1. Founding Council

The Enterprise Law 2020 and the Law on Securities 2019 both clearly stipulate the organization of the apparatus, the organization of meetings and votes of the Board of Directors, the General Meeting of Shareholders of joint-stock companies, public joint-stock companies, and these provisions are concretized in the charter of that joint-stock company. Therefore, any legal actions and acts on behalf of the manager or operator of the enterprise must comply with the provisions of law and the company’s charter.

However, the law does not contain any provisions on the Founding Council and the Founding Council is not the structure, organization of management, administration and leadership of enterprises besides the General Meeting of Shareholders, the Board of Directors, the Supervisory Board.

In case the Founding Council is symbolic, or the department performs the role of advisor and consultant to the Board of Directors, it does not contravene the law and the company’s charter and does not affect the rights and interests of shareholders. However, if the Founding Council is stipulated and allowed to have the right to influence decisions, resolutions and votes of the Board of Directors and the General Meeting of Shareholders, this will be a legal issue, namely infringing on the legitimate rights and interests of shareholders and violating the legal provisions on the organization of the apparatus of a public joint-stock company.

2. Founding Council in a public company

One case that is heating up public opinion is that on December 14, 2022, the Board of Directors of Hoa Binh Construction Group issued a decision to establish the Founding Council. According to the Organizational and Operational Regulations of the Founding Council promulgated by this Group, the Founding Council is the body that advises, advises and criticizes the Board of Directors and the Board of Directors of the company. Notably, for some important issues of the company, the Board of Directors is only approved when the consensus of the Founding Council is reached such as: changing important goals, directions and strategies of the company; amending the Charter and Certificate of Business Registration; any significant change in the company’s business operations or the start of a new type of business; all mergers and acquisitions and investment contracts greater than VND 100 billion;

The establishment of the Founding Council is not a new issue but has previously happened in some banks such as Asia Commercial Joint Stock Bank (ACB), MaritimeBank (MSB), SouthernBank (PNB) … For example, the Founding Council at ACB was established by the General Meeting of Shareholders on 09/03/2007 with the function of advising the Board of Directors and the Board of Directors in the process of managing and operating the Bank; Give opinions on important issues in the bank’s governance and administration. However, due to many reasons, these banks have now abandoned the Founding Council model.

3. Current situation of the Founding Council model

Which legal basis allows the establishment of the Founding Council?

Thecurrent law does not provide for the establishment, organization and operation of the Founding Council. Specifically, Clause 1, Article 137 of the Enterprise Law 2020, Section 2, Chapter III of the Law on Securities 2019 stipulates that joint-stock companies are organized to operate according to one of the following two models: (i) General Meeting of Shareholders, Board of Directors, Supervisory Board and General Director; or (ii) the General Meeting of Shareholders, the Board of Directors and the General Director; in this case, at least 20% of the members of the Board of Directors must be independent members and have an Audit Committee under the Board of Directors.

Because there are no specific provisions in law, there are many different views on the establishment, operation and legal status of the Founding Council. In particular, there is a view that the current law does not stipulate but does not prohibit the establishment of the Founding Council, so enterprises can do what the law does not forbid. However, from both a legal and practical perspective, there are many issues that need to be raised and considered thoroughly around this perspective.

The power to decide on the establishment of the Founding Council?

This issue depends on the conception of the legal status of the Founding Council. If the Founding Council is a counterbalancing body (equal) to the Board of Directors, it cannot be established by members of the Board of Directors, as this does not guarantee the “counterbalancing” nature of these two bodies. If the Founding Council is the supervisory body of the Board of Directors, it cannot be established by the members of the Board of Directors themselves, but must be elected or approved by the General Meeting of Shareholders.

In case the General Meeting of Shareholders wants to elect members of the Founding Council, the legal status of the Founding Council must be specified in the company’s charter, not only based on the operation regulations of the Founding Council. But the charter of a public company must comply with the Enterprise Law, documents guiding the governance of public companies and the model charter of a public company. Therefore, when the law has not specified it, there are no grounds to stipulate the legal status of the Founding Council in the operation charter of a public company.

In case the General Meeting of Shareholders establishes the Founding Council by itself as in some recent enterprises, is it valid? In our view, members of the Board of Directors are elected by shareholders to represent shareholders and groups of shareholders in exercising corporate governance rights. The fact that the Board of Directors establishes more Founding Councils to “limit”, control the voting and approve their own decisions without being approved by shareholders is an act of exceeding its authority, indirectly infringing on the legitimate rights and interests of shareholders.

If the Board of Directors and the Founding Council reach a consensus in making substantive decisions, with the common interests of the company and shareholders in mind, this will both increase criticality, openness, transparency and efficiency in corporate governance. However, if a disagreement arises between the Board of Directors and the Founding Council, there will be great risks, then the operation of the Board of Directors will be “suspended” until consensus is reached from the Founding Council and in this situation, it is the shareholder who suffers, double damage.

What is the mechanism to control the Founding Council?

Another issue is the responsibility of members of the Founding Council for resolutions of the Board of Directors that are erroneous but that resolution has been adopted or agreed upon by the Founding Council. Conversely, if a member of the Founding Council makes a personal mistake, is the company jointly responsible? The current law only provides for the responsibilities of company managers (Article 165 of the Enterprise Law 2020); the right of shareholders to initiate lawsuits against members of the Board of Directors, Director and General Director (Article 166 of the Enterprise Law 2020). The concept of “Company Manager” under the Enterprise Law does not include members of the Founding Council, so it is difficult to have a mechanism to handle the responsibilities of members of the Founding Council when there is a mistake as well as the joint responsibility of the company.

In addition, stemming from the requirement to ensure shareholders’ rights and market stability, securities laws set high standards in complying with governance principles, ensuring transparency and disclosure for public companies. In particular, there are many regulations to control and eliminate acts of “nepotism”, with self-interested elements such as: prohibiting members who are managers and operators of enterprises, controllers from having family and blood relations (Point b, Clause 5, Article 162 of the Enterprise Law 2020); or conditions for conducting transactions between the company and related persons (Article 167 of the Enterprise Law 2020).

Therefore, public opinion and authorities may raise questions about the resignation of key leaders at public companies from positions at the Board of Directors/Board of Directors in favor of relatives who hold leadership positions at the company; but still has de facto control over the Founding Council under tacit internal agreements. Does this “nullify” the principles of transparent governance of public companies and directly affect the interests of minority shareholders?

Consensus among shareholder groups is an important key to building and implementing effective governance. However, even if the company has disagreements in management among groups of shareholders, a balanced and balanced governance model is also an important solution to ensure stability and ensure maximum rights of small shareholders.

Above is the content of KALF’s advice on the Founding Council in a public company and related issues. All of our above advice opinions are based on applicable legal provisions. If you have any questions or requests about legal issues, please contact us for timely answers.