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Allens is an independent partnership operating in alliance with Linklaters LLP.

AusCham SeminarDirectors’ Duties Bill Magennis27 November 2015

Allens is an independent partnership operating in alliance with Linklaters LLP.

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Sources of Law for Directors’ Duties

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The general duties of a Board of Management (BOM) are traditionally said to be derived from the following main sources:• the Law on Enterprises (LOE) • Circular 121/2012/TT-BTC dated 26 July 2012 of the Ministry

of Finance on corporate governance applicable to public companies

• the Company Charter• internal corporate governance rules (if any)

Sources of duties: is this complete?

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General duties summary• to act in accordance with laws and the company's Charter;• to act honestly and prudently to their best ability in order

to assure the maximum legitimate interests of the company [deleted”and the owners of the company”];

• to be loyal to the interests of the company and the owners of the company and to not use information, secrets, business opportunities of the company or abuse the position and powers and assets of the company for their own personal benefits or for the benefit of a third party; and…………….most strangely in my view…………

Law on Enterprises Article 160

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• Article 160 Responsibilities of managers of company• 1. Each member of the BOM, the director or general

director and other manager [of a company] has the following responsibilities:

• …………..• (d) To notify the company in a timely manner, and fully

and accurately of enterprises in which he or she or his or her related persons own or have contributed capital or controlling shares; this notice shall be displayed at the head office and branches of the company.

Is this a World first?

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Article 159 Public disclosure of relevant interests

“If the charter of the company does not provide any other stricter provisions, the public disclosure of relevant interests and related persons of a company shall be implemented in accordance with the following provisions:

1. The company must gather and update a list of related persons of the company in accordance with article 4.17 of this Law and corresponding transactions between them and the company;

2. Members of the BOM, inspectors, the director or general director and other managers of the company must declare their relevant interests to the company, including:

(a) Names, enterprise code numbers, head office addresses, business lines of [ALL] enterprises in which they own contributed capital or shares [whether same business or not or supplier or not]; ratio and period of such ownership of contributed capital or shares;

(b) Names, enterprise code numbers, head office addresses, business lines of enterprises in which their related persons jointly own or separately own contributed capital or shares of more than ten (10) per cent of charter capital;

3. The declaration stipulated in clause 2 of this article must be made within seven working days from the date of a relevant interest arising; any amendment and addition shall be notified to the company within seven working days from the date of amendment or addition;”

Method of making your private life public

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“4. The public disclosure, review, extract and copy of the list of related persons and relevant interests as declared in accordance with clauses 1 and 2 of this article shall be implemented as follows:

(a) The company must report such list to the General Meeting of Shareholders at its annual meeting;

(b) The list shall be retained in the head office of the enterprise; in necessary cases, part or all of the contents of the list mentioned above may be retained at branches of the company;

(c) Shareholders, authorized representatives of shareholders, members of the BOM or the Inspection Committee, the director or general director, and other managers have the right to review, make an extract and copy part or all of the contents declared during working hours;

(d) The company must facilitate the persons stipulated in sub-clause (c) of this clause to access, sight, make an extract and copy the list of related persons of the company and other contents in the fastest and most convenient manner, and the company is not permitted to prevent them from or cause difficulties to them in exercising such rights. The sequence and procedures for reviewing, making an extract and copying the declarations of related persons and relevant interests shall be implemented in accordance with the charter of the company.”

…yet more

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• Circular 121 on public companies [one hundred shareholders or more whether listed or not] imposes further specific obligations on a BOM member:o to notify the State Securities Commission and the relevant stock

exchange of, and publicly disclose, any transaction in the shares of the company that they or their related persons undertake; and

o to notify the company of any other remuneration that they received from related entities.

Further disclosure obligations applicable to public companies

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The Law on Bankruptcy provides that if the Chairman of the BOM or the legal representative (usually the General Director) fails to file a petition to commence bankruptcy procedures when observing that the company has become insolvent, they will be liable in accordance with law.

