Minority shareholders protection in shareholding companies a comparison between vietnamese enterprises law and the united kingdom company law

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Joint Swedish-Vietnamese Master’s Programme MASTER’S THESIS MINORITY SHAREHOLDERS PROTECTION IN SHAREHOLDING COMPANIES A COMPARISON BETWEEN VIETNAMESE ENTERPRISES LAW AND THE UNITED KINGDOM COMPANY LAW SUPERVISORS: Supervisor 1: Professor Christina Moell Supervisor 2: Professor Bui Xuan Hai Acknowledgements First of all, I would like to thank my supervisors, Professor Christina Moell and Professor Bui Xuan Hai, for saving the time in their very busy work to supervise my thesis as well as instruct me for further studying. I am grateful to Professor Christopher Wong for his continuous support and guidance during the course. I would like to acknowledge the generous support from Ho Chi Minh City University of Law and the Faculty of Law, Lund University. I would like to thank to Sida (the Swedish International Development Agency) for its fund in the project. Last but not least, I am always indebted to my parents and my husband for their wholehearted support during the years of my studies. Table of Content ACKNOWLEDGEMENTS 1 TABLE OF CONTENT 2 ABBREVIATION 3 PART 1. INTRODUCTION 4 1. 1 The need for this research 4 1. 2. The situation of the research 4 1. 3. Purposes 5 1.4. Methodology 5 1. 5. Delimitation 6 1. 6. The structure of the thesis 6 PART 2. THEORETICAL ISSUES ON MINORITY SHAREHOLDERS PROTECTION 7 2.1 Who is a minority shareholder? 7 2.2 Why minority shareholders should be protected 10 2.2.1 Minority shareholders suffer from actual and potential oppression caused by managerial power and majority rule 11 2.2.2 Minority shareholder protection is a significant factor that can encourage investment and support the development of financial markets and economic growth 14 2.3 Principles of minority shareholder protection 15 2.3.1 Maintaining the effect of majority rule 15 2.3.2 Equitable treatment of shareholders 16 PART 3. COMPARATIVE STUDY OF MINORITY SHAREHOLDERS PROTECTION IN VIETNAMESE AND UNITED KINGDOM COMPANY LAW 18 3.1 Sources of law 19 3.2 The rights of minority shareholders regarding the general meeting 20 3.2.1 Calling for a general meeting 20 3.2.2 Attending the general meeting 22 3.2.3 Getting items on the agenda 24 3.2.4 Raising a motion at the general meeting 25 3.2.5 The right to challenge resolutions adopted at the general meeting 26 3.3 The right to appoint directors 28 3.4 Shareholders’ remedies 31 2 3.4.1 Derivative actions 3.4.2 Unfair prejudice 3.4.3 Action to enforce the constitution of the company 31 35 36 3.5 The ability of minority shareholders to access company’s information 39 3.6 The ability to control related party transactions and major transactions 40 3.6.1 Major transactions 40 3.6.2 Related party transactions 41 3.7 Pre-emptive right 42 PART 4. CONCLUSION 46 TABLE OF STATUES AND OTHER LEGAL INSTRUMENTS 47 National legislations 47 The United Kingdom 47 Vietnam 47 TABLE OF CASES 48 BIBLIOGRAPHY 49 Official Reports and other Documents 49 The United Kingdom 49 Vietnam 49 Monographs 49 In English 49 In Vietnamese 49 Articles in Journals, Anthologies, and others 50 In English 50 In Vietnamese 51 3 Abbreviation 3 AGM Annual general meeting EGM Extraordinary general meeting CA Companies Act EA Enterprises Act UK United Kingdom Part 1. Introduction 1. 1 The need for this research Minority shareholder protection is one of the fundamental concepts within the domain corporate governance. It has also become in recent years an important indicator for the World Bank when it evaluate a country’s business environment1. Among many types of business, shareholding company is typically characterized by the separation between the ownership evidenced by the possession of shares and the management of the company. Depriving from separation above, no shareholder especially a minority shareholder, is capable of directly participating in the managerial activities and supervision of the company in a significant and effective way. The minority shareholders are however investors in and also co-owners of the company and they do reserve the right to perform their rights and duties as shareholders. However, because of the typical characteristics of the corporate governance of a shareholding company, minority shareholders often challenge with the potentials of dual oppression and face unfair treatment from both the majority shareholders and the management. Consequently, their rights become unsubstantial and the position of their capital, too, is often abused by majority shareholders and damaged consequentially. Owing to their inherently weak position, the laws of most countries provide some protection for them. However, these provisions are not perfect and the more important point in the protection of minority shareholders is the mechanism for enforcing them. The reality in Vietnam has, in recent years indicated two concerns and problems: first, the legal provisions on minority shareholders protection are themselves defective and the enforcement is ineffective which also lead to negative results for such investors in particular and the business environment in general. From the totality of issues relating to minority shareholders, the author selects the topic “MINORITY SHAREHOLDERS PROTECTION IN SHAREHOLDING COMPANY – A COMPARISON BETWEEN VIETNAMESE ENTERPRISES LAW AND THE UNITED KINGDOM COMPANY LAW” for her master thesis. 1. 2. The situation of the research In Vietnam, the issue of minority shareholder protection has been discussed by the following authors in the following studies and articles: According to Report on Business Environment 2008 by World Bank (WB) and International Finance Corporation (IFC), Vietnam was ranked 91 among 178 countries in the world (this rank in 2007 was 104/175). Among 10 investigated criteria, 4 of them were dropped back, including: issuing business license; investors protection which comprises transparency, directors’ liability and shareholders’ ability to bring suits against directors and managers; business dissolving and paying taxes. See ”Nhà đầu tư nhỏ chưa được bảo vệ.” (Small investors have not been protected). http://www.ktdt.com.vn/newsdetail.asp? CatId=11&NewsId=25760 , accessed on 12 December 2008. 