In the operation of joint-stock companies, challenges to the validity of shares have become increasingly common, particularly when disputes arise concerning shareholder status, voting rights, and economic interests.
I. Current situation regarding challenges to the validity of shares
In practice, challenges to the validity of shares in joint-stock companies are occurring with increasing frequency and show an upward trend, especially in the context of enterprises expanding capital mobilization, changing shareholder structures, and increasing share transfer transactions. This situation is clearly reflected in the following aspects:
First, challenges arise from improper capital contribution and incorrect recognition of shareholders. In many cases, shareholders register to purchase shares but fail to fully pay or fail to pay on time in accordance with the Law on Enterprises, yet are still recognized by the company as shareholders and allowed to participate in voting. When the rights and interests of other shareholders are affected, particularly voting ratios and corporate control - challenges to the validity of such shares are often raised.
Second, challenges relate to the issuance of shares beyond authority or in violation of procedures. In practice, a number of enterprises issue shares without a valid resolution of the General Meeting of Shareholders or the Board of Directors, or without complying with regulations on registration of changes to charter capital. Existing shareholders or new investors often challenge the validity of shares issued in such circumstances due to concerns about dilution of ownership ratios and governance rights.
Third, challenges arise from unlawful share transfer transactions. Disputes and complaints commonly occur when shares are transferred through handwritten agreements, are not recorded in the shareholders’ register, or violate restrictions on transfer applicable to founding shareholders. In such cases, transferees may request recognition of ownership of the shares, while other shareholders or the company may challenge the validity of the transfer transaction.
Fourth, challenges stem from conflicts between the company charter and statutory regulations. Certain company charters contain unclear provisions or provisions inconsistent with the Law on Enterprise 2020 regarding conditions for share issuance, transfer, and exercise of shareholder rights. The application of such provisions in practice easily gives rise to challenges, particularly when there are changes in shareholder structure or when internal disputes are resolved.
Fifth, the practical consequences of challenges to the validity of shares. Prolonged challenges not only intensify disputes among shareholders or between shareholders and the company, but also negatively affect corporate governance, reputation, and capital-raising capacity. In many cases, such challenges must be resolved through courts or arbitration, resulting in significant time and cost burdens and disruption to business operations.
The current situation regarding challenges to the validity of shares highlights shortcomings in legal compliance and internal corporate governance.
II. Concept of challenges to the validity of shares
Given the prevalence of internal disputes in joint-stock companies concerning shareholder status and rights attached to shares, clarifying the concept of challenges to the validity of shares is essential to accurately determine the scope of challenge rights, eligible claimants, and the time at which such rights arise in accordance with the provisions of law.
1. What is a challenge to the validity of shares?
A challenge to the validity of shares refers to a request by an individual or organization with relevant rights and interests for the enterprise or a competent authority to review and reassess the legal validity of shares where there are grounds to believe that the formation, issuance, recognition, or transfer of such shares fails to comply with legal regulations or the company charter.
The substance of such challenges typically focuses on determining whether the shares lawfully give rise to shareholder status and the corresponding rights, such as voting rights, dividend rights, and the right to participate in corporate governance.
2. Who has the right to challenge the validity of shares?
The right to challenge the validity of shares does not belong to a single subject, but may be exercised by various parties whose rights and interests are directly affected.
First, shareholders are the most common subjects entitled to raise challenges when they believe that invalid shares adversely affect their voting rights, ownership ratios, or economic interests.
In addition, the company itself (acting through the Board of Directors or the legal representative) may proactively review, address, or request a determination of the validity of shares in order to ensure lawful corporate governance.
Where disputes arise, competent adjudicatory bodies such as courts or arbitration tribunals are the entities responsible for resolving disputes and issuing final rulings on the validity of shares based on the parties’ claims.
3. When do shareholders have the right to challenge the validity of shares?
Shareholders have the right to challenge the validity of shares when there are grounds to believe that such shares violate legal regulations or the company charter, and such violations infringe upon or threaten to infringe upon the shareholders’ lawful rights and interests.
The right to challenge may arise at various points in time, such as when the company records a new shareholder, convenes a General Meeting of Shareholders, votes on significant matters, or when disputes over profit distribution occur.
Additionally, the right to challenge may arise when shareholders discover indications such as shares not being fully paid, shares being issued or transferred beyond authority, or shares not being lawfully recorded in the shareholders’ register.
III. Legal regulations governing challenges to the validity of shares
Although the law does not recognize “challenges to the validity of shares” as an independent legal institution, through regulations on capital contribution, share issuance, share transfer, and dispute resolution, the law has established a legal basis for reviewing and resolving such challenges.
1. How does current law regulate the validity of shares?
Pursuant to Article 114 of the Law on Enterprise 2020, the shares of a joint-stock company include the following types:
A joint-stock company must have ordinary shares. Holders of ordinary shares are ordinary shareholders.
In addition to ordinary shares, a joint-stock company may have preference shares. Holders of preference shares are preference shareholders. Preference shares include dividend preference shares, redeemable preference shares, voting preference shares, and other preference shares as provided in the company charter and securities laws.
Ordinary shares may not be converted into preference shares. Preference shares may be converted into ordinary shares pursuant to a resolution of the General Meeting of Shareholders.
Furthermore, the offering and transfer of shares are considered valid only if they satisfy the conditions set out in Articles 120 to 130 of the Law on Enterprise 2020.
Regulations on transfer restrictions, recording in the shareholders’ register, and information disclosure are also key legal criteria for determining the validity of shares.
