How to identify unfair dividend distribution in a joint-stock company with NPLaw

Profit is the ultimate measure of business performance and the primary objective of every investor. However, what if the company’s business achievements are allocated through an unfair dividend distribution mechanism, thereby depriving you of your legitimate rights and interests, particularly minority shareholders? From closed-door meetings to ambiguous resolutions, such conduct not only causes financial loss but also erodes trust and drives the company into a spiral of internal disputes. Together with NPLaw, we analyze the current practices, the applicable legal framework, and the available legal remedies when confronting inequity in dividend distribution.

I. Current practices relating to unfair dividend distribution

Unfair dividend distribution is one of the leading causes of internal corporate conflicts, directly affecting shareholders’ rights and the company’s sustainable development. In practice, such conduct often arises in sophisticated forms such as:

• Abuse of power by controlling shareholders: Dominant shareholders may influence the adoption of resolutions that primarily serve their own interests, for instance by approving an unreasonably low dividend payout ratio in order to retain profits for projects beneficial to themselves, or by distributing dividends only to certain classes of preference shares they hold.
• Lack of financial transparency: Financial statements may be manipulated, and expenses artificially inflated to reduce after-tax profits, thereby decreasing the distributable profits available for dividend payments.
• Exploitation of loopholes in the company’s Charter: Vague or incomplete provisions on principles and procedures for profit allocation may enable the Board of Directors or the Director/General Director to issue decisions favoring a specific group of individuals.

Such practices not only result in financial damage but also undermine shareholders’ confidence, especially that of minority shareholders, in the fairness and transparency of corporate governance.

II. The concept of unfair dividend distribution

To safeguard their lawful interests, shareholders must first understand the legal nature of such a conduct. NPLaw provides the following definition and guidance on identifying unfair dividend distribution.

1. What constitutes unfair dividend distribution?

Unfair dividend distribution refers to the payment of dividends by a joint-stock company in a manner that fails to comply with the principle of proportionality to shareholding ratios, contravenes the provisions of the company’s Charter, or violates applicable laws, thereby enabling certain shareholders to receive disproportionate benefits while infringing upon the legitimate rights of others.

Such a conduct may take various forms, including unjustified delays in dividend payment, declaration of dividends at an unreasonably low rate compared to actual profits, or utilization of profits for wrong purposes that do not serve the company’s overall interests but rather benefit a controlling shareholder group.

Accordingly, unfair dividend distribution constitutes a violation of fundamental shareholder rights and creates an imbalance in the enjoyment of corporate returns.

2. How to prove the existence of unfair dividend distribution

To establish the existence of unfair dividend distribution, shareholders must gather specific and persuasive evidence. Pursuant to Article 91 of the Civil Procedure Code 2015, the burden of proof lies with the party asserting a claim. Relevant evidence typically includes:

• Audited financial statements: These are the most critical documents reflecting business performance and after-tax profits. Where a company records substantial profits but declares no dividends or an unusually low dividend compared to industry standards, it may constitute an initial indicator.
• The company’s Charter: Provisions governing principles of profit and dividend distribution. Any deviation from the Charter constitutes direct evidence of irregularity.
• Resolutions of the General Meeting of Shareholders (GMS) or the Board of Directors (BOD): These determine dividend payments. A resolution lacking transparency, reasonable justification, or showing signs of self-dealing may be subject to challenge.
• Minutes of GMS or BOD meetings: These record discussions and debates relating to profit distribution.
• Information on related-party transactions: If profits are transferred to subsidiaries or affiliated companies in which major shareholders have interests, it must be demonstrated that such transactions do not serve the best interests of the parent company.
• Evidence of unreasonable delay: Correspondence, emails, or written requests from shareholders seeking dividend payment that were ignored or rejected without legitimate grounds.
• Auditor’s opinions (if any): Any comments concerning financial matters relating to profits and distribution.

Proving unfair dividend distribution requires a comprehensive assessment of financial records, legal documents, and governance conduct to demonstrate unreasonableness and resulting damage.