4 Chau Quoc An (2006), Chế độ pháp lý về quản trị công ty theo quy định của Luật doanh nghiệp, (The legal regime on corporate governance under Enterprise Law) Master thesis; Nguyen Ngoc Bich (2004), Luật doanh nghiệp – Vốn và quản lý trong công ty cổ phần, (Enterprise Law – Capital and management in shareholding companies), Young Publisher; Cao Đinh Lanh, ”Xung đột các nhóm lợi ích trong công ty cổ phần” (Conflicts between interest groups in shareholding companies), The Journal of Democracy and Law, No 3/2007; Tran Quoc Hoai, (2006), Pháp luật về bảo vệ nhà đầu tư trên thị trường chứng khoán, (Law on protection of investors’ interest in security market), Master thesis; Tran Viet Khoa (2007), Luật Doanh nghiệp Việt Nam trong xu thế hội nhập kinh tế quốc tế, (Vietnamese Enterprise Law in the tendency of internationally economic integration), Master thesis; The Institute of international economy (1991), Công ty cổ phần ở các nước phát triển – Quá trình thành lập, tổ chức và quản lý, (Shareholding companies in developed countries – The process of establishment, organization and management, Social Science Publisher, Hanoi; Farrukh Iqbal and Jong – II You (2002), Kinh tế thị trường dân chủ và phát triển – Từ góc nhìn Châu Á, (Democratic market economy and development – From the Asia view), The World Publisher. However, these works above mainly focus on corporate governance. The issue of minority shareholders protection was only mentioned to the extent of listing some legal provisions and pointing out the rights of minority shareholders under them. Up to now, there has been no independent and specialized research on minority shareholders protection in Vietnam, especially from the comparative perspective. 1. 3. Purposes My research has two main purposes: (i) studying theoretical issues on minority shareholders protection and, (ii) making a comparative study of minority shareholders protection under the UK and Vietnamese Company law which leads to conclusions on minority shareholders protection in Vietnam. My research first intends determine who are the minority shareholders and the reasons why they should be protected. As to the second purpose, the comparative study of minority shareholders protection in the UK and in Vietnam aims at drawing conclusions about the merits and demerits of the Vietnamese treatment of such protection. 1.4. Methodology To carry out the research, the following methods will be used in the thesis: - Comparative method: this method will be used to compare and collate the issues arising in the UK and Vietnamese company law with the aim of establishing their similarities and differenties and explaining the reason for them. The result of this method will serve the purposes of the thesis. Particularly, this method will be mainly used in part 3 of the thesis to support the comparative study between the UK and Vietnamese company law on minority shareholders protection. 5 - Analytical method: this method will be used mainly for part 2 of the thesis where accessing various opinions about minority shareholders. By using the analytical method, this part point out the concept of minority shareholders; the reasons for which minority shareholders should receive protection, and principles on minority shareholders protection. 1. 5. Delimitation Pursuant to the aims stated above, my research will not cover all issues relating to minority shareholders protection but will be limited to company law matters. Within company law, the comparative research concentrates on the typical tools which minority shareholders could actively employ to protect themselves. Beside, because investor protection in general and minority shareholders protection in particular is not confined to company law, but also to securities regulation2, thus, securities law will be mentioned if particularly relevant. The research on minority shareholders protection also will be limited in shareholding company (công ty cổ phần). In the UK, a company can be classified as limited by shares, limited by quaramtee, or unlimited. Shareholders in a company limited by shares will hold liability to the amount which they contributed to the company’s assets. Any limited company with a share capital may be a private company or a public company. The key difference between these two kinds of company are a private company can not offer its securities to the public as a public company3. In Vietnam, a shareholding company also has it chater capital in shares; its shareholders shall be liable for the debts and other property obligations of the company to the extent of the amount of capital contributed to the company, its shares may be tranferred freely, and it can issue all types of securities to the public4. Because of the similarities above, the comparative study on minority shareholders protection will be made between the shareholding company in Vietnam and the public company in the UK. 1. 6. The structure of the thesis In accordance with the purposes and scope of my research, the content of the thesis will contain 4 parts: 1. Introduction 2. Theoretical issues on minority shareholders protection 3. Comparative study of minority shareholder protection in Vietnamese and the United Kingdom company law 4. Conclusion - Caspar Rose, “The Challenges of Quantifying Investor Protection in a Comparative Context”, 8 European Business Organization Law Review (2007), p.373. Section 1, CA 1985. Article 77, EA 2005. 