Vietnam introduced in 1986 a market reform program known as "Doi Moi" (renovation), transforming the economy from a centrally planned economic model to economic-oriented one. These initiatives and the implementation of structural reforms have brought positive changes and achievements in Vietnam’s social and economic situation.
Since Vietnam opened its door to foreign investment and private sector, Vietnam has gone fast in setting a legal framework for a market economy. Though there remains a lot of work to do to create a reliable and secure legal framework which is essential for the development of the market economy, a market-oriented legal framework has been formed in Vietnam with major laws issued. The first to mention is the Foreign Investment Law issued December in 29 December 1987, which was then amended twice on 30 June 1990 and 23 December 1992. On 12 November 1996, the new Foreign Investment Law was passed to replace the 1987 law. During 1990’s, a lot of code and laws have been promulgated, such as the Law on Companies and Law on Private Enterprises both issued in 1990, Law on Bankruptcy in 1993, Labour Code in 1994, Civil Code in 1995, Commercial Law in 1997, VAT & Corporate Income Tax Laws in 1997, etc.
However, Vietnam’s rapid progress in passing new laws has caused inconsistent, ambiguous, contradictory and overlapping laws. The laws are often incomplete and subject to conflicting official interpretations from various ministries and local authorities. In fact, the fast economic changes has forced the State authorities to promulgate new laws and regulations, without, in many cases, due consideration, thus causing such new laws overlapped and contradictory with the present ones or making them provisionally valid. In spite of the Government’s willing to regulate on most of important issues, there are inevitably gaps in the current body of laws as well as confusion.
Laws on Companies and Private Enterprises in 1990 and its impacts on private sector
Very early after the introduction of the market reform program, the National Assembly issued on 21 October 1990 two important laws, namely the Law on Companies, which provides for limited liability companies and joint stock companies and Law on Private Enterprises which provides for private enterprises equivalent to sole proprietorship enterprises in Western countries. The Law on Companies and the Law on Private Enterprises (collectively referred to as "1990 Laws") laid a legal foundation for the development of private sector in the country. The right of freedom to do business and to establish businesses of Vietnamese citizens and entities was for the first time recognized, though limited to a certain extent, in these laws.1 It is important to know that before the enactment of those laws, private owned businesses (liability limited companies, joint stock companies and private enterprises) were not legally permitted in Vietnam, and State-owned enterprises dominated. The right of freedom to do business was then affirmed in the highest legal instrument, 1992 Constitution.2
The above laws had great impacts the development of private sector in the past years. During more than 7 years from the issuance of the 1990 Laws, over 35,000 companies and private enterprises have been established with the total registered capital of 17,389,099 millions VND. On the average, more than new 5,000 companies and private enterprises are registered each year, with the annual capital of about 2,484,157 millions VND. It is estimated that the private businesses have created over 400,000 jobs and made considerable contribution to the State budget.3
However, in practice, the development of the private sector in Vietnam is still modest in comparison with its potential. This is most attributed to the impediments of the legal framework for private sector, particularly the 1990 Laws. Though the 1990 Laws were amended in 1994 and the administrative procedures for establishment and businesses registration simplified in 19984, there remained a lot of legal obstacles for businesses in terms of establishment, registrations and business activities. According to the 1990 Laws, the establishment of a company or private enterprises involved various approvals and licences, about 16 to 26 seals required to be obtained from different State authorities. The time-consuming, expensive, cumbersome administrative procedures, together with the bureaucracy, red tape, have in many cases discouraged investors, and actually prompted them to use other unofficial, underground forms for doing business. Furthermore, the 1990 Laws, which were issued in the early stage of economic reforms, are now inconsistent with the present business legal framework.
Therefore, to further promote the private sector in the country which should be a driving force for a market-oriented economy of Vietnam, the amendment of the above laws or issuance of a new law is a must. The MPI was assigned in 1996 the task to do research and draft amended laws on companies and private enterprises toward business-oriented model. During the drafting process, there were 12 drafts of which the first 10 drafts were prepared in the direction that the Law on Companies and the Law on Private Enterprises remain to be separate and are to be amended. But at last for the final two drafts, the drafters decided to merge two draft laws on companies and private enterprises into one law called the Law on Business.
New Law on Business and its developments
The new Law on Business (hereinafter referred to as the "Law") was passed by the National Assembly5 on 12 June 1999. The Law consists of 10 chapters, 124 articles, and will come into force as of 01 January 2000, in replace of the 1990 Laws.
