Legal regulations on share transactions conducted without the approval of the general meeting of shareholders

In the practice of corporate governance of joint-stock companies, there are numerous cases where share transactions are conducted without the approval of the General Meeting of Shareholders, leading to various legal consequences relating to the validity of the transaction, shareholders’ rights, and the liabilities of relevant parties. These issues require careful consideration and assessment in accordance with corporate law regulations.

I. Current situation regarding share transactions conducted without the approval of the General Meeting of Shareholders

In the course of operation of joint-stock companies, transactions involving the transfer, pledge, mortgage, or restriction of rights over shares have increasingly become common in order to meet capital mobilization needs, restructure ownership, or serve the business interests of shareholders. However, in many cases, such share transactions are carried out without obtaining, or in the absence of, approval from the General Meeting of Shareholders as required by law or by the company’s Charter.

This situation arises from various causes, including insufficient awareness of the authority of the General Meeting of Shareholders, inadequacies or lack of clarity in the company’s Charter, or the deliberate circumvention of internal control mechanisms for personal gain.

The consequence of share transactions conducted without the approval of the General Meeting of Shareholders is the potential emergence of disputes among shareholders, between shareholders and the company, and even the infringement of the rights and interests of bona fide third parties.

In many cases, Courts or Arbitral Tribunals are required to examine the legality and validity of such transactions and to determine the liability of individuals or organizations that have conducted transactions beyond their authority.

Therefore, properly identifying the current situation and underlying causes of share transactions carried out without the approval of the General Meeting of Shareholders constitutes an important basis for assessing legal risks and proposing appropriate preventive measures.

II. Concept of share transactions conducted without the approval of the General Meeting of Shareholders

Within the corporate governance structure of a joint-stock company, the General Meeting of Shareholders is the highest decision-making body, responsible for deciding significant matters related to capital structure and shareholders’ interests. Accordingly, share-related transactions that are required by law or the company’s Charter to obtain approval from the General Meeting of Shareholders, but are nevertheless carried out without such approval, entail significant legal risks.

1. What is a share transaction conducted without the approval of the General Meeting of Shareholders?

A share transaction conducted without the approval of the General Meeting of Shareholders refers to transactions involving the company’s shares, including but not limited to the transfer of shares, issuance of additional shares, restriction of rights over shares, or transactions that alter the ownership structure, which are carried out in circumstances where the law or the company’s Charter clearly requires a resolution or approval of the General Meeting of Shareholders, but such approval has not been obtained in practice.

Such transactions are often subject to scrutiny with respect to their legality, validity, and the liabilities of the parties involved.

2. How can share transactions conducted without the approval of the General Meeting of Shareholders be identified?

The identification of share transactions conducted without the approval of the General Meeting of Shareholders may be based on several typical indicators.

First, the transaction is established in the absence of a valid resolution of the General Meeting of Shareholders adopted in accordance with the procedures prescribed by law or the company’s Charter.

Second, the transaction concerns matters falling exclusively within the authority of the General Meeting of Shareholders, such as decisions on types of shares, the total number of shares authorized for offering, or restrictions on share transfers, but is instead decided by an individual or another body.

In addition, the fact that the transaction is objected to by shareholders or is requested to be annulled after the lack of approval from the General Meeting of Shareholders is discovered may also indicate a risk of illegality.

3. How does a share transaction conducted without the approval of the General Meeting of Shareholders differ from a transaction contrary to the company’s Charter?

Although there is a certain overlap, a share transaction conducted without the approval of the General Meeting of Shareholders is not entirely identical to a share transaction contrary to the company’s Charter.

Transaction conducted without the approval of the General Meeting of Shareholders emphasizes the absence of approval authority from the highest decision-making body of the company as required by law or the Charter.

Meanwhile, a share transaction contrary to the company’s Charter refers to transactions that violate specific provisions recorded in the Charter, even in cases where the Charter does not require approval from the General Meeting of Shareholders.

In other words, a share transaction conducted without the approval of the General Meeting of Shareholders may simultaneously constitute a transaction contrary to the company’s Charter, but not all transactions contrary to the Charter originate from the absence of approval by the General Meeting of Shareholders. Distinguishing between these two concepts helps to accurately determine the appropriate legal basis and handling approach for each specific case.