6 Part 2. Theoretical issues on minority shareholders protection Before elaborating on minority shareholders protection in the UK and Vietnam for the comparative purposes, it will be useful to define who are minority shareholders and clarify why they should receive protection. In addition, the protection of minority shareholders should follow some principles in order to secure the company’s legitimate business. Hence, this part will present in turn the three issues: (1) who are minority shareholders; (2) why minority shareholders should be protected; and (3) principles of minority shareholders protection. 2.1 Who is a minority shareholder? In this section, the thesis does not attempt to give a unique all - embracing definition of minority shareholder but try to suggest what is meant by the term “minority shareholders”5. It is important to bear in mind that the term “minority” does not relate exclusively to numbers of shareholders6. By comparing minority race in constitutional law and minority shareholders in corporate law, Professor Anupam Chander said that “minority status among shareholders centers on share ownership and other indicia of control”, and “ignores other features that might be said logically to describe someone who is in a minority” such as “A Texan is not a minority shareholder simply because all the other shareholders are from New York”7. And, the minority shareholders might be, in number, an actual majority of the shareholders. As defined by the UK Law commission, the term “minority shareholder” for simplicity, connotes one or more members not holding the majority of voting rights capable of being cast at general meetings8. In other word, the label "minority" is based on shareholding and power relations within the corporation. 9 The questions that may come to mind are whether a shareholder who provides a majority of the capital of a company must escape being a minority shareholder? Or will a shareholder who holds a very small percentage of the capital definitely be a minority shareholder? Commonly, the “minority” or the “majority” refer to those who hold the minority See, Bui Xuan Hai (2007), Corporate Governance in Vietnamese Company Law: A Proposal for Reform, Doctor Thesis, La Trobe University, Australia, p.25 with refer to La Porta, Lopez-de-Silanes, Shleifer, and Vishny, who consider all managers and controlling shareholders of a company as “insiders”, while creditors and minority shareholders are “outside investors”. Nguyen Ngoc Bich (2004), Luật Doanh nghiệp – Vốn và quản lý trong công ty cổ phần (Enterprises Law – Capital and management in Shareholding Companies), Young Publisher, p. 251. Anupam Chander, “Minorities, Shareholder and Otherwise”, 113 Yale Law Journal (2003) p.162. The Law Commission, Shareholder Remedies, Law Commission Consultation Paper 142 (1996), http://www.lawcom.gov.uk/docs/cp142.pdf, accessed on 20 November, 2008. Supra note 7, p.162. 7 or the majority of the shares of a company10.Under Vietnamese law, there has been inconsistent and ambigous conception about minority shareholders. Under Decree 48/1998/NĐ-CP dated 11/7/1998 on Securities and Securities market, “minority shareholders are those who hold less than 1% voting shares of the issue organization”. And, Decree 144/2003/NĐ-CP dated 28/11/2003 on Securities and Securities market did not give a definition of minority shareholder but did say tha: “majority shareholders are those who hold more than 5% voting shares of the issue organization”. Though both Decrees were repealed, they expressed the approach of law makers about minority shareholders. From company law perspective, the Enterprise Act of 1999 and the Enterprise Act of 2005 do not contain any definition of minority or majority shareholder but provides some special rights for shareholders who hold 10% and more voting shares. Later, the Law on Credit Organizations, article 20.6 provides that “majority shareholders are individuals or organizations holding more than 10% of capital share or more than 10% of voting shares of a credit organization. The new Securities Act 2006 provides that “majority shareholders are those directly or indirectly holding not less than 5% of voting shares of the issue organization11. Thus, legislation in Vietnam during the ten passing years has determined majority shareholders on the ground of the percentage of voting shares which has not been consistent in various fields of law. Consequently, by excluding majority shareholders, minority shareholders can be defined. However, it can easily be seen that the number “1%”, “5%” or “10%” can not determine the position of minority or not because, “sometimes, a shareholder who provides the majority of the capital of a company is a minority shareholder with regard to the exercise of control in the company”12. For instance, in Berger v. Berger, a court held that even a person who held ninety-eight percent of his company's stock could be a minority shareholder based on a "qualitative,” not "mechanistic," assessment.13 This is really true in case the law permits the issue of priority shares - shares which have special controlling rights attached to them, making it possible to control the company without holding a large percentage of the shares and without providing a large share of the company’s capital.14 Because of the existence of this kind of shares, a shareholder providing the majority of the capital may sometimes not control the company and be effectively in a minority position with regard to the exercising of controlling rights15. “In other cases, a shareholder who provides only a limited percentage of the Nguyen Thiet Son (1999), Công ty cổ phần ở các nước phát triển, (Shareholding companies in developed countries), Institute of International Economy, Social Sciences Publisher, p.53. Article 6.9 Securities Act 2006. L. Timmerman and A. Doorman, “Rights Of Minority Shareholders In The Netherlands” 6 Electric Journal of Comparative Law (2002), http://www.ejcl.org/64/art64-12.html, accessed on 20 September, 2008; 592 A.2d 321, 326 – 28 (N.J. Super.Ct.Ch.Div.1991). Frere Cholmeley Bischoff (1996), Chapter England and Wales in Dennis Campell (1996), Protecting Minority Shareholders, Kluwer Law International, p.126; see also Article 78, EA 2005. Supra note 12, p.182. 