TRANSFER OF SHARES FROM A FOUNDING SHAREHOLDER TO A FOREIGN INVESTOR

Joint Stock Company A is an enterprise with 100% Vietnamese capital, established for more than 01 year, with 04 founding shareholders who are individuals. I am currently one of the founding shareholders of the company and hold 65% of the capital. For certain personal reasons, I wish to transfer the entire number of shares that I own to a foreign investor being a Japanese company. May I transfer such shares to them and, if so, I would like to be advised on the order, procedures, and relevant notes relating to this transfer.

Answer

Firstly, conditions for the transfer of shares from a founding shareholder to a foreign investor

1. Restriction period applicable to the transfer of shares by founding shareholders

Pursuant to Article 120.3 of the Law on Enterprises 2020, within three (03) years from the date of issuance of the Enterprise Registration Certificate, common shares held by a founding shareholder:

• May be freely transferred to another founding shareholder; and
• May be transferred to a non-founding shareholder only with the approval of the General Meeting of Shareholders.

In this case, based on the information provided, Company A is still within the three-year restriction period from its establishment. Therefore, the transfer of common shares by a founding shareholder to a foreign investor (who is not a founding shareholder) must be approved by the General Meeting of Shareholders.

In addition, pursuant to Article 120.4 of the Law on Enterprises 2020, the above restriction does not apply to:

• Shares additionally acquired by a founding shareholder after the company’s establishment; and
• Shares that have already been transferred to non-founding shareholders.

2. Types of shares eligible for transfer

Under Article 116.3 of the Law on Enterprises 2020, voting preference shares are not transferable, except in cases of transfer pursuant to a legally effective court judgment/decision or inheritance.

For other types of shares, transfer restrictions apply only if such restrictions are provided for in the company’s charter, in accordance with Article 127.1 of the Law on Enterprises 2020. Any restriction on share transfer is valid only if it is clearly stated on the corresponding share certificates.

Accordingly, prior to the transaction, it is necessary to review the company’s charter and the type of shares to be transferred to ensure that such shares are not subject to transfer restrictions or prohibitions.

3. Legal status and market access conditions of the foreign investor

The foreign investor receiving the shares must:

• Have valid legal status in accordance with the laws of its country of incorporation (in this case, Japan); and
• Satisfy the market access conditions applicable to foreign investors under Article 9 of the Law on Investment 2020, as well as relevant international treaties to which Vietnam is a party.

4. Foreign ownership ratio after the transfer

Pursuant to Article 23.1 of the Law on Investment 2020, an economic organization must apply investment conditions and procedures applicable to foreign investors if it falls into one of the following cases:

• Foreign investors hold more than 50% of its charter capital;
• An economic organization falling under the above case holds more than 50% of its charter capital; or
• Foreign investors and such economic organizations collectively hold more than 50% of its charter capital.

In this case, the Japanese investor’s acquisition of 65% of the charter capital will result in Company A becoming a foreign-invested enterprise with foreign controlling ownership. Accordingly:

• The foreign investor must carry out the share acquisition registration procedure under Article 26 of the Law on Investment 2020; and
• After completion of the transaction, Company A will be subject to regulations applicable to foreign-invested enterprises in its subsequent investment activities, but is not required to obtain an Investment Registration Certificate solely due to this share transfer.

Secondly, procedures for the transfer of shares to a foreign investor

1. Registration of share acquisition by the foreign investor (Investment Law)

Under Article 26.2(b) of the Law on Investment 2020, a foreign investor must register its capital contribution or share acquisition prior to any change of shareholders if such acquisition results in the foreign investor holding more than 50% of the charter capital of the enterprise.

Accordingly, the Japanese investor must complete and obtain approval from the investment registration authority for the acquisition of 65% of the shares in Company A before the parties finalize the share transfer transaction.

2. Approval by the General Meeting of Shareholders

Pursuant to Article 120.3 and Article 147.1 of the Law on Enterprises 2020, since the transfer occurs within the three-year restriction period and the transferee is not a founding shareholder, Company A must convene a General Meeting of Shareholders or collect written opinions to approve the share transfer.

3. Execution and performance of the share transfer agreement

After obtaining:

• Approval for the share acquisition from the investment registration authority; and
• Approval from the General Meeting of Shareholders,

the parties shall execute the share transfer agreement, carry out payment, and sign a contract liquidation/minutes of completion in accordance with their agreement.

4. Update of the Shareholders’ Register

Pursuant to Article 122.5 of the Law on Enterprises 2020, the company shall update the relevant shareholder information in the shareholders’ register upon request of the concerned shareholders.

5. Personal income tax obligations

Under Article 3.4 of the Law on Personal Income Tax 2007, income derived from share transfer is subject to personal income tax.

The transferring shareholder is required to declare and pay personal income tax on a per-transaction basis, at a rate of 0.1% of the transfer price, in accordance with the applicable tax regulations.

Conclusion:

1. As Company A is still within three (03) years from the date of issuance of its Enterprise Registration Certificate, the transfer of common shares by a founding shareholder to a foreign investor is only lawful upon approval by the General Meeting of Shareholders.
2. Only transferable share types permitted by law may be transferred; in particular, voting preference shares are not transferable under the Law on Enterprises. For other share types, any restrictions provided in the company’s charter must be carefully reviewed.
3. The foreign investor’s share acquisition registration procedure must be completed before any change of shareholder information. Failure to comply with the correct sequence may result in the transaction not being recognized by the competent authority.
4. The company’s charter may impose stricter conditions on share transfer, including restrictions on foreign investors. If the charter restricts or prohibits share transfer to foreign investors, the transaction may be invalid or not implementable.

Based on the above analysis, a founding shareholder intending to transfer shares to a foreign investor should fully assess the applicable legal conditions, strictly comply with the procedures under the Law on Investment and the Law on Enterprises, and carefully review the company’s charter to ensure that the transaction is lawful and legally effective.