III. Legal regulations relating to share transactions conducted without the approval of the General Meeting of Shareholders

Share transactions directly affect the capital structure and control rights within a joint-stock company. Accordingly, corporate law imposes certain limitations on shareholders’ freedom to transact shares in specific cases, while granting decision-making authority to the General Meeting of Shareholders to ensure transparency and protect the company’s common interests.

1. In which cases is approval from the General Meeting of Shareholders mandatory for share transactions?

Pursuant to Clause 1 Article 138 of the Law on Enterprise 2020, the General Meeting of Shareholders comprises all shareholders with voting rights and is the highest decision-making body of a joint-stock company.

Specifically, under Clause 2 Article 138 of the Law on Enterprise 2020, the General Meeting of Shareholders decides on:

• The types of shares and the total number of shares of each type authorized for offering; the annual dividend rate of each type of share;
• Investment decisions or the sale of assets with a value of 35% or more of the total asset value recorded in the company’s most recent financial statements, unless the Charter stipulates a different ratio or value;
• The repurchase of more than 10% of the total number of sold shares of each type.

In addition, pursuant to Clause 2 Article 120 of the Law on Enterprise 2020, within three (03) years from the date the company is granted the Enterprise Registration Certificate, ordinary shares of founding shareholders may be freely transferred among founding shareholders and may only be transferred to non-founding shareholders with the approval of the General Meeting of Shareholders. Accordingly, the transfer of ordinary shares of founding shareholders during this period is subject to mandatory approval from the General Meeting of Shareholders.

Furthermore, the company’s Charter may provide additional cases in which share transactions must be approved by the General Meeting of Shareholders, and such provisions are binding on both shareholders and the company.

2. Are share transactions conducted without the approval of the General Meeting of Shareholders always considered unlawful?

Not all share transactions conducted without the approval of the General Meeting of Shareholders are automatically deemed unlawful. The assessment of the legality of a transaction depends on whether the law or the company’s Charter mandates approval from the General Meeting of Shareholders for that transaction.

If the law does not require, and the Charter does not stipulate, the need for approval from the General Meeting of Shareholders, the share transaction may still be considered lawful even in the absence of a resolution of the General Meeting of Shareholders. Conversely, if the transaction falls within cases that must be approved by the General Meeting of Shareholders pursuant to Clause 1 Article 167 of the Law on Enterprise 2020 or under the Charter, but is nevertheless carried out, the transaction may be at risk of being declared invalid or subject to annulment under civil law and corporate law regulations.

3. Legal liabilities of shareholders conducting share transactions without the approval of the General Meeting of Shareholders

Shareholders who conduct share transactions without the approval of the General Meeting of Shareholders in cases where such approval is required by law or the Charter may bear various forms of legal liability. First, the shareholder may be required to compensate the company or other shareholders for actual damages arising from the unauthorized transaction.

Pursuant to Clause 2 Article 165 of the Law on Enterprise 2020, members of the Board of Directors, the Director or General Director, and other managers who violate regulations on rights and obligations or abuse their authority must bear personal or joint liability to compensate for lost benefits, return benefits obtained, and fully compensate the company and third parties for damages.

In addition, the transaction may be subject to annulment or declared invalid under Article 122 of the Civil Code for failure to satisfy the conditions for validity of a civil transaction, resulting in the obligation of the parties to return to each other what they have received.

4. Which authority has jurisdiction to resolve disputes related to share transactions conducted without the approval of the General Meeting of Shareholders?

Disputes relating to share transactions conducted without the approval of the General Meeting of Shareholders may first be resolved through negotiation or internal mediation between shareholders and the company. If no agreement is reached, the parties may initiate legal proceedings before the competent People’s Court to resolve commercial and business disputes in accordance with Clause 1 Article 31 of the Civil Procedure Code 2015.

Alternatively, if the company’s Charter or an agreement between the parties contains an arbitration clause, the dispute may be resolved by commercial arbitration pursuant to the Law on Commercial Arbitration 2010. The selection of an appropriate dispute resolution authority directly affects the effectiveness of protecting the lawful rights and interests of the parties involved in share transactions.