8 company’s capital can have considerable control rights because of the special nature of the shares he possesses”.16 Professor Anupam also confirmed this by saying “controlling shareholders can hold a minority of shares yet exercise control”. John D. Rockefeller "succeeded in his famous struggle to oust the chairman of the board of Standard Oil of Indiana despite controlling only 14.9% of Standard Oil's stock."17 In the Asian context, Claessens, Djankov and Lang find that pyramidal ownership18 has been common in Asian economies. Then, the consequence of such ownership arrangements is that the controlling shareholders are able to obtain greater control with minimal capital expense, which makes “tunnelling” much easier19. The Italian Securities Act (1998) and two interpretive releases published on 11 April 2008 also use “the no-relation rule” to define to guarantee the effective representation of shareholders who are truly minority shareholders by preventing potential abusive conducts by controlling shareholders or shareholders who otherwise have enough voting power to exercise significant influence over shareholders' meetings20. Therefore, basing ourselves on the amount of capital alone, “we do not know exactly what a minority shareholder is”21. It depends on the capital structure provided for in the articles of association of a company. When a company makes use of a specific control structure, whether that be priority shares, a pyramid structure, or preference shares, pure percentages lose much of their relevance22. Professor Anupam also agree with the US Federal Fifth Circuit, in a 2000 decision that explicitly considered minorities and majorities: "The question of minority versus majority should not focus on mechanical mathematical Supra note 12, p.208. Supra note 7, p.163. In this structure, the family achieves control of the constituent firms by a chain of ownership relations: the family directly controls a firm, which in turn controls another firm. The pyramid structure allows the family to use the financial resources of existing group firms to invest in new firms. See Heitor Almeida, Sang Yong Park Marti Subrahmanyam Daniel Wolfenzon, ”The structure and formation of business groups: Evidence from Korean Chaebols”, http://pages.stern.nyu.edu/~msubrahm/papers/Pyramids.pdf on 01 January 2009. Johnson, La Porta, Lopez-de-Silanes, and Shleifer (2000) use the term “tunnelling” to describe the transfer of resources out of firms for the benefits of their controlling shareholders. Much evidence emerging during the Asian financial crisis shows that “tunnelling” is a very serious agency problem in emerging markets. The recent debacles of Enron, Worldcom, and Global Crossing convince people that “tunnelling” is also possible even in developed economies. See Chong-En Bai, Qiao Liu, Joe Lu, Frank M. Song, and Junxi Zhang (2004), “Corporate Governance and Market Valuation in China”, papers.ssrn.com/sol3/papers.cfm?abstract_id=393440, accessed on 10 September, 2008. Domenico Fanuele and Tommaso Tosi (of Shearman & Sterling LLP), “Power to the minority” in [2008] International Financial Law Review, p.48; Pursuant to Articles 147- ter (3) and 148(2) of the Italian Securities Act, minority shareholders may propose candidate lists only if they are not related, either directly or indirectly, to any of the reference shareholders. Supra note 12, p.208; see also supra note 7, p.163, “Corporate law does not define "minority" shareholders on the basis of numbers alone”. Supra note 12, p.182. , accessed 9 calculations, but instead, 'The question is whether they have the power to work their will on others... ,,23. To conclude this section, the author stresses that capital and control are not necessary aligned. Therefore, the number of shares alone can not define a minority position notwithstanding the controlling ability of a shareholder. In addition, the assessment of this ability is very difficult and varies from situation to situation so we will look in vain for a general definition of minority shareholders. Some countries, such as the Netherlands and the UK, use a situation – to – situation basis from the start and also decides from case to case what qualifies one as a minority shareholder24. Professor L. Timmerman and A. Doorman defined minority shareholders as those who, “irrespective of the amount of capital they provide, are unable to exercise any significant form of control within the company”25. It cannot be denied that minority shareholders must logically be unable to control the management of the company but, the number of shares held by shareholders is also likely to reflects their position. Hence, minority shareholders are those who hold so few shares in relation to the total number of shares that they are unable to control the management of the company. 2.2 Why minority shareholders should be protected Theoretically, the investor protection issue can be viewed from a narrow (firmlevel) or a broad (country – level) perspectives26. From the former perspective, minority shareholders need to be protected because of the potential for oppression both by managerial power and the majority rule. From the latter perspective, “minority shareholder protection is a significant factor that can encourage investment and support the development of financial markets and economic growth”27. The corporate world today subdivides into rival systems of dispersed and concentrated ownership28. While in Japan and continental Europe corporate governance is organized on an "insider/control-oriented" basis29, the structure of ownership and control in the UK and the USA has been characterized as an “outsider” or “arm’s – length” system30. In this system, shareholders generally… “take a "hands-off" approach with companies they own” and “maintain their distance and give executives a free hand to manage”31. Hollis v. Hill, 232 F.3d 460, 466 (5th Cir. 2000) (quoting Bonavita v. Corbo, 692 A.2d 119, 124 (N.J. Super . Ct. Ch. Div. 1996)). Supra note 12, p.195. Supra note 12, p.182. Supra note 5, p.26. Supra note 5, p.26. Brian R. Cheffins, “Does Law Matter? The Separation of Ownership and Control in the United Kingdom” 30 Journal of Legal Studies (2001) p.459. Under this system, the stock market plays only a secondary role in the economy, and those companies with publicly traded shares typically have "core" shareholders and/or dominant creditors that exercise considerable influence over management; see supra note 26, p.461. Petri Mantysaari (2005), Comparative Corporate Governance, Springer Berlin Heidelberg Publisher, p.79. Supra note 28, p.461. 