The distribution of profits among shareholders is a core issue in the operation of a joint-stock company, as it directly reflects shareholders’ economic interests. It also serves as a foundation for maintaining investor confidence, encouraging capital contributions, and fostering long-term commitment to the company. Profit distribution must comply with legal regulations while ensuring fairness among shareholders, avoiding conflicts of interest, and minimizing legal risks for the enterprise.

I. Current issues relating to the distribution of profits among shareholders

In practice, the distribution of profits among shareholders in joint-stock companies is not always conducted transparently or in full compliance with legal regulations. Many enterprises have not established a clear profit distribution mechanism in their charters or apply such mechanisms inconsistently among shareholders, leading to disputes over economic interests.

In addition, there are cases where companies delay or fail to distribute profits despite having post-tax profits, or distribute profits inconsistently with capital contribution ratios. These situations have led to disputes between shareholders and the company, as well as among shareholders themselves, adversely affecting internal relationships and corporate governance.

II. Concept of profit distribution among shareholders

The distribution of profits among shareholders is one of the fundamental economic rights of shareholders in a joint-stock company. A proper understanding of the nature and principles governing profit distribution enables shareholders to protect their lawful rights and interests, while helping enterprises comply with legal requirements and limit potential disputes.

1. What is the distribution of profits among shareholders?

Pursuant to Clause 3, Article 4 of the Law on Enterprise 2020, a shareholder is defined as an individual or organization that owns at least one share of a joint-stock company.

The distribution of profits among shareholders refers to the company’s allocation of post-tax profits, after fulfilling all financial obligations, to shareholders in accordance with the law, the company’s charter, and resolutions of the General Meeting of Shareholders.

Profit distribution reflects the direct relationship between the company’s business performance and the economic interests of shareholders.

2. Is profit distribution among shareholders required to follow shareholding ratios?

In principle, profits are distributed in proportion to each shareholder’s shareholding ratio, unless otherwise provided in the company’s charter or stipulated for specific classes of shares (such as preference shares with fixed dividends).

Such a principle ensures fairness among shareholders and is consistent with the capital contribution nature of a joint-stock company.

3. Is profit distribution linked to the company’s business performance?

Profit distribution is closely tied to the company’s business performance and may only be conducted when the company generates profits and satisfies all statutory conditions.

Such a requirement ensures that profit distribution does not adversely affect the company’s solvency or financial stability.

III. Legal regulations on the distribution of profits among shareholders

1. Principles governing the distribution of profits among shareholders

Profit distribution to shareholders is governed by the Law on Enterprise 2020. Under Clause 5, Article 4 of the Law on Enterprise 2020, dividends are defined as the net profits that a joint-stock company pays to shareholders in cash or other assets, based on the number of shares held by each shareholder.

Net profit (net income or post-tax profit) is the remaining profit after deducting all costs, including taxes and other financial obligations, from total revenue derived from the sale of goods and provision of services.

Profit distribution must ensure fairness, transparency, and compliance with the class of shares held by each shareholder.

For ordinary shares, dividends are determined based on realized net profits and are paid from the company’s retained earnings in accordance with Clause 2, Article 135 of the Law on Enterprise 2020.

2. What legal conditions must be satisfied before a company distributes profits to shareholders?

Pursuant to Clause 2, Article 135 of the Law on Enterprise 2020, a company may only pay dividends when all of the following conditions are satisfied:

  • The company has fulfilled its tax obligations and other financial obligations in accordance with the law;
  • The company has set aside mandatory funds and fully covered any accumulated losses in accordance with the law and the company’s charter;
  • After dividend payment, the company remains capable of fully settling all due debts and other property obligations.

3. Methods of distributing profits among shareholders

According to Clause 3, Article 135 of the Law on Enterprises 2020, dividends may be paid in cash, in shares of the company, or in other assets as stipulated in the company’s charter. Where dividends are paid in cash, payment must be made in Vietnamese Dong and in accordance with lawful payment methods.

4. How does the law regulate the time of profit distribution among shareholders?

Under Clause 4, Article 135 of the Law on Enterprise 2020, dividends must be fully paid within six (06) months from the end date of the annual General Meeting of Shareholders.

The Board of Directors is responsible for preparing the list of shareholders entitled to receive dividends, determining the dividend rate applicable to each share, and specifying the deadline and form of payment at least 30 days prior to each dividend payment. Notice of dividend payment must be sent by a method ensuring delivery to shareholders at the registered addresses in the shareholder register at least 15 days prior to the payment date.

Profit distribution must be recorded in a valid resolution and comply with statutory procedures on convening meetings and voting.

IV. Questions regarding the distribution of profits among shareholders

In practice, the distribution of profits among shareholders is often a sensitive issue that may easily lead to disputes if not conducted in compliance with the law and the company’s charter. Below are several common issues analyzed from a legal perspective.

1. May a company distribute profits if it still has accumulated losses?

In principle, a company is not permitted to distribute profits to shareholders if it still has accumulated losses. Under Clause 5, Article 4 of the Law on Enterprise 2020, dividends are defined as net profits paid to shareholders, meaning profits remaining after all expenses (including corporate income tax) have been deducted from total revenue over a given period.

If a company still has accumulated losses but nevertheless distributes profits, such conduct is considered a violation of legal conditions for profit distribution, posing risks to financial safety and infringing upon creditors’ rights. In such cases, the distributed profits may be required to be refunded, and responsible individuals may take legal liability.

2. If a company delays profit distribution, do shareholders have the right to file complaints or initiate legal proceedings?

Where the General Meeting of Shareholders has adopted a resolution on profit distribution but the company fails to implement it or implement against the committed timeframe, shareholders are entitled to:

  • File complaints and request explanations from the Board of Directors or executive management;
  • Request the company to fulfill its dividend payment obligations in accordance with the adopted resolution;
  • Initiate legal proceedings before a court or arbitration (if agreed) to protect their lawful rights and interests pursuant to Article 151 of the Law on Enterprise 2020.

Delayed profit distribution is not merely an internal governance issue but may also constitute a breach of civil obligations, resulting in liability for damages if shareholders suffer losses.

3. What are the legal consequences of unlawful profit distribution among shareholders?

Where profit distribution is conducted in violation of legal regulations or the company’s charter, possible legal consequences include:

  • The decision or resolution on profit distribution may be declared invalid;
  • Shareholders who have unlawfully received profits may be required to refund the amounts received;
  • Members of the Board of Directors, the Director/General Director, and other related individuals may be jointly liable for compensating the company for damages.

It underscores that compliance with legal procedures and conditions for profit distribution is mandatory and not merely an internal matter.

4. May profits be distributed while the company is undergoing dissolution?

During the dissolution process, a company is not permitted to distribute profits in the ordinary sense. Under Clause 2, Article 135 of the Law on Enterprise 2020, the remaining assets of the company may only be distributed to shareholders after all debts and other financial obligations have been fully settled