3. Disputes arising from unfair dividend distribution

Unfair dividend distribution frequently lead to serious internal disputes within a joint-stock company, including:

• Disputes between minority shareholders and controlling shareholders.
• Disputes concerning the rights and obligations of executive management or the Board of Directors, where shareholders allege a failure to properly discharge fiduciary duties.
• Disputes over the validity of GMS or BOD resolutions on profit distribution. Shareholders may petition the Court to invalidate such resolutions if they are adopted for self-serving purposes or in violation of law or the Charter.
• Requests for share repurchase by dissenting shareholders.
• Requests for inspection or review of corporate books and records to clarify issues relating to profits and their allocation.

Such conduct may trigger a series of complex disputes, adversely affecting corporate stability and long-term development.

III. Legal provisions governing dividend distribution

Vietnamese law establishes a comprehensive legal framework to ensure fairness in dividend distribution. The Law on Enterprise 2020 serves as the principal legal basis. 

1. Statutory provisions on dividend distribution in a joint-stock company

Under the Law on Enterprises 2020:

• A joint-stock company must determine after-tax profits in accordance with applicable laws and the company’s Charter. Such profits must first be allocated to statutory and charter-based funds (e.g., financial reserve fund, development investment fund) before dividend distribution.
• Dividend payment must be approved by a resolution of the General Meeting of Shareholders in accordance with Clause 4, Article 135. The resolution must specify the dividend rate per share, form of payment, time, and place of payment.
• Dividends must be distributed proportionally to the shareholding ratio and par value of shares, except in the case of dividend-preferred shares with specific provisions. According to Clause 3, Article 135, dividends may be paid in cash, shares, or other assets as stipulated in the Charter. Cash payments must be made in Vietnamese Dong and may be effected via cheque or electronic transfer.
• A company may pay dividends only if it satisfies the statutory conditions under Clause 2, Article 135, including full discharge of tax and financial obligations, allocation of required funds and coverage of prior losses, and assurance that it remains solvent and capable of paying due debts immediately after dividend payment under Clause 3, Article 135.

These statutory provisions provide a strict legal framework for assessing unfair dividend distribution.

2. Impact on minority shareholders

Unfair allocation of share profits has particularly adverse and far-reaching consequences for minority shareholders, as they hold a limited authority within the company, including:

• Direct financial loss: Minority shareholders may experience a reduction or complete loss of dividend income, while their invested capital remains retained within the company without generating commensurate returns.
• Reduce of share value: If the company consistently fails to declare dividends or distributes dividends at an unreasonably low level, the market value of the shares may be adversely affected, thereby diminishing the shareholders’ overall assets.
• Loss of confidence in corporate governance: Minority shareholders may perceive such treatment as inequitable, resulting in a loss of trust in the Management Board and the Board of Directors, leading to dissatisfaction and an intention to divest.
• Loss of control and voice: Decisions regarding profit distribution are typically approved by the General Meeting of Shareholders. Minority shareholders, holding a limited voting percentage, are generally unable to prevent unfavorable resolutions proposed by majority shareholders.
• Difficulties in exit: If the company lacks transparency and fails to distribute dividends, its shares may become less attractive in the market, creating obstacles for minority shareholders seeking to transfer their shares.

Unfair profit distribution practices directly infringe upon the financial rights of minority shareholders and weaken their position within the company.

3. Legal mechanisms for shareholder protection

The Law on Enterprise 2020 provides multiple mechanisms to protect shareholders in cases of unfair dividend distribution:

• The right to receive dividends in proportion to shareholding (Article 115).
• The right to access corporate information, including financial statements and operational data (Article 115).
• The right of shareholders or shareholder groups holding at least 5% of total ordinary shares for a continuous period of six months (or a lower threshold as provided in the Charter) to request the convening of an extraordinary GMS to address issues relating to profits and dividends (Article 115).
• The right to request the company to repurchase shares in certain cases, including disagreement with a GMS resolution on profit distribution (Article 132).

These mechanisms are designed to protect shareholders, particularly minority shareholders, against inequitable treatment.

