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.

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.