Legal issues to note when establishing departments in a joint stock company

When establishing departments within a joint stock company, strict compliance with legal regulations is significantly important. It not only ensures that the company operates lawfully but also safeguards the rights and interests of shareholders and helps prevent potential legal risks.

In the following article, NP Law clarifies legal issues relating to the conditions, procedures, and competent authorities for establishing departments in a joint stock company, as well as addressing frequently asked questions regarding such establishments.

I. Overview of the establishment of departments in a joint stock company

The establishment of departments within a joint stock company constitutes an important part of the enterprise’s organizational and management structure. Departments are considered essential components contributing to the effective formation of an organizational framework. Each company may design its departmental structure differently depending on its business model and operational needs. Accordingly, a company may establish one or multiple departments, each department shall be responsible for distinct functions.

Typical departments in a joint stock company may include:

• Board of Supervisors
• Human Resources Department
• Accounting Department
• Administrative Department
• Information Technology Department
• Marketing Department
• Business Development Department
• Customer Service Department, etc.

II. Legal regulations on the establishment of departments in a joint stock company

1. Conditions for establishing departments in a joint stock company

With respect to the Board of Supervisors, according to Point a, Clause 1, Article 137 of the Law on Enterprise 2020, a joint stock company with more than eleven (11) shareholders and in which institutional shareholders hold more than 50% of the total shares is required to establish a Board of Supervisors. Based on Clause 2, Article 168 and Article 169 of the Law on Enterprise 2020, the conditions for establishing a Board of Supervisors include:

• More than half of the Supervisors must permanently reside in Vietnam.
• The Head of the Board of Supervisors must hold at least a university degree in economics, finance, accounting, auditing, law, business administration, or a discipline related to the company’s business activities, unless the company charter prescribes higher standards.
• It does not fall within the categories prohibited under Clause 2, Article 17 of the Law on Enterprises.
• The Board of Supervisors must receive professional training in one of sectors such as economics, finance, accounting, auditing, law, business administration, or another field relevant to the company’s business activities.
• The Board of Supervisors are not a family member of a member of the Board of Directors, the Director or General Director, or other managers of the company.
• The Board of Supervisors are not a company manager; not necessarily a shareholder or employee of the company, unless otherwise stipulated in the company charter.
• The Board of Supervisors must meet other standards and conditions as prescribed by relevant laws and the company charter.

For other departments such as human resources or administration, the law does not impose specific requirements; instead, the joint stock company may stipulate conditions in its charter or internal regulations.

2. Number of members required to establish departments in a joint stock company

Pursuant to Clause 1, Article 168 of the Law on Enterprise 2020, the Board of Supervisors must consist of between three (03) and five (05) Supervisors. The term of a Supervisor must not exceed five (05) years and may be renewed for an unlimited number of terms.

For other departments, the enterprise may determine the number of members based on its objectives and operational needs.

3. Authority to approve the establishment of departments in a joint stock company

Pursuant to Point l, Clause 2, Article 153 of the Law on Enterprise 2020, the Board of Directors has the authority to decide on the organizational structure and internal management regulations of the company.

Accordingly, the authority to approve the establishment of departments in a joint stock company lies with the Board of Directors.

III. Questions regarding the establishment of departments in a joint stock company

1. What procedures are required to establish departments in a joint stock company?

The establishment of departments in a joint stock company is not as complex as company incorporation; however, certain procedures must still be followed to ensure legality and operational efficiency. The main procedures include:

• Development of the organizational structure and assigning responsibilities: The company must determine the new organizational structure after establishing departments, including the number and types of departments (e.g., human resources, accounting, marketing) as well as the roles and functions of each department.
• Notification to competent authorities (if required): In some cases, changes to the organizational structure may require notification to or updates with the business registration authority. However, if the establishment of departments does not affect fundamental company information (such as company name, business lines, or charter capital), such procedures are not required.
• Notification to tax authorities: If the newly established department affects tax declaration or administration (e.g., accounting or finance departments), the company must notify and update information with the tax authority.
• Issuance of internal regulations: The company must develop internal rules governing departmental operations, clearly specifying powers, duties, responsibilities, working procedures, reporting mechanisms, and inspection and supervision processes.
• Adjustment of labor contracts and appointment of personnel: Upon establishing a new department, the company must appoint a department head and assign personnel. The appointment of department heads must comply with internal procedures and be approved by shareholders or the Board of Directors, where applicable.
• Update of labor contracts: Where personnel restructuring occurs, labor contracts must be updated accordingly, particularly when employees are transferred between departments or when new employment contracts are executed.
• Update of financial and tax reports: The company must adjust and update financial statements to reflect the establishment of new departments, especially where such departments affect financial management and cash flows.

2. When does the decision to establish departments in a joint stock company take effect?

A decision to establish departments in a joint stock company takes effect from the date it is adopted or from the effective date specified in the resolution, unless otherwise stipulated in the company charter.

3. What are the benefits of establishing departments in a joint stock company?

Establishing departments offers numerous benefits, including:

• Improved operational efficiency through specialization and clear division.
• Easier management due to a well-defined organizational structure.
• Enhanced flexibility, enabling quicker adaptation and decision-making.
• Cost optimization through more efficient allocation of resources.
• Increased innovation as departments can propose initiatives and improvements.
• Improved internal relationships through better inter-departmental communication and cooperation.

4. Are there any requirements regarding business lines when establishing departments in a joint stock company?

There are no specific requirements regarding business lines when establishing departments in a joint stock company.

The establishment of departments primarily depends on the company’s management, organizational, and operational needs, and departments are typically formed based on specific functions and tasks.

5. Main issues to note when establishing departments in a joint stock company

Several important issues should be considered to ensure lawful and effective operations:

• Approval by the Board of Directors: The establishment of departments must be approved by the Board of Directors to ensure legality and consensus among shareholders or legal representatives.
• Amendment of the company charter: If the establishment of departments affects the organizational structure or authority within the company, the charter must be amended or supplemented accordingly.
• Clear allocation of functions and duties: Each department’s roles and responsibilities must be clearly defined to avoid overlap and ensure operational efficiency.
• Appointment of personnel: The appointment of department heads and assignment of personnel must be transparent and aligned with employees’ qualifications and competencies. Labor contracts and employee benefits must also be updated accordingly.

IV. Legal consulting services on the establishment of departments in a joint stock company

The above information is provided by NP Law to assist clients with issues related to the establishment of departments in joint stock companies. Should you have any questions regarding this matter or other legal issues, please contact NP Law for direct consultation and guidance.