The introduction of the Law is widely welcomed by businessmen and investors throughout the country. It is considered as comprehensive, advanced and friendly to businesses. The Law is also substantially in compliance with general standards and practices of corporate laws in most countries. The following review will consider the developments and advances of the Law compared with the 1990 Laws, as well as its impacts on the development of private sector in the country.
Type of businesses
The Law makes available four types of businesses for investors to choose as follows:
- Limited liability company;
- Joint stock company;
- Partnership; and
- Private enterprise (equivalent to sole proprietorship in Western countries).
Partnership is a new type of business stipulated under the Law. The 1990 Laws only provided for two types of businesses, namely limited liability company and joint stock company. The partnership form aims at professions such as legal practicing, architecture, accounting or medical practicing. A partnership must have at least two partners who shall be liable by their own assets for the obligations of the partnership. In addition, a partnership may have other members who make capital contribution but shall be only liable for debts of the partnership within their capital contributed.6 In the past, due to lack of a partnership form under the 1990 Laws, all law firms in Vietnam were established and are operating under the form of a limited liability company. It is assumed that, when the Law takes effect, the present law firms will be required to be re-established under a partnership form, pending the Government guiding regulations.
For other types of businesses (limited liability company, joint stock company and private enterprise), the Law provides for more comprehensive and clearer provisions. Especially for the limited liability company, the Law only limits the numbers of its members to fifty7 but abolishes the requirement that the company must have at least two members as under the 1990 Laws. The Law also recognizes one-member limited liability company as a derivative form of limited liability company. The one-member limited liability company is owned by one organization (owner) and the owner shall be liable for debts and other asset obligations of the company within the registered capital of the company. The scheme behind this type of company is that the one-owner limited company is applicable to companies established by the State, social or social-political organizations, and in the future will be applicable to wholly foreign-owned companies which are currently under the ambit of the Law on Foreign Investment in Vietnam.8
Regarding join stock company, the Law requires that a joint stock company must have at least three members and the Law does not set the maximum number of members of the company.9 Previously, the 1990 Laws provided that the number of members of a joint stock company must not be less than seven during its operations.
It is noted that, the Law regulates quite specifically and comprehensively those matters, previously not covered by the 1990 Laws, in relation to:
- For limited liability company, capital contribution, rights and obligations of the members, the right of a member to ask the company to re-purchase the capital contribution of that member, assignment or heritage of capital contributions, specifically the provisions for protection of minor members.
- For joint stock company, various kind of shares, rights and obligations of shareholders, offer for sale and assignment of shares, issuance of bonds, etc. which have taken into account the current regulations on securities and securities market.10
- Partnership, rights and obligations of partners. However, for partnerships, the Law only provide general provisions and expressly assign the Government to issue specific regulations on establishment, management and operations of partnerships.11
- Private enterprises, management, lease and sale of private enterprises, etc.
Who can make capital contribution, establish businesses
It is noteworthy that the Law broadens those persons and entities which are entitled to make capital contribution, establish businesses in comparison with the 1990 Laws.12 The Law only stipulates those persons or entities who are prohibited from establishment, management or making capital contribution to businesses. Except for these prohibition cases, all persons and entities are entitled to establish, make capital contribution or manage businesses.
Inter alia, the persons and entities in the following cases are not allowed to establish or manage businesses:13
- Public servants, military officers and police officers;
- Management personnel in State-owned enterprises, except for those who are appointed representatives to manage the capital contribution by the State in other businesses;
- Persons subject to criminal convictions or imprisonment penalties or those who are revoked by the Court the right to practice for the reason that they committed criminal offences of smuggling, counterfeits trading, illegal trading, tax dodging, client deceiving or other offences provided by the laws;
- Owners of private enterprises, partners of partnerships, Directors (General Directors), Chairmen or members of Board of Management, Council of Members of those businesses which are declared bankrupt, shall not be allowed to manage the business for a period of from one to three years from the date on which the business is declared bankrupt;
- Foreign organizations, foreign persons who do not permanently reside in Vietnam.
For the right to make capital contribution to businesses, the Law excludes the following cases:14
- State agencies, agencies of arm forces (military and police forces) which use State assets and public funds to contribute to businesses for their own benefits;
- Public servants.