The LOE also stipulates that the "rights and duties" of the BOM include to request bankruptcy of the company.

Insolvency

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• The general duties of the members of the BOM and the General Director of the company are owed to the company.

• Under the Law on Enterprises before 1 July 2015 these duties are also owed to the shareholders of the company. However, the new LOE limits the duty to act honestly and prudently to the best interests of the company only, and not expressly to the shareholders.

Who are the duties owed to?

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• Members of the BOM are required to notify the company of any enterprise in which they, or their related persons, hold an interest.

• Additionally, transactions between the company and a member of the BOM, or their related persons, must be specifically approved by the BOM or the shareholders (depending on the value of the transaction) with the conflicted member being prevented from voting.

Dealings with company/conflicts

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Liability and penalties

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Derivative actions

Generally, the LOE allows a shareholder or group of shareholders holding at least 1% of the total number of ordinary shares for a consecutive period of six months to require the inspection committee to initiate legal action for civil liability against members of the board of management, including where a member of the board of management exercised assigned rights and duties contrary to law.

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Under the LOE “Article 210 Dealing with breaches

Agencies, organizations and individuals committing breaches of the provisions of this Law shall, depending on the nature and seriousness of the breach, be subject to disciplinary action or administrative penalty, or must pay compensation if any loss or damage is caused, and individuals may be subject to criminal prosecution in accordance with law.

If the BOM passes a resolution contrary to law or the Charter causing damage to the company, the members of the BOM who voted for the resolution will be jointly liable and must compensate the company for the damage. Those opposing the resolution will be exempt from liability.

The Civil Code of Vietnam also provides for a general basis for compensation for non-contractual damages, where loss arises due to an "illegal act", which is generally defined as any breach of the law.

Vietnam's Criminal Code also contains various offences which may be relevant to a director, including in relation to abuse of position and negligent performance of duties.

Liability

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Directors’ Crimes

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Article 285.- Negligence of responsibility, causing serious consequences

1. Those who, due to negligence of their responsibility, fail to perform or improperly perform their assigned tasks, causing serious consequences ………….. shall be sentenced to non-custodial reform for up to three years or between six months and five years of imprisonment.

2. Committing the crime and causing very serious or particularly serious consequences, the offenders shall be sentenced to between three years and twelve years of imprisonment.

3. The offenders shall also be banned from holding certain posts, practicing certain occupations or doing certain jobs for one to five years.

Criminalisation of Business Mistakes: Penal Code Article 285

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• Article 277.- Definition of position-related crimes• Position-related crimes are acts of infringing upon the

legitimate activities of agencies and/or organizations [joint stock companies?], which are carried out by persons holding positions whilst they are on official [board member?] duties.

• The persons with positions as mentioned above are those who are assigned through appointment, election, contract or other arrangements, with or without salaries, to perform certain official duties and have certain powers while performing such official duties.

Who are “those” in article 285

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The Ministry of Public Security has commenced legal proceedings against 16 ex-officials at a Vietnamese bank for activity that allegedly caused a total loss of over U$S448 million to the state budget last year.

As part of the expansion of a criminal case at the Vietnam Construction Joint Stock Commercial Bank (VNCB), in which Pham Cong Danh, former chair of the management board, was arrested in July 2014, the ministry’s investigation agency on Sunday said it had issued a decision to take legal action against these ex-officials, who worked for the same bank.

The decision was approved by the Supreme People’s Procuracy, the agency added.

All the 16 former bankers are banned from leaving their residence, according to the decision.

Of these, Pham The Tuan, an ex-member of the VNCB management board and ex-deputy head of the supervisory

board of the lender, has been charged with “negligence of responsibility, causing serious consequences,” under Article 285 of the Penal Code.

Tuan is accused of being negligent in not reporting in a ‘timely fashion’ Danh’s and his staff’s activity to the bank’s management board, and of not taking effective measures to cope with their offenses, leading to the fact that they moved money out of the VNCB, causing a loss of VND2.5 trillion (over $112 million) to the bank.