10 Especially where this distancing approach prevails, shareholders, especially, minority ones might fare prejudicial actions from both the management and majority shareholders. This section considers each perspective to make clear the need for minority shareholders protection. 2.2.1 Minority shareholders suffer from actual and potential oppression caused by managerial power and majority rule The separation of ownership and control in the modern corporation results there being a distance between shareholders and the corporate business. Sharing this view, Professor Brian R. Cheffins considered that this separation in the UK was a “managerial evolution, if not revolution”…and, “a trend toward a divorce between control and ownership was clear for very large companies”32. In such circumstances, “boards of directors, instead of the shareholders, are becoming the power organ within the corporation”33. The issue of the separation of ownership and stewardship in joint stock corporations was raised by Adam Smith, in his masterwork “The Wealth of Nations” over three hundred years ago. It was therefore suggested that a set of effective mechanisms should be in place to resolve the conflict of interests between firm owners and managers. Later, in the seminal work by Adolf Berle and Gardiner Means (1932), they argued that, in practice, managers of a firm pursued their own interests rather than the interests of shareholders34. From this identification of the separation of ownership and control, ”the concern of corporate law has been to try to mitigate the effects of this separation”35. On the one hand, the separation is necessary to help companies, especially large ones survive the increasingly competitive modern economy and to meet the heightened demand for managerial skills within companies.36 On the other hand, as the Berle-Means hypothesis explains, minorities are presumed to be without adequate power or incentive to prevent abuse37 and thus are prone to suffer it. Therefore, the separation “implied a need for the state to protect minority shareholders from the rapaciousness of corporate managers”.38 In the UK, the power of the board of directors are to a very large extent regulated by articles of association39. Normally, the articles of association confer all the power to manage the company into the hands of the board which are thus very wide. In Ampol, Lord Wilberforce said that “directors, within their management powers, may takes decisions against the wishes of the majority of shareholders”, Supra note 26, p.467. Weiguo He (2004), Improving the Protection of Minority Shareholders in Chinese Company Law, Master thesis, Tsinghua University, p.1. Supra note 17, p.6. Ross Grantham, ”The Doctrinal Basis of The Rights of Company Shareholders”, 57 Cambridge Law Journal (1998), p.555. 36 Supra note 31, p.1, see also supra note 26, p.461. 37 Supra note 5, p.134. 38 Supra note 5, p.127. 39 Supra note 28, p.95. 11 and that “the majority of shareholders cannot control them in the exercise of these powers while they remain in office”40. In European context, it is also recognized that ”shareholders who control a proportion of total voting rights much larger than their ownership (and therefore dividend) rights have an incentive to extract value from the company at the expense of non-controlling shareholders41. Beside the managerial power, “the relations between majority shareholders and minority shareholders have always been a thorny issue in corporate law”42. The minority shareholders tend to claim that the majority shareholders are abusing their rights with their ultimate control over the corporate matters. Meanwhile, the majority shareholders defend themselves with the argument that they are simply exercising their legal rights as majority shareholders43. In short, because of the dominance of majority shareholders in the company, the oppression of minority shareholders was therefore a central concern in the corporate governance and the protection for them were of paramount importance44...Though, that said large shareholders with sufficent political power may even try to evade the protection of minority shareholders stipulated in 45 company law . All powers of a company are in theory exercised by one or other of its own organs: the shareholders in general meeting or the board of directors. Each of these bodies usually makes its decision by majority vote, and the minority shareholders are usually bound by the decisions of the majority. This means that those who control more than half of the votes on the board or at a shareholders’ meeting will have substantial power. Problems may arise where those in effective control of a company use their power to benefit themselves and cause a detriment to minority shareholders. In such a case, the danger is, indeed, that companies will be run exclusively in the interests of the controlling shareholders, and that the interests of the minority shareholders will be ignored, or at least not fully recognized46. Then, it is clear that the law should provide some remedies for cases where such majority power has been abused47. Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821. See supra note 25, p.95 Commission of the European Communities, ”Impact Assessment on the Proportionality between Capital and Control in Listed Companies”, Working Document 2007, p.4. 