Foreign entities, persons who do not permanently reside in Vietnam, overseas Vietnamese persons who settle abroad can contribute capital to limited liability companies, joint stock companies, partnerships under the Law on Encouragement of Domestic Investment. Currently, foreign entities or individuals can hold or buy up to thirty percent of the equity of a limited liability or joint stock company in Vietnam. In connection with the process of equitization of State-owned enterprises (SOEs), the Government has issued some regulations for guiding the sale of shares to foreign entities and individuals. So far, 167 SOEs have completed the equitization, transformed into joint stock companies, and of those companies, six companies have part of their shares sold to foreigners15 (ranging from 16 to 30% of the equity or registered capital).
The broadening of those persons and entities who can establish or make capital contributions to businesses also shows the implication that the foreign-invested enterprises and SOEs will be in the future under the scope of one law. At the present, the Law shall apply to privately owned businesses. However, in the long run, specific laws for foreign invested enterprises and SOEs will be merged into the Law, and all businesses operating in Vietnam will be governed by an uniform law. This is to create a level playing field for all businesses, in compliance with the integration of Vietnam into regional and international economic organizations.
Simple administrative procedures for business establishment
One development in the Law, which is most welcomed by local investors, is the administrative reform concerning the procedures for establishment of a business. Under the 1990 Laws, to establish a company or private enterprise, an investor or promoter had to go through two steps: (i) Application for establishment at the People’s Committee of a city or province where the business is supposed to be located, and then (ii) business registration of the provincial Department of Planning and Investment (DPI).16 The administrative procedures involved in application for establishment and business registration were frustrating, time-consuming, expensive and cumbersome. This administrative burden in practice discouraged investors to make their investment in a larger scale. Moreover, the establishment of a business involves a lot of paperwork.
New points made under the Law are as follows:
- The two-step process for business establishment is cut down to one step only, that is the establishment licence is no longer required, and what the promoter must do now is to "register" business with the Business Registry only. The Business Registry will be established in each city under central authority and province under the People’s Committee. At the present, the Business Registry is the DPI attached to the People’s Committee in each province, city. The Government now is drafting a decree on the system of the Business Registries so as to uniformly manage business registration as well as collect information and statistics on businesses nation-wide.
- The application file for business registration now is substantially simplified. The promoter who wants to establish a company or a private enterprise is only required to provide some information about the would be business. The procedures are very simple and quite quick. The Business Registry shall issue business registration for the business within 15 days from receipt of proper application file, and the business registration can not be refused without justifiable reasons.17 The application file for business registration simply consists of an application, charter (for companies), list of members for limited liability companies, list of partners for partnerships, list of founding shareholders for joint stock companies.
- Another noted point is that the requirement for the minimum legal (registered) capital is no longer required for establishing a business in connection with business registration. Under the 1990 Laws, in different fields business, a business was required to have a minimum registered capital (legal capital) and the amounts of capital, in forms of assets or money, to be contributed by promoters must be certified by a bank or other State authorities.18 This requirement is found to be unrealistic. Local investors have voiced their support for the remove of the legal capital requirement.
Public access to business information
A central Business Registration System will be established to be responsible for issuing business registrations for establishment of businesses and uniformly collecting and managing all relevant information relating to businesses. A decree on Business Registries is scheduled to be issued at the beginning of the year 2000, and accordingly there will be a Business Registry in each province, attached to the provincial People’s Committee, and there will be a central agency for coordination of the operations of Business Registries in cities, provinces nation-wide.
The Business Registration System will be computerized, establish a database for recording all necessary information on establishment, operations and close of businesses, their branches or representative offices throughout the country. Under the Law, businesses are required to periodically report to the relevant Business Registry the information on their operations, financial standing. Subject to a certain fee paid to the Business Registry, every persons or entities can obtain the information on a given business, for example a copy of Business Registration and any amendments thereof, financial status, etc. The system will certainly make operations of businesses more transparent, avoid fraudulence due to limited access to business information as in the past.
From the practices of the implementation of the 1990, the Law provides more comprehensive provisions regarding management and internal affairs of businesses. However, most of those provisions serve as guidelines for businesses, which are optional and flexible for businesses to decide. Some provisions are compulsory so as to protect interests of minor shareholders, investors for avoidance of power abuse of main shareholders, investors and management personnel, and also to protect interests of creditors. Such provisions include rights and obligations of members and shareholders, and minor members or shareholders, obligations of management personnel, payment of dividends, etc.
