When investors contribute their capital to joint-stock companies, they will become shareholders of such companies. If they own a large number of shares, their rights in the enterprises are affirmed with many benefits. However, if their shares are less, after the capital-contribution period, they will probably feel insecure since their voice in the enterprises is almost ignored, leading to their rights and benefits not being solidated. How to draw more attention to their voice is a complex problem not only for the shareholders themselves and the enterprises they invest in, but also for the legal policies.
Determining the concept of “minority shareholders” under the Enterprise Law 2020
The enterprise laws over the years have not provided a definition of minority shareholders; however, from a theoretical perspective, there are many different views on this issue.
The first viewpoint is based on the Securities Law 2019 that defines “A major shareholder means a shareholder that holds at least 5% of the voting shares of an issuer”, which can be understood that minority shareholders are those who own less than 5% of the voting shares. With this understanding, the percentage of share ownership is the only criterion to identify minority shareholders in the company. This concept is not completely appropriate because, in fact, there are many shareholders or groups of shareholders that are still called “minority shareholders” in enterprises even though they might own more than 5% of the voting shares.
The second perspective suggests a comprehensive review of the criterion of share ownership ratio and the criterion of controlling activities in the enterprise between among shareholders and groups of shareholders, in fact, it shows that there are minority shareholders own shares of more than 5%, yet they do not have the right to control or operate the business, meanwhile, shareholders, a group of shareholders who own a smaller percentage of shares but hold voting rights to govern the operation of the business. This view can be considered consistent with the actual situation of corporate governance in practice.
Despite multiple perspectives, it can be theoretically understood that a minority shareholder is a shareholder with a small percentage of shares that cannot either grant them the control of the company and or capability to impose their views, wills, plans, and strategies on the company’s activities.
Although the Enterprise Law 2020 still provides no specific definition of who a minority shareholder is, it has determined the legal status of shareholders or group of shareholders by mentioning their interests and offers remarkable changes in comparison with the 2014 version.
Shortcomings for minority shareholders under the Enterprise Law 2014
The Enterprise Law 2014 had certain limitations for minority shareholders in joint-stock companies. These inadequacies do not guarantee the interests of minority shareholders and make them feel insecure when deciding to contribute their capital to enterprises.
First, the Enterprise Law 2014 removed the provision in which enterprises may or may not apply the cumulative voting method. Particularly, Article 144.3 of the Enterprise Law 2014 stipulates that “Unless otherwise prescribed by the company’s charter, Members of the Board of Management and the Control Board shall be elected by cumulative voting.” The abolition of the mandatory regulation on the cumulative voting method had a direct effect on the interests of minority shareholders in passing the Resolution of the General Meeting of Shareholders.
Next, minority shareholders do not own enough shares to prevent or veto resolutions and decisions of the General Meeting of Shareholders. In contrast, a large group of shareholders with a majority share ratio can easily pass resolutions of the General Meeting of Shareholders provided they meet at least 65% and 51% of the total votes on a case-by-case basis (Article 144.1, Article 144.2 of the Enterprises Law 2014) without regard to the approval or disapproval of minority shareholders.
The Enterprise Law 2014 also stipulates that a shareholder or a group of shareholders “owns 10% or more of the total number of ordinary shares for a period of at least 6 consecutive months or a smaller percentage as specified in the company’s charter” has the right to nominate candidates to the Board of Management and Control Board; examining, copying meetings and resolutions; request to convene the General Meeting of Shareholders,... It can be seen that the ownership rate of 10% of the total number of ordinary shares is not low, and the condition of a period of at least 06 consecutive months is not simple either (Article 114.2, the Enterprise Law 2014). It is difficult for small and medium shareholders to meet this condition, thus, indirectly hindering them from exercising their rights.
With a limited number of votes, it is difficult for minority shareholders to elect, appoint candidates or hold important positions in the Board of Management, Board of Directors as well as Control Board. Therefore, minority shareholders are often disadvantaged in terms of information and policies implemented by major shareholders, and it is also difficult to prevent and veto resolutions and decisions in the enterprise.