42 Supra note 33, p.43 43 Italian regulators are careful about how they balance the interests of majority and minority shareholders. If the balance tips too heavily in favour of minority shareholders, shareholder conflicts and disputes (possibly resulting in litigation) could increase, leading to delays in executing corporate transactions and increased costs for companies and their shareholders. Such delays could ultimately scare off investors and damage the interests of all shareholders. See supra note at 18, p.49. Eric Hilt, “When Did Ownership Separate from Control? Corporate Governanca in the Early Nineteenth Century”, 68 Journal of Economic History (2008) p. 648. Caspar Rose, “The Challenges of Quantifying Investor Protection in a Comparative Context”, 8 European Business Organization Law Review (2007) p.372. Jennifer Payne, “Section 459-461 Companies Act 1985 in Flux: the Future of Shareholder Protection” 64 Cambridge Journal (2005) p.647. Andrew Hicks & S.H.GOO (1997), Cases and Materials on Company Law, Blackstone Publisher, p.243. 12 Specifically, in case of conflicts between majority shareholders and/or the management on the one hand, and minority shareholders, on the other hand, the typical outcome is that minority shareholders lose because they are unable or unwilling to challenge decisions by the board and are also outvoted at general meetings48. Moreover, as Davies and Banks both claim, “the interests of minority shareholders may be ignored by majority shareholders in general meetings when passing the company’s decisions”49. The study of minority shareholders protection in UK and US has shown that “common accusations are that the majority has excluded the minority from active participation in the business or has mismanaged or misappropriated assets.”50 In other words, “the dominant shareholder has greater ability to extract resources that otherwise would have been shared with minority investors”51. In addition, the reality that “minority shareholders maintain a passive role in the corporation, pay little attention to the daily operations of the corporation, have little incentive to engage in corporate activities, and are prone to vote in favour of management's recommendations”52 makes the minority rights little more than symbolic and almost encourages majority shareholders and the management to abuse their rights for personal benefits. Things are of course even worse for minority shareholders if the management and the majority shareholders collude. After an examination of 2658 companies in East Asia, Claessens and his colleagues found that if majority shareholders effectively control companies, “their policies may result in the expropriation of minority shareholders”53. Through their empirical research, La Porta and his co-authors share this view and propose that all outside investors “need to have their rights protected”54. This proposal was supported by Professor Gordon Walker, when he said that it is important to protect outside investors “because of potential and actual expropriation of minority shareholders and creditors by controlling shareholders” 55 . In conclusion, the minority shareholder problem maintains that both controlling shareholders and managers have the power to extract private benefits at the cost Elijah Mwangi Kiboi, “Protection of The Rights and Interests of Minority Shareholders”, www.amelinyangu.net/PROTECTION%20OF%20THE%20RIGHTS%20AN accessed on 28 October, 2008. Supra note 5, p.27. Sandra K. Miller, “How Could U.K and U.S Minority Shareholder Remedies for Unfairly Prejudicial or Oppressive Conduct be Reformed?”, 36 American Bussiness Law Journal (1999) p.580. Jay Dahya, Orlin Dimitrov and John J. McConnell, “Dominant Shareholders, Corporate Boards and Corporate Value: A Cross-Country Analysis”, ECGI Working Paper Series in Finance, Working Paper No.99/2005, Updated February 2006, p.5. Steven M. Haas, “Toward a Controlling Shareholder Safe Harbor”, 90, Virginia Law Review (2004) p. 2288; see also supra note 7, p.127,… “The debacles of Enron and WorldCom demonstrate that… “minority investors may yet be imperiled by the manipulations of controlling persons”. Supra note 5, p.26. Supra note 5, p.26. Supra note 5, p.26. ..., 13 of minority shareholders56. As La Porta and his coauthors write, "Corporate governance is, to a large extent, a set of mechanisms through which outside investors protect themselves against expropriation by the insiders"57. 2.2.2 Minority shareholder protection is a significant factor that can encourage investment and support the development of financial markets and economic growth “Protecting minority shareholders serves to protect property rights” …and “property rights might ultimately be made more robust through legal efforts to enlarge the group of people holding property”.58 In other words, protecting minority shareholders is beneficial for the capital formation. The theory underlying the Berle-Means modem corporation is that “large scale enterprise needs to pool equity capital from many people who will cede working control over that capital”59. With “the desire to obtain minority participation in the capitalist enterprise, thereby improving the enterprise through the additional capital contributed by the minority”, corporate law ensures that “a minority shareholder is treated "fairly" by the controlling shareholder or management encourages people to invest funds without needing to worry about expropriation” 60 . Second, weak protection of minority shareholders increases the average cost of capital for a company because minority shareholders will anticipate their weak position and will want receive compensation for the increased risk they run61. This may put the company at a competitive disadvantage with foreign companies. Third, “the degree of protection a country's legal system provides for outside investors has a significant effect on its corporate governance regime. Stronger legal protection for minority shareholders is associated with a larger number of listed companies, more valuable stock markets, lower private benefits of control, and more diffuse share ownership”62, thus, it creates an attractive legal