295 of the Civil Code 2015, shares can be used as secured assets in charge transactions between parties. According to the Law on Enterprises 2020, the charge is recorded at Article 187.1(e), according to which, capital contributors of a partnership have the right to: “Leave as by inheritance, gift, charge, pledge and other forms as prescribed by law and the company’s charter […]”. However, the Law on Enterprises 2020 is silent on the right to charge contributed capital of members of a limited liability company or the right to charge shares of shareholders of a joint-stock company. More specifically, the rights of common shareholders are listed in Article 115 of the Law on Enterprises 2020 without mentioning the right to use shares as secured assets. On the other hand, clause 6 of this Article openly regulates that common shareholders have “other rights as prescribed by this Law and the company’s charter”. Thus, according to this clause, shareholders can only use shares as collateral for attempted transactions if the company’s charter provides.

However, according to Article 158 of the Civil Code2015, property ownership includes “the right to possess, use and dispose of the property of the owner in accordance with the law”. Considering that shares are owned by shareholders, shareholders shall have the right to dispose of their shares through the use of shares as collateral, unless otherwise provided for in the company’s charter.

The share charge contract must be made in writing and takes effect from the time of signing or as otherwise agreed between the parties.

Realization of secured assets as a shareAccording to Article 303 of the Civil Code 2015, parties have the right to agree on the method of realization of the secured assets like shares in the share charge contract, which may include the following methods:

1.  Auction of shares or selling of shares by the chargee. After the shares have been subscribed by a third party if the proceeds from the selling of shares (after deducting property realization costs) are greater than the value of the secured obligation, the chargor (the shareholders) will receive back the difference, and if the amount collected is less than the guaranteed obligation value, the shareholder must be responsible for the difference. In addition, shareholders and the party registering to buy shares must carry out necessary procedures as prescribed by law to transfer share ownership from the shareholder to that registrant, including the transfer of shares; or

2.  The chargee receives the shares to replace the performance of the chargor’s obligations. Similar to the above method, if the value of the share is greater than the value of the secured obligation, the chargee must pay the difference to the shareholder; In case the share value is less than the value of the secured obligation, the shareholder must be responsible for the difference. Shareholders are obliged to carry out the necessary procedures to transfer ownership of shares from the shareholder to the chargee, including the transfer of shares.

In case the share charge contract does not include provisions on the realization of secured assets, the shares as secured assets will be auctioned unless otherwise provided in accordance with Vietnamese law.

Thus, it can be seen that the result of the realization of secured assets as shares is the transfer of ownership rights from shareholders (the chargor) to another party (the third party or the chargee himself) so that they become a shareholder of the company. This issue is also mentioned in Article 58.1 of Decree 21, in which the recipient of the transfer of security property being shared in a commercial legal entity will inherit the rights and obligations of the securing party for this share in that legal entity.

Transfer of sharesAccording to the provisions of Article 127.1 of the Law on Enterprises 2020, shareholders are free to transfer shares, except for some cases mentioned in Section 3.4 [Restrictions on transfer of shares] below. The transfer is done by means of a transfer contract or through trading in the stock market. In case of transfer by contract, the transfer papers must be signed by the transferor and the transferee or their authorized representatives. In case of transactions in the stock market, the order and procedures for transfer shall comply with the provisions of the law on securities.

In the case of transfer of shares as collateral, the transferee only becomes a shareholder of the company at the time when their information is fully recorded in the register of shareholders. The transferee also needs to request the company to record the transfer of this share with the competent authority in accordance with the law (if any).

Restrictions on transfer of sharesWhen receiving shares as secured assets, the chargee should note the following restriction on share transfer in the company:

1.  For shares of founding shareholders, within 3 years from the date the company is granted the Certificate of Business registration, the common shares of founding shareholders are freely transferable to other founding shareholders and can only be transferred to a person who is not a founding shareholder if approved by the General Meeting of Shareholders. In this case, the founding shareholders who intend to transfer common shares do not have the right to vote on the transfer of such shares. This restriction does not apply to additional common shares that founding shareholders have after registering for business establishment and shares that have been transferred to someone other than founding shareholders.

2.  The company’s charter contains provisions restricting the transfer of shares. The chargee needs to request the chargor to provide the company’s charter to verify the existence of regulations restricting the transfer of shares that may affect this charge transaction. In case there is a restriction, the chargee should make sure that the chargor will ensure that such restriction is amended in the Charter and such amendment is maintained for the duration of the Agreement charge contract.

3.  With regard to voting preference shares, shareholders who own voting preference shares may not transfer such shares to other people, except in cases of transfer under a legally effective court judgment or inheritance.

Thus, the chargee needs to carefully consider whether the charge transaction with shares as collateral is subject to the above-mentioned restriction on share transfer to minimize risks and ensure their own benefits.

In addition, the chargee should also be aware of the case that the transferee (the party registering to buy shares when realization collateral assets or the chargee himself) is a foreign investor. In this case, some restrictions on the percentage of foreign ownership in Vietnamese enterprises can have a significant effect on the realization of collateral. The transferee may also be bound by foreign investment laws.

Thus, from the above analysis, shares in unlisted joint-stock companies can be used as collateral for charge transactions. To ensure its interests, the chargee needs to carefully verify the nature of the shares used as collateral as well as the enterprise holding the shares. Besides, a tight charge contract will help the parties to limit risks and disputes in the future.