Another of these offenders is Le Cong Thao, ex-director of the bank’s information technology centre, who has been alleged to “deliberately act against the state’s regulations on economic management, causing serious consequences.”

Meanwhile, the 14 remaining former bankers have all been indicted for “breaching regulations on loan provision in the operations of credit institutions.”

With their alleged activity, all the defendants in this case have caused a total loss of more than VND10 trillion (over $448.16 million), investigators said.

http://tuoitrenews.vn/society/31341/16-vietnamese-former-bankers-charged-for-causing-448mn-loss

2 November 2015: 16 Vietnamese bankers charged over $448 m loss

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Directors' duties under Circular 121

Article 13 Responsibilities and obligations of members of the board of management• Members of the board of management must comply with all responsibilities and obligations

stipulated in the Law on Enterprises and related legal instruments.

• Members of the board of management are responsible to implement their duties in an honest and diligent manner in the best interests of the shareholders and the company.

• Members of the board of management are responsible to attend all meetings of the board of management and clearly provide their opinions on the matters addressed for discussion.

• Members of the board of management are responsible to disclose to the company the items of remuneration they receive from the subsidiary companies, affiliated companies and other organizations in which they act as a representative of capital contribution in the company.

• When any member of the board of management or related person conducts trading of shares of the company, such member or related person must report to the State Securities Commission ["SSC"] and disclose information about such trading in accordance with law.

• A public company may purchase liability insurance for members of the board of management after obtaining approval from the general meeting of shareholders. Such insurance shall not include insurance for liabilities of members of the board of management in relation to any breach of law and the company charter.

So what about Directors and Officers Insurance? The great illusion?

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Dealing with State owned enterprises

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Dealing with State owned enterprises

ABN Amro case

In 2006, an officer (US Citizen) of the Hanoi branch of ABN Amro was (in a widely held view, improperly) held under house arrest, and several local employees were jailed, in relation to a transaction carried out between ABN Amro and its customer, a State-owned bank, which resulted in substantial losses to the customer. The State sought compensation via the criminal law.

While this case is not directly on point in relation to directors' liability, it does indicate how interpretation of circumstances by the State in Vietnam can lead to dire consequences for foreign investors and representatives of foreign investors.

See the BBC report at this link: http://news.bbc.co.uk/2/hi/business/5257270.stm

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Dealing with State owned enterprises

Jetstar Pacific case

In 2009, the Vietnamese media reported that the then chief executive officer of Jetstar Pacific airline (in which Qantas then held a 27% interest) was arrested because he was alleged to cause a US$31 million loss to the State pursuant to a fuel hedging agreement with Qantas.

Globally, many carriers suffered loss due to volatility of fuel prices during the global financial crisis in a similar manner. However, two Qantas officers were not allowed to leave Vietnam whilst the case was investigated.

For further information see: http://www.ft.com/cms/s/0/205c6f0a-fc7d-11de-bc51-00144feab49a.html#axzz3HbsoIYjW

http://www.theage.com.au/national/qantas-boss-says-detained-pair-have-done-no-wrong-20100109-m00v.html.

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Conclusion

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The general duties of a Board of Management (BOM) are traditionally said to be derived from the following main sources:• the Law on Enterprises (LOE) • Circular 121/2012/TT-BTC dated 26 July 2012 of the Ministry

of Finance on corporate governance applicable to public companies

• the Company Charter• internal corporate governance rules (if any)

In addition it is now clear that one must add the Penal Code to the list of sources of directors’ liabilities for events that do not have traditional criminal intent:http://moj.gov.vn/vbpq/en/Lists/Vn%20bn%20php%20lut/View_Detail.aspx?ItemID=610

Sources of duties: is this complete?

25Allens is an independent partnership operating in alliance with Linklaters LLP.