WHAT IS INSPECTION COMMITTEE? IS A JOINT-STOCK COMPANY REQUIRED TO ESTABLISH AN INSPECTION COMMITTEE?

In fact, there are joint-stock companies with an extremely large scale that the number of shareholders can reach tens, even hundreds of domestic and foreign shareholders. Accordingly, the management and control of the company become much more complicated than that of small-scale joint-stock companies. This is one of the reasons why these companies are required to establish an Inspection Committee for better operation.

However, the establishment of the Inspection Committee also needs to comply with the specific processes and conditions in the Law on Enterprises 2020. The following article will answer some questions as well as mention the provisions related to the establishment of the Inspection Committee in a joint-stock company.

Legal basis: The Law on Enterprises 2020

1. What is the Inspection Committee?

The Law on Enterprises 2020 does not have specific regulations on the notion of an Inspection Committee. However, based on relevant regulations in law, it can be understood that an Inspection Committee in a joint-stock company is an department that inspects and supervises all activities of the company, especially a large-scale joint-stock company with many shareholders.

2. Is a joint-stock company required to establish an Inspection Committee?

According to Article 137 of the Law on Enterprises 2020, joint-stock companies may select either of the following models of organization of management and operation:

• A General Meeting of Shareholders, a Board of Management and a director or general director.

• A General Meeting of Shareholders, a Board of Management, an Inspection Committee and a director or general director. If a joint-stock company has less than eleven (11) shareholders and the shareholders being organizations together own less than fifty (50) percent of the total shares of the company, it is not required to have an Inspection Committee.

3. Organizational structure of an Inspection Committee

The Inspection Committee must:

• Having from three to five inspectors. The term of an inspector shall be not more than five years, and inspectors may be re-elected for an unlimited number of terms;

• More than half of the inspectors of the Inspection Committee must reside permanently in Vietnam;

• If the Inspection Committee has only one inspector, such inspector shall concurrently act as the head of the Inspection Committee and must satisfy the criteria applicable to the head of the Inspection Committee.

The head of the Inspection Committee shall be elected by the Inspection Committee from among the inspectors; the election, removal or discharge shall be implemented on the principle of majority vote.

The head of the Inspection Committee must meet some conditions:

• Not falling within one of the cases prohibited from establishing and managing enterprises in Vietnam stipulated in Article 17.2 of the Law on Enterprises 2020;

• Having been trained in one of the following specialties: economics, finance, accounting, auditing, law, business management or in a specialized faculty appropriate for the business activities of the enterprise;

• Not be a person with a family relationship with any member of the Board of Management, the director or general director or other managers;

• Not being a manager of the company; and is not required to be a shareholder or an employee of the company, unless otherwise stipulated in the charter of the company;

• Other criteria and conditions in accordance with other relevant laws and the charter of the company.

4. Right and obligations of Inspection Committee

Article 170 of the Law on Enterprises 2020 clearly stipulates the rights and obligations of the Inspection Committee in a joint-stock company, specifically:

• To supervise the Board of Management and the director or general director with respect to management and administration of the company.

• To inspect the reasonableness, legality, truthfulness and prudence in management and administration of business activities; and the systematic nature, consistency and appropriateness of statistic and accounting work and preparation of financial statements.

• To evaluate the completeness, lawfulness and truthfulness of reports on business, half-yearly and annual financial statements and reports on evaluation of the management of the Board of Management; and to submit evaluation reports at annual meetings of the General Meeting of Shareholders. To review contracts and transactions with related persons which fall within the authority of approval of the Board of Management or the General Meeting of Shareholders and to make recommendations on contracts and transactions requiring approval of the Board of Management or the General Meeting of Shareholders.

• To review, inspect and evaluate the effectiveness and efficiency of systems of internal control, internal audit, risk management and early warning of the company.

• To review books of account, records of accounts and other documents of the company, and the management and administration of the operations of the company if deemed necessary or pursuant to a resolution of the General Meeting of Shareholders or as requested by a shareholder or group of shareholders as stipulated in Article 115.2 of the Law on Enterprises 2020 (A shareholder or a group of shareholders holding five (5) or more percent of the total ordinary shares or holding a smaller percentage)

• Upon request by a shareholder or group of shareholders as stipulated in Article 115.2 of the Law on Enterprises 2020, the Inspection Committee shall carry out an inspection within a period of seven working days from the date of receipt of the request. The Inspection Committee must submit a report on the issues required to be inspected to the Board of Management and the requesting shareholder or group of shareholders within a period of fifteen (15) days from the date of completion of the inspection. Inspections stipulated in this clause may not disrupt the normal activities of the Board of Management and shall not interrupt the administration of the business operations of the company.

• To recommend to the Board of Management or the General Meeting of Shareholders any chan ges and improvements in the organizational and management structure, supervision and administration of the business operations of the company.

• Upon discovery that a member of the Board of Management or a director or general director is in breach of the provisions in article 165 of this Law, to give immediate written notice to the Board of Management and request the person in breach to cease the breach and take meas ures to remedy any consequences.

• To attend and participate in discussions at meetings of the General Meeting of Shareholders and of the Board of Management and other meetings of the company.

• To use an independent consultant or the internal audit department of the company to perform the assigned duties.

• The Inspection Committee may consult the Board of Management prior to submission of reports, conclusions and recommendations to the General Meeting of Shareholders.

• Other rights and obligations as stipulated in the Law on Enterprises 2020 (such as the rights of Inspection Committee to be provided with information), the charter of the company and resolutions of the General Meeting of Shareholders.

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