environment for investment, especially foreign investment. This outcome were also recognized by the Dutch: “if the Dutch legal system does not provide adequate protection of minority shareholders compared with foreign legal systems, foreign investors will not invest in Dutch companies and Dutch investors will increase their investments in foreign companies”63. Investor protection organizations are emerging in Russia which aim at making minority shareholders more pro-active in defending their rights. More and more Seppo Kinkki, “Minority Protection and Dividend Policy in Findland”, 14 European Financial Management (2008) p.470–471. Supra note 7, p.158-159. Supra note 7, p.159. Supra note 7, p.159. Supra note 7, p.172. Supra note 12, p.181-182. Supra note 28, p.462; see also Mike Burkart, Fausto Panunzi, “Agency conflicts, ownership concentration, and legal shareholder protection”, 15 Journal of Financial Intermediation (2006) p.2. Supra note 12, p.181. 14 companies are becoming aware that violating shareholders rights is a major problem that has to be eliminated in order to get access to foreign capital64. This is a matter of concern to investors, but there are also public policy arguments in favour of ensuring that minority shareholders are adequately protected from the opportunistic behaviour of majority shareholders. If investors are inadequately protected there is a danger that they will refuse to invest if they are only offered a minority stake or more likely that the cost of securing their investment will rise65. Listed companies are subject to stock market control. Bad publicity regarding a majority’s unfair conduct towards the minority is likely affect the company’s profitable and share value. For the reasons and benefits mentioned above, it is no exaggeration to say that “where today's constitutional jurisprudence of equal protection aspires to colour blindness, corporate law places minority concerns at the heart of its endeavour”66. 2.3 Principles of minority shareholder protection 2.3.1 Maintaining the effect of majority rule The majority rule means that those who control more than half of the votes on the board or at a shareholders’ meeting – and indeed, those who command a good deal less than a majority 67 of the votes but manage to exercise defacto control – thus have substantial power . In shareholding companies, shareholders normally vote according to the capital that they have invested in the company. One share equals one vote. Under common law, the governance of companies is generally based on the principles of majority rule. However, it is recognized that as a corollary of this, there must be some protection for minority shareholders68. Why would company law specially protect minority shareholders since it could be assumed that majority rule is completely lawful? As mentioned above, principally, a company operates under majority rule. The board of directors also acts by majority vote to carry out its duties. The problem is that “there is always the danger that the majority will use its power to further its own interests to the detriment of the company or the minority shareholders” while “a minority shareholder’s policy views do not carry any weight unless he or she can mobilize a majority vote”. Thus, there are two contradictory principles must be taken into account69: - Respect for majority power, this being necessary to ensure effective management of the company; and - Protection of minority shareholders. Veronica Osipova, “The Problems of Development of Corporate Governance in Russia: Comparison with Central European and China”, 15 Bond Law Review (2003) p.131. Supra note 46, p.647. Supra note 7, p.119. See S.H.Goo, Minority shareholders’ protection – A study of section 459 of the Companies Act 1985, http://books.google.com/books?hl=en&id=SBlfi2V0aDIC&dq=%22companies +act+1985%22&printsec=frontcover&source=web&ots=B8B6XFGfiP&sig=i4LKeYbEEy pjL9dKwCkoy0r211Q&sa=X&oi=book_result&resnum=4&ct=result#PPP1,M1 Caroline Hague (1997), The Protection of Minority Shareholders, http://sunzi1.lib.hku.hk/ hkjo/view/14/1400223.pdf , accessed on 29 October, 2008. Supra note 12, p.2 , p.3 15 It is quite clear that while majority shareholders can express their wishes by way oftheir controlling vote and turn these wishes into the company’s decisions, minority shareholders need to at least have the power to ensure that that their voices are heard and taken into account where they have different opinions from the majority shareholders. There are cases in which the majority shareholders are doing nothing illegal, but are conducting themselves in an “oppressive” manner by using their majority power to supress dissent70. It may be necessary to protect minority shareholders but this generally should not empower the minority to make decisions for the corporation or to vest in them the controlling position, but merely avoid the fact that “mechanical application of majority rule, without any constraint will lead to unfair consequences that will violate reasonable shareholders expectations”71. In other words, ”the law has to strike a delicate balance between safeguarding the company’s legitimate business from being obstructed by tiresome complaining minorities on the one hand, and restraining unfair and wrongful acts which the majority can exploit to its own advantage thereby prejudicing the legitimate interests of the minority, on the other hand”72. 