4. Legal sanctions applicable to unfair dividend distribution

Legal remedies may include:

• Invalidation of GMS or BOD resolutions under Article 151 where such resolutions violate statutory provisions or the Charter.
• Compensation for damages according to Articles 165 and 166, if members of the BOD or managers abuse their authority to implement unfair profit distribution, thereby causing loss to the company or its shareholders. They may take personal or joint liability and must return any benefits obtained from the wrongful conduct.

Such sanctions aim not only to restore the injured party’s rights but also to deter future violations.

IV. Questions on unfair dividend distribution

1. What should shareholders do upon discovering unfair dividend distribution?

Shareholders should:

• Collection of information and evidence: Requesting the company to provide financial statements, minutes of the General Meeting of Shareholders (GMS) and/or the Board of Directors (BOD), the Company Charter, and resolutions or decisions relating to profit distribution. According to Point e, Clause 1, Article 115 of the Law on Enterprise 2020, shareholders are entitled to examine, review, and extract copies of minute books and other corporate documents.
• Submission of a written request/complaint to the company: Sending a formal written request to the Board of Directors or the Supervisory Board requiring clarification of the matter and reconsideration of the profit distribution resolution.
• Consultation with a lawyer: Seeking legal advice to assess the extent of the violation, evaluate the prospects of a potential lawsuit, and obtain detailed guidance on subsequent procedural steps.
• Request for convening an extraordinary General Meeting of Shareholders: If holding the statutory ownership threshold (5% or more of the total ordinary shares, or a lower threshold as stipulated in the Company Charter), shareholders may request the convening of an extraordinary GMS to bring the matter forward for discussion and re-voting in accordance with Clause 2, Article 115 and Clause 3, Article 117 of the Law on Enterprise 2020.
• Initiation of court proceedings: If the foregoing measures prove ineffective, shareholders may file a lawsuit requesting the Court to invalidate the relevant resolution, order compensation for damages, or compel the company to repurchase the shares.

Accordingly, shareholders should proactively gather evidence and exercise the rights afforded by law to address and challenge unfair share profit distribution practices.

2. Do minority shareholders have the right to initiate legal proceedings?

Shareholders or shareholder groups holding at least 5% of ordinary shares may request the Court or an arbitral tribunal to invalidate a GMS resolution within 90 days if its procedure or substance violates the law or the Charter (Article 151). 

Additionally, shareholders holding at least 1% of ordinary shares may initiate derivative actions against managers for breach of fiduciary duties causing damage (Article 166).

3. Can an unfair dividend resolution be invalidated?

A dividend resolution may be invalidated if it violates statutory provisions or the company’s Charter, including failure to satisfy dividend payment conditions under Article 135. The petition must be filed within 90 days from receipt of the resolution.

4. Is unfair dividend distribution grounds for convening an extraordinary GMS?

Shareholders holding at least 5% of ordinary shares may request an extraordinary GMS where serious violations of shareholder rights occur. An extraordinary meeting provides an opportunity to reconsider dividend decisions, replace members of the BOD or Supervisory Board, or adopt other remedial measures.

5. When is dividend distribution considered unlawful or unfair?

Dividend distribution is deemed unlawful or unfair where:

• The statutory financial conditions under Article 135 are not satisfied.
• The principle of equality among shares of the same class under Article 114 is violated.
• The preferential rights of dividend-preferred shareholders under Article 117 are infringed.
• The company fails to provide adequate financial information, thereby preventing shareholders from assessing the legitimacy of the dividend decision.

Accordingly, dividend distribution is considered unfair when it contravenes statutory provisions, the company’s Charter, or evidences abuse of power causing damage to other shareholders, particularly minority shareholders.

V. Why seek legal advice from NPLaw in cases of unfair dividend distribution

Strict compliance with legal provisions on profit distribution is essential to maintaining corporate stability and safeguarding shareholders’ interests. However, when confronted with unfair dividend distribution, navigating legal procedures independently may prove challenging, particularly for minority shareholders.

If you are a shareholder whose rights have been infringed due to unfair dividend distribution, or a company seeking to ensure lawful compliance in dividend allocation, please contact NPLaw for professional legal assistance.

The above information is provided for reference purposes only. For detailed advice tailored to your specific circumstances, please contact: