Protection of minority shareholders in joint stock company (Part 2)

By October 17, 2022 No Comments

3. Drafting pre-emptive clause at the request of shareholders and setting the conditions for the transfer of shares

At the first stage, the shareholders made their requests for us to advise them a mechanism to bound the shareholders to long-term cooperation and prevent one or several shareholders from bringing new shareholder. It was then we supposed that pre-emptive clauses may be applicable in this case since pre-emptive rights allow the shareholders to acquire the shares before they are offered to new investors and, as such, meant to maintain their shareholding when the Company is small and the membership is closely held.

Law on Enterprise 2020 provided a statutory default pre-emptive right by requiring a proprietary company to offer new shares to existing shareholders in priority to a third-party acquirer[1] (on a pro-rata basis to their existing holdings). Shareholders in joint stock company are not conferred a pre-emptive right upon the transfer of shares from a shareholder to a third party, except otherwise specified in the Charter[2].  

Certainly, we kept the statutory pre-emptive right in the Charter, and we also drafted a thorough clause upon the transfer of shares. We approached pre-emptive clause by “the right of first refusal” structure, where a selling shareholder must first offer his shares to the remaining shareholders before seeking interest from third party. If the remaining shareholders refuse, then the selling shareholder is entitled to offer the shares to a third party on terms no more favorable than the terms of the offer. This structure puts the remaining shareholder first in line, giving them initiative in instance.

While drafting the clause, we noted down the enforceability of pre-emptive right notice as disputes often arise where a notice of purported transfer of share is given regardless of pre-emptive right provisions, mostly caused by the inconsistency between the terms set out in each notice. So, we defined the fundamental terms constituting an offer and required them to be clearly stated in pre-emptive rights notice, which are: number of owned shares and number of selling shares, the method of determining the selling price or the fixed selling price, the term and method of payment, the validity period of the offer. Whatever terms provided in the notice, it must be consistent and the notice must share a same threshold of condition to transfer the shares.

Definitely, the shareholders could impose a method for calculating the selling price or purchase price in the Charter and the term must consist with such method. However, the scale of the Company is still small and the price basically should be determined by a market-based mechanism or upon the mutual agreement amongst the shareholders. Hence, we are of the opinion that the method for determination of price is non-essential at this stage.  

4. Delimitation between Chairman of the Board of Directors and the General Director when exercising the rights of the legal representative

As provided by the shareholders, the General Director is the active legal presentative of the Company. He shall act on behalf of the Company most of the time, approve the day-to-day transactions falling within his jurisdiction. The Chairman of BOD shall replace the GD to undertake these tasks in case the GD is absence from work.

In term of the management structure of the Company, it is a popular practice that the Company has two legal representatives. Notwithstanding that, the delimitation between the legal representatives is usually ignored whereas the Charter should have provided a clear distinctness to prevent the overlapping of authority exercised by the legal presentative. The shareholders also acknowledge this matter.

We then solved this matter by offering a division of powers prescribed in the Charter. We decided to hold on tight the factual management instead of trying to equally divide the power and sort out specific activities of each position to avoid the case where a particular listing would be omitted or not fully covered.

The GD shall still be in charge as legal representative the whole time, except when he is absent or unable to perform the work. In this event, the Chairman of BOD shall represent the Company in the role of legal presentative. However, the shareholders expressed their concern that the GF can wash his hand of duty and hand over the responsibility to the Chairman of BOD for any excuse. 

After that, we narrowed down the scope of absence and inability that can be cited by the GD. Accordingly, the GD is considered absent from the work if he was out of Office due to working schedule or sick leave. His inability means the case he passed away, missing or being prosecuted for penal liability, detained or serving an administrative measure at compulsory education establishments, restricted or incapacitated for civil acts; banned by the Court from holding or practicing as a general director. Moreover, we advise the Client to build an internal process to justify his excuse as a basis for comparison of his compliance. Any act goes beyond such legal framework shall be treated as a violation. The GD shall assuredly be responsible in person if his absence is without a reasonable excuse.