IV. Questions regarding share transactions conducted without the approval of the General Meeting of Shareholders

In the application of corporate law, share transactions conducted without the approval of the General Meeting of Shareholders often raise questions concerning transaction validity, parties’ rights, and the handling of legal consequences. Below are common issues and corresponding explanations based on current legal regulations.

1. Are share transactions conducted without the approval of the General Meeting of Shareholders invalid?

Share transactions conducted without the approval of the General Meeting of Shareholders are not automatically deemed invalid in all cases. Whether a transaction is invalid depends on whether the law or the company’s Charter mandates approval from the General Meeting of Shareholders.

If the transaction falls within cases requiring approval from the General Meeting of Shareholders (e.g., transfer of ordinary shares of founding shareholders during the restricted period) but such approval is absent, the transaction may be at risk of being declared invalid under the Civil Code 2015 and the Law on Enterprise 2020. Conversely, if no mandatory requirement exists, the transaction may still be recognized as valid.

2. How should a completed share transaction conducted without the approval of the General Meeting of Shareholders be handled?

Where a share transaction has been completed but is later discovered to lack the required approval from the General Meeting of Shareholders under the law or the Charter, the parties should re-examine the legal basis of the transaction.

Depending on the special circumstances, the transaction may be required to be annulled, the parties may be required to return to each other what they have received, or the transaction may be legitimized through obtaining subsequent approval from the General Meeting of Shareholders. In the event of a dispute, the competent authority will determine the outcome based on a comprehensive assessment of the transaction’s legality and its impact.

3. Does the company have the right to refuse to recognize a new shareholder in cases of share transactions conducted without the approval of the General Meeting of Shareholders?

The company has the right to refuse to record a new shareholder in the shareholder register if the share transaction falls within cases requiring approval from the General Meeting of Shareholders but has been carried out without such approval.

Such refusal aims to ensure compliance with legal regulations and the company’s Charter, while protecting the common interests of the company and existing shareholders. However, the refusal must be based on clear legal grounds and implemented transparently, avoiding abuse that may cause damage to related parties.

4. Are the rights of the share purchaser protected in cases of share transactions conducted without the approval of the General Meeting of Shareholders?

The protection of the purchaser’s rights in such cases is considered based on the purchaser’s good faith and the fault of the parties involved.

If the purchaser is a bona fide third party who does not know and could not reasonably know that the transaction required approval from the General Meeting of Shareholders, their rights may be protected to a certain extent under the law.

However, if the transaction is declared invalid, the share purchaser may still be required to return the shares and may only have the right to claim damages from the seller in accordance with general civil law provisions.

5. Can share transactions conducted without the approval of the General Meeting of Shareholders be subject to administrative sanctions?

In certain cases, share transactions conducted without the approval of the General Meeting of Shareholders may lead to administrative penalties, particularly where the violation is associated with non-compliance with regulations on the establishment, organization, and management of enterprises.

For example, pursuant to Clauses 1 and 2 Article 46 of Decree No. 122/2021/ND-CP, a fine ranging from 10,000,000 VND to 20,000,000 VND may be imposed for failure to ensure the required number of members or shareholders. A fine ranging from 20,000,000 VND to 30,000,000 VND may be imposed for contributing capital to establish an enterprise, registering capital contribution, purchasing shares, or acquiring capital contributions in other economic organizations in an improper form, or where the subject has no right to contribute capital or purchase shares but still does so.

V. Why should you seek legal advice from NPLaw regarding share transactions conducted without the approval of the General Meeting of Shareholders?

Share transactions conducted without the approval of the General Meeting of Shareholders constitute a complex legal issue that directly affects shareholders’ rights, capital structure, and transaction validity. Consulting lawyers at NPLaw will assist enterprises and shareholders in properly assessing legal grounds, anticipating risks, and developing appropriate solutions, ranging from negotiation and transaction legitimization to dispute resolution before Courts or Arbitral Tribunals. With extensive practical experience and in-depth knowledge of corporate law, NPLaw is well-positioned to accompany clients in effectively and sustainably protecting their lawful rights and interests.

The above information is for reference purposes only. Should you require detailed advice for a specific case, please contact NPLaw Firm for prompt consultation.