The 1990 Laws were silent on re-structure of companies and private enterprises, making it difficult for businesses in case of acquisition, merger, transformation, etc. The Law now reserve one chapter for re-organization, dissolution and bankruptcy of businesses.19 The cases where a business is restructured as covered by the Law include division and separation of businesses, consolidation of businesses, merger of businesses, company transformation including transformation of one-member limited liability company, dissolution of businesses and procedures thereof, and bankruptcy of businesses.20
The Law on Business, a most long-awaited law, has been regarded by businesses and investors as an open, business-oriented and comprehensive legal instrument for private sector. It is expected by many that the Law will promote and speed up the development of private sector in Vietnam which is still modest compared with the State sector. The Law will also help the equitization of SOEs and the formation of securities markets in Vietnam. The less interference of the State in business operations, coupled with the increase of the self-responsibility of businesses for establishment and operations, will make private sector more active and transparent.
1Article 1 of the Law on Companies states that "Vietnamese citizens aged from full 18, Vietnamese economic organizations having legal person status in different economic sectors, social organizations have the right to contribute capital for investment or to establish liability limited companies or joint stock companies under this Law". Article 1 of the Law on Private Enterprises also states that "Vietnamese citizens aged from full 18 have the right to establish private enterprises under this Law".
2Article 47, 1992 Constitution.
3Source: Ministry of Planning and Investment or widely known as MPI.
4Inter-ministerial Circular No. 05/1998/TTLT-KH&DT-TP dated 10 July 1998 of the MPI and the
Ministry of Justice, which cut down the burden of administrative procedures for establishment of companies and private enterprises.
5The legislative body in Vietnam.
6Article 95, Law on Business.
7Article 26, Law on Business.
8The Law on Foreign Investment in Vietnam was issued on December in 29 December 1987, amended twice on 30 June 1990 and 23 December 1992, and replaced by the new Law on Foreign Investment in Vietnam on 12 November 1996 ("LFI"). The LFI provides for three forms of investment in Vietnam: Joint Venture Company (JVC), Business Cooperation Contract (BCC) and Wholly Foreign-Owned Company (FOC). The FIL also provides another form of investment which is regarded as the fourth form, i.e. Build-Operate-Transfer (BOT) and its variations Build-Transfer-Operate (BTO) and Build-Transfer (BT).
9Article 51, Law on Business
10The securities regulations in Vietnam include Government Decree No. 48/1998/ND-CP dated 01 July 1998 on Securities and Securities Market, Circular No. 01/1998/TT-UBCK dated 13 October 1998 on issuance of shares and bonds to the public of the National Securities Committee which is in charge of securities market and securities activities, and various other regulations. It is expected that two Stock Exchange Centers will be opened in Hanoi and Ho Chi Minh City next year.
11Several draft decrees are being prepared by the Government and expected to be issued at the beginning of the year 2000. For law firms, one draft ordinance on lawyers are under debate for several years, and under the latest draft, lawyers can practice under either of the two forms: law office or partnership.
12Under the 1990 Law on Companies, only Vietnamese economic organizations with legal person status and Vietnamese citizens aged from full 18 can establish and make capital contribution to companies.
13Article 9, Law on Business.
14Article 10, Law on Business.
15As a step to speed up the equitization of SOEs, the Government issued Decision No. 145/1999/QD-TTg dated 28 June 1999 providing the Regulations on Sale of Shares to Foreign Investors. Under the Regulations, the total value of shares to be sold to foreign investors shall not exceed 30% of the registered (charter) capital of the company.
16In particular, the provincial People’s Committee issued an establishment licence for establishment of the business, and then the business must apply for business registration certificate at the relevant DPI.
17Article 12, Law on Business.
18In the past, the Government set levels of minimum legal capitals for companies and private enterprises in each field under Decrees No. 221 and 222 dated 23 July 1991 which were then replaced by Decree No. 26/1998/ND-CP dated 7 May 1998. For example, under Decree No. 26, the minimum legal capital for a limited liability company in agriculture, forestry, fishery sectors is 300 millions VND, in technology (manufacture) and construction sectors is 600 million VND, and in service and trading sectors is 500 millions VND.
19Chapter VII (Articles 05 to 113), Law on Businesses.
20In particular, to be implemented in accordance with the Law on Bankruptcy dated 30 December 1993 and Government Decree No. 189/CP dated 23 December 1994.
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