2. What legal bases are used to determine whether shares are valid or invalid?
The Determination of whether shares are valid or invalid must be based on a specific system of legal grounds. Primarily, these include the provisions of the Law on Enterprise 2020, particularly those relating to charter capital, shares, shareholders, and the issuance and transfer of shares (Articles 111 to 130).
In addition, the company charter constitutes an important internal legal basis, provided that its provisions are not inconsistent with the Law on Enterprise 2020.
Where disputes arise, the Civil Code 2015 (on the validity of civil transactions) and the Civil Procedure Code 2015 (with respect to the right to initiate legal proceedings and request courts to resolve disputes) also serve as legal grounds for competent authorities to assess the validity of shares.
3. How is the procedure for challenging the validity of shares regulated?
Currently, the law does not prescribe a separate complaint procedure specifically for challenges to the validity of shares; instead, such challenges are addressed through internal corporate dispute resolution mechanisms.
Initially, shareholders may lodge internal complaints by requesting the Board of Directors or the General Meeting of Shareholders to review and resolve the matter.
If the challenge is not resolved or is resolved unsatisfactorily, shareholders have the right to initiate legal proceedings before the court. Pursuant to Clause 1, Article 166 of the Law on Enterprises 2020, a shareholder or group of shareholders holding at least 1% of the total ordinary shares may, on their own behalf or on behalf of the company, initiate legal action to claim personal or joint liability of members of the Board of Directors, the Director, or the General Director, seeking restitution of benefits or compensation for damages caused to the company or other persons.
The order and procedures for litigation are governed by the Civil Procedure Code 2015. Litigation costs in cases where shareholders or groups of shareholders initiate lawsuits on behalf of the company are treated as company expenses, unless the claim is rejected.
4. What are the legal consequences of determining shares to be invalid?
Where shares are determined to be invalid, the holder of such shares is not fully recognized as a shareholder and may not exercise, or may be restricted from exercising, rights attached to the shares, such as voting rights, dividend rights, and participation in corporate governance, pursuant to Articles 115 to 118 of the Law on Enterprise 2020.
In addition, transactions related to invalid shares may be declared void under Article 122 of the Civil Code 2015, giving rise to obligations of restitution and compensation for damages, if any. The company may also be required to adjust its charter capital and shareholders’ register and bear legal liability if violations occur.
IV. Questions regarding challenges to the validity of shares
In the practice of corporate governance in joint stock companies, when challenges to the validity of shares arise, both enterprises and shareholders often face uncertainty in determining responsibilities, authority, and appropriate handling methods. Below are answers to the most common issues, based on the provisions of corporate law and practical application.
1. What are the company’s responsibilities upon receiving a challenge to the validity of shares?
Upon receiving a challenge, the company is responsible for accepting, reviewing, and verifying the content of the challenge objectively and promptly. A joint-stock company must review capital contribution records, share issuance or transfer documents, examine the shareholders’ register, and relevant resolutions and decisions.
Where the challenge is well-founded, the company must implement necessary remedial measures, such as adjusting the shareholders’ register, requiring shareholders to fulfill outstanding obligations, or submitting the matter to the General Meeting of Shareholders or the Board of Directors, as appropriate within their respective authorities.
2. If the challenge is not properly resolved, does the shareholder have the right to initiate legal proceedings?
If the company fails to resolve the challenge or resolves it unsatisfactorily, shareholders have the right to initiate legal proceedings before a court or arbitration tribunal to request a determination of the validity of the shares.
Pursuant to Clause 1, Article 166 of the Law on Enterprise 2020, shareholders or groups of shareholders holding at least 1% of the total ordinary shares may, on their own behalf or on behalf of the company, initiate lawsuits to claim personal or joint liability of members of the Board of Directors, the Director, or the General Director, seeking restitution of benefits or compensation for damages to the company or other persons.
3. During the resolution of a challenge, may the disputed shares exercise voting rights?
Current law does not automatically provide for the suspension of voting rights in respect of shares under challenge.
However, where there are clear grounds indicating that the shares are likely invalid and the exercise of voting rights may cause serious consequences, the company or shareholders may request the court to apply interim emergency measures.
Internally, the company charter or resolutions of the General Meeting of Shareholders may provide for the temporary restriction of rights attached to shares under dispute.
4. Does a challenge to the validity of shares automatically suspend dividend distribution?
A challenge to the validity of shares does not automatically suspend dividend distribution. However, if the challenged shares are directly related to determining the list of shareholders entitled to dividends, the company may temporarily withhold the corresponding dividend portion until a final conclusion is reached.
This approach aims to protect the interests of all parties and avoid subsequent disputes or restitution obligations.
5. How are the rights and interests of the holder handled if shares are determined to be invalid?
Where shares are determined to be invalid, the holder is not recognized as a lawful shareholder with respect to the invalid shares. Rights such as voting, dividend entitlement, and participation in governance are not recognized, and related transactions may be declared void under civil law.
Depending on the specific circumstances, the holder may be refunded the contributed capital or may be required to compensate for damages if the holder is at fault and causes losses to the company or other shareholders.
V. Why seek legal advice from NPLaw on challenges to the validity of shares?
Challenges to the validity of shares are complex legal issues directly affecting shareholder rights, capital structure, and the effectiveness of corporate governance decisions. Improper self-handling without sufficient legal grounds may lead to prolonged disputes and significant risks.
With a team of lawyers experienced in corporate law and internal dispute resolution, NPLaw provides comprehensive advisory services, including:
- Assessing the validity of shares and the legal basis for challenges;
- Advising on effective and lawful strategies for handling challenges;
- Representing clients in dealings with enterprises, competent authorities, and courts.
The above information is for reference purposes only. For detailed advice on specific cases, please contact NPLaw for immediate consultation.