Besides, according to the Enterprise Law 2014, it is possible to identify shareholders owning at least 10% of the total number of shares to be considered as minority shareholders. This did not align with the Securities Law 2006 at that time, which defined that shareholders owning more than 5% of the voting shares of the company are major shareholders, so this regulation also affected major shareholders as well.
The Enterprise Law 2020 contributes to strengthening the position of minority shareholders in enterprises
Significant changes in the Enterprise Law 2020 are expected to widen opportunities for minority shareholders to exercise their rights and gradually upgrade minority shareholders’ status. Although there are still problems, it has partly overcome the limitations of the 2014 Enterprise Law.
First, the new law reduces the ownership rate of common shares from 10% to 5% for common shareholders. According to the provisions of Article 115.2 of the Enterprise Law 2020, shareholders owning 5% or more of the total number of ordinary shares or a smaller percentage specified in the company’s charter shall enjoy certain rights: to examine, search, copy meeting minutes and resolutions and decisions of the Board of Management; request to convene a meeting of the General Meeting of Shareholders,… Meanwhile, in the Enterprise Law 2014, such rights were only available for shareholders or groups of shareholders who own 10% or more of the total number of ordinary shares for a period of at least 6 consecutive months or another smaller percentage specified in the charter. The reduction in the share ownership ratio of shareholders has identified groups of minority shareholders and broadened their rights, and is consistent with the concept of minority shareholders under the Securities Law 2019.
Secondly, according to Article 115.2, the Enterprise Law 2020 removes the condition that shareholders must own shares for a period of 06 consecutive months. The old law restricted the rights of new minority shareholders for not allowing them to exercise their rights immediately. Minority shareholders also invested their capitals in exchange for shares but they were not allowed to immediately exercise their rights because they did not own shares for a period of 6 consecutive months. The Enterprise Law 2020 thus has abolished the requirement that shareholders own shares for a period of at least 06 consecutive months as a prerequisite to be able to exercise some fundamental rights such as: requesting to convene the General Meeting of Shareholders, nominating candidates to the Board of Management, Control Board, etc.
Thirdly, the Enterprise Law 2020 has extended the minimum time for making a list and sending invitations for the meeting to shareholders from 7 days to 21 days so that shareholders can exercise their rights more proactively.
Practical performance of the mechanism of ensuring the rights of minority shareholders under the Enterprise Law 2020
Although the new Enterprise Law provides progressive amendments for minority shareholders, the practical performance of protecting this group of shareholders has not met theoretical expectations.
The Enterprise Law 2020 enhances the rights of groups of minority shareholders, but in practice, it is not that easy. A group of small shareholders with a percentage of 5% shares has the right to request the convening of the General Meeting of Shareholders, but how to assemble those minority shareholders who share the same request to convene a general meeting until reaching the mandatory rate of 5% is not easy.
With the reduction of share ownership ratio from 10% to 5% so that minority shareholders can ensure their certain rights, according to the mandatory provisions in Article 115.2 of the Enterprise Law 2020, almost all enterprises have adapted the new regulations to make adjustments; however, there are still several enterprises that have not yet promptly changed so. Therefore, unprotected minority shareholders have been indirectly forfeited.
Also, the basic rights of minority shareholders such as the request to convene the General Meeting of Shareholders; examining, copying meeting minutes and resolutions, decisions of the Board of Management, mid-year and annual financial statements, etc., almost are “ignored”, “abandoned” by enterprises, and minority shareholders do not even understand their rights. They do not have an effective voice and hardly have opportunities to participate in operating and controlling the enterprises, so their fundamental rights are more difficult to be satisfied by the enterprise.
Enhancing the rights of minority shareholders means limiting the rights of major shareholders in the enterprises. Therefore, balancing the interests of groups of shareholders is a conundrum. Whether the Enterprise Law 2020 can act as a shield for minority shareholders to feel more secure about their investments depends on the ability to apply the legislation of minority shareholders and enterprises during their business operation process.
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