New
Rules of Law on Enterprises (LE) 2014: Subsidiary companies are not permitted
to invest by capital contribution to or shares purchase of the parent company;
Subsidiary companies of the same parent company are not permitted to jointly
contribute capital or purchase shares in order to have mutual cross ownership.
1.
The
problem
There have been some
inadequate and backward rules proved by some business activities problems in
reality since the effective date of LE 2005. It leads to the changes of LE 2005
solving that problems. One of the noticeable changes of LE 2014 compared with
LE 2005: Subsidiary companies are not permitted to invest by capital
contribution to or shares purchase of the parent company; Subsidiary companies
of the same parent company are not permitted to jointly contribute capital or
purchase shares in order to have mutual cross ownership.
2.
Analysis
Late 2012, there was
a severe debate over subsidiary companies’s investment by capital contribution
to or share purchase of the parent company and capital contribution or shares
purchase of subsidiary companies of the same parent company in order to have
mutual cross ownership in Vietnam Securities Market (VSM). For examples, 09 Nov
2012, the Board of Management Masan Group J.S.C (MSN) decided: MSN and MSN’s
100% capital subsidiary companies would buy up to 25% outstanding shares of
Masan Customer J.S.C (MSF); 05 Nov 2012, Kinh Do Binh Duong J.S.C (Kinh Do J.S.C
– KDC owns 99.8% charter capital) registered to buy up to 8% outstanding KDC
shares by order matching method or put through trading method. In the first 6
months of 2012, 3 subsidiary companies of Gilimex J.S.C (GIL – HOSE market)
bought 2.7 million GIL shares. Under LE 2005, that behaviors are legal. That
companies complied with a legal basic principle: “Everything which is not
forbidden is allowed”. LE 2005 doesn’t prevent any subsidiary companies from
investing by capital contribution to or shares purchase of the parent company;
jointly contribute capital or purchase shares in order to have mutual cross
ownership.
Relationship in
corporate groups is regulated under Chapter 7 LE 2005 and Chapter 8 LE 2014.
However, the rules as indicated as the title are only regulated under LE 2014.
In details, subsidiary companies are not permitted to invest by capital
contribution to or shares purchase of the parent company; Subsidiary companies
of the same parent company are not permitted to jointly contribute capital or
purchase shares in order to have mutual cross ownership. From the new rules and
examples at above paragraph, I will notice something:
Firstly, from 01 July
2015 (the effective day of LE 2014), subsidiary companies are not permitted to
invest by capital contribution to or shares purchase of the parent company;
Subsidiary companies of the same parent company are not permitted to jointly
contribute capital or purchase shares in order to have mutual cross ownership (
Clause 2, Article 189 LE 2014). However, new rules have not still solved a
problem: What’s wrong with this behaviors before the effective date of LE 2014?
We can not find any rules solving that.
Secondly, Why were
there mutual tradings in corporate groups like KDC, MSN, GIL as indicated
above? I can give some reasons:
1.
That
behaviors didn’t violate relevant Vietnam Rules. At General Shareholders Meeting
on 12 April 2014 of GIL J.S.C, a large GIL’s shareholder Sai Gon Securities
Company (SSI) refered to State Security Commission (SSC) Documentary: A Parent
Company’s share bought by a subsidiary company is considered as a treasury
share. I think SSC’s idea is inappropriate and illegal. SSC don’t have the
authority to explain contents of legal normative document. “Treasury share” is defined
as “ a share was issued by a shareholding company and then, it bought this share
itself” (Clause 1, Article 2, Decree No. 58/2012/NĐ-CP). Under this rule, a
parent company’s share bought by a subsidiary company is not a treasury share.
Besides, under LE 2005, a subsidiary company is a legal entity and shall have
shareholding status when it buys parent company’s share.
2.
This
behaviors might be related to leaders’s desire to keep power at public company
against new big shareholders groups. For example, a group of leaders owns 40%
shares and a group of new big shareholders owns 45% shares now.
There will be a “war of power” between them for controlling the company. The
present group of leaders don’t have enough funds to buy many shares, they will
vote for establishing a subsidiary company. Next, they will assign somebody who
have a good relationship with them to be leaders of the subsidiary company. The
subsidiary company will purchase the parent company’s shares, such as 10%
shares. The present group of leaders will be a winner in a “war of power” for
the next election with 50% shares supporting them against 45% shares supporting
a group of new big shareholders.
3.
Increasing
the parent company’s shares by purchasing demands from subsidiary companies.
4.
Helping
the insider shareholders to sell parent company’s shares with the high price by
selling them to subsidiary companies.
5.
Helping
the parent company not to comply with the strict rules about “treasury shares
trading”.
Thirdly,
with reasons as analyzed above, I think it’s appropriate to change the law
about that behavior. LE 2014 forbade that behavior from 01 July 2015.
3.
Conclusion
The new rules in LE 2014 are
appropriate. It has solved some problem existing in VSM recently. However, some
Decrees, Circulars (ready to be issued) guiding LE 2014 need to be clearly
written in orther to solve the problem as indicated above.