2.3.2 Equitable treatment of shareholders “The equitable treatment of shareholders” is among six principles recommended by OECD and it is also considered as of “the utmost importance for the protection of minority shareholders73. This reinforces the idea that “the watchwords of corporate law include not only wealth maximization, but also fairness”74. All shareholders, large or small, should receive adequate protection from the law. Bill Gates, Warren Buffett, and the small pensioner are all rendered equal-by law75. However, it should be noted that, “for corporate law, equality is not sameness”76. Under EA 2005, article 78 provides that ”each share of the same class shall entitle its holder to the same rights, obligations and interests”. This means that the differences and the identity among shareholders must also be taken into account. This is the reason why “corporate law even goes so far as to impose special duties on controlling shareholders and managers that are not borne by minority shareholders.”77 In other words, “the exact content of the principle of equality is dependent on the nature of the subject in question”78. With regard to certain rights, for example, the right to vote in a general meeting of shareholders and the right to receive a dividend, equality is indeed relative; there it is proportional to the number of shares the shareholder holds. With regard to certain other rights however, mainly information related ones, the equality has a different nature; there it is absolute”79. Supra note 30, p.6. Supra note 33, p.1. Supra note 67, p.3. Supra note 12, p.191. Supra note 7, p.122. Supra note 7, p.174. Supra note 7, p.174. Supra note 7, p.174. Supra note 12, p.191-192. Article 27, Regulations on corporate governance. 16 Briefly, “corporate law believes that equal treatment can only be assured by taking minority status into account.”80 The principle of equality does not aim at giving minority shareholders the same treatment as the majority. As the weaker party in a company, minority shareholders only need an equitable and fair treatment protecting their rights as provided by law and the capital they have invested in the company. In short, minority shareholder protection is an fundamental issue in corporate governance. Minority shareholders are those who not only hold a small amount of shares but are also non-controlling parties in a company. Shareholders' rights and and the need for their legal protection result from the separation of ownership from control in the modern corporation. Shareholders, especially minority shareholders supply finance to companies but managers and majority shareholders have control of it, and due to human nature, are prone to misuse their rights. This implies the need for legal protection of minority shareholders81. Moreover, strong protection of investors in general and of outside investors in particular bring significant benefits to a state’s economy. Minority shareholder protection thus enhances both shareholder value and corporate competetiveness. Those are the reasons why “minority shareholder protection, explicitly and implicitly, animates much of corporate law”82 and becomes an important part of corporate governance. Equipped with appropriate rights, minority shareholders will be able to defend themselves in the fight against “oppression”. Supra note 7, p.120. Brigid Gavin, “Shareholders’ Rights in the European Union”, 32 Intereconomics (1997) p.93. Supra note 7, p.128. 17 Part 3. Comparative study of minority shareholders protection in Vietnamese and United Kingdom company law Investors protection is, in general expressed through investors’ rights and their enforcement thereof. According to the OECD Principles of Corporate Governance, the basic shareholder rights should include the rights to: (1) secure methods of ownership registration; (2) convey or transfer shares; (3) obtain relevant and material information on the corporation on a timely and regular basis; (4) participate and vote in general shareholder meetings; (5) elect and remove members of the board; and (6) share in the profits of the corporation83. Commonly, shareholder rights are divided into financial rights and participatory rights.84 Financial rights reflect shareholder financial interests and their aim of making money when they invest in companies. These rights include the right to get dividends, to transfer of shares, to gain money from winding up a company…85 The participatory rights are of three kinds: (1) informational rights; (2) rights attached to the general meeting, and (3) the right to bring suit86. It could be shown that these rights are contained in the company law of many states87. They are there given to all shareholders irrespective of the number of shares they hold and it could not be said that they are all minority shareholders rights. The right to vote in the general meeting of shareholders, for example, “will usually not be a minority right because this right is not specific to minority shareholders and this right usually has no significant meaning for minority shareholders”88. In case of disagreement, they will be the ones to be outvoted at the general meeting. Therefore, this section will not focus on the shareholder rights in general but on the “true minority right”, which “possess the characteristic that it creates the possibility that an outcome can be reached that is different from the outcome that the majority of the shareholders wish”89. It is apparent that minority shareholder rights are not going to be the same in different legal systems. In this section, the author will then concentrate on “true minority rights” under Vietnamese company law while making a comparision between it and the UK company law. In fact, minority shareholder rights are governed by various laws and regulations. However, as stated in the Introduction, this thesis considers these rights from a company law perspective and only Companies Act and the like will be studied. Other kinds of Acts and rules will only be mentioned if they are relevant. In order to support the comparative study in The OECD Principles of Corporate Governance 2004, http://www.oecd.org/dataoecd/32/ 18/31557724.pdf , accessed on 10 December 2008. Gregor Bachmann “Strengthening Shareholders’ Rights: A Comment on the EU Action Plan”, 6 ERA-Forum (2005) p.354 Supra note 84, p.354. Supra note 84, p.354. Articles 79, EA 2005; section 263 (2), section 9, section 121; section 135; Table A, Regulation 54; section 183 (4), section 359, section 459, CA 1985. Supra note 12, p.182. Supra note 12, p.182. 18
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