FOREIGN INVESTOR HOLDING 65% OF CHARTER CAPITAL: DOES IT REALLY CONTROL?

According to the Law on Enterprises 2020, a member's rights do not correspond directly to their investment ratio in all circumstances. For a foreign investor holding 65% of the charter capital in a Limited Liability Company (LLC), can they exercise absolute control over the company?

1. General rights of LLC members

The rights of LLC members are stipulated in Clause 1, Article 49 of the Law on Enterprises 2020. These rights apply to all members regardless of their ownership ratio:

1.1. Attend meetings of the Members' Council, discuss, recommend, and vote on matters within the jurisdiction of the Members' Council;

1.2. Possess a number of votes proportional to their contributed capital, except as provided in Clause 2, Article 47 of this Law;

1.3. Receive distributed profits proportional to their contributed capital after the company has fully paid taxes and fulfilled other financial obligations;

1.4. Receive a share of the company's remaining assets proportional to their contributed capital upon dissolution or bankruptcy;

1.5. Be prioritized in contributing additional capital when the company increases its charter capital;

1.6. Dispose of their contributed capital by transferring part or all of it, gifting it, or other forms in accordance with the law and the Company's Charter;

1.7. File a civil liability lawsuit, personally or in the name of the company, against the Chairperson of the Members' Council, Director or General Director, legal representative, and other managers;

1.8. Other rights as prescribed by this Law and the Company's Charter.

2. Rights of a member holding 65% of charter capital

The authority of a member holding 65% of the charter capital significantly impacts the organization of Members' Council meetings and the passing of resolutions and decisions under Articles 58 and 59 of the Law on Enterprises 2020 as follows: 

2.1. Impact on members' council meetings 

2.1.1. A meeting of the Members' Council shall be conducted when the attending members represent at least 65% of the charter capital;

2.1.2. If the first meeting fails to meet the conditions in Section 2.1.1 and the Charter does not provide otherwise, the meeting shall be reconvened as follows:

a. The notice for the second meeting must be sent within 15 days from the date of the intended first meeting. The second meeting shall be conducted if attending members represent at least 50% of the charter capital;

b. If the second meeting fails to meet conditions, the notice for the third meeting must be sent within 10 days from the date of the intended second meeting. The third meeting shall proceed regardless of the number of attending members or the amount of capital represented.

Conclusion, a member holding 65% of the capital has the power to boycott a meeting to temporarily block the minority members (holding under 35%). However, this advantage is temporary. Absence only delays the process. By the third meeting, proceedings will occur regardless of the majority member's presence. This prevents a single large shareholder from indefinitely delaying company decisions.

2.2. Impact on passing resolutions and decisions 

2.2.1. General decisions are passed when approved by attending members representing at least 65% of the total contributed capital of all attending membersl, except for Section 2.2.2;

2.2.2. A threshold of at least 75% of the total contributed capital of attending members is required for: selling assets valued at 50% or more of the total asset value recorded in the latest financial statement (or a smaller percentage/value if specified in the Charter); amending or supplementing the Company's Charter; reorganizing or dissolving the company.

Conclusion, a member with 65% capital does not have sufficient power to unilaterally pass critical matters listed in Section 2.2.2. They require support from other members to reach the 75% threshold. Consequently, a minority member holding 25% or more has the "veto power" to block major decisions initiated by the 65% holder.

3. Rights of minority members holding 35% capital or less

In addition to general rights, members or groups of members owning 10% or more of the charter capital have specific rights under Clause 2, Article 49:

3.1. Request a meeting of the Members' Council to resolve matters within its jurisdiction;

3.2. Inspect, review, and extract transaction logs, accounting books, and annual financial reports;

3.3. Inspect, review, extract, and copy the member register, meeting minutes, resolutions, decisions, and other company documents;

3.4. Request a Court to cancel a resolution or decision of the Members' Council within 90 days of the meeting conclusion if the procedures or contents do not comply with the Law or the Charter.

4. Lexsol's recommendations

Lexsol recommends that businesses:

4.1. Understand the legal limitations regarding control when holding 65% of the Charter Capital.

4.2. Conduct comprehensive legal due diligence before investing.

4.3. Develop strategies to protect interests based on the legal reality in Vietnam.

4.4. Seek advice from legal experts experienced in Vietnamese enterprise law.

4.5. Foreign investors should consider negotiating and drafting specific Charter provisions to protect their interests, especially if they are the primary funding and operating party.

Read more: Foreign Investment Legal Advisory in Vietnam

5. Conclusion 

Based on the aforementioned legal framework, a member holding 65% of the charter capital cannot exercise absolute control over an LLC but only holds authority over specific matters.

Crucially, while the 65% holder might not be able to "push through" every major change unilaterally, they hold a significant power of refusal. If a minority member (under 35%) makes a proposal that the 65% member disagrees with, that proposal is effectively blocked. This "veto" capability is the true strength of holding 65% - not necessarily the power to act, but the power to prevent others from acting.

If you have further inquiries, please contact Lexsol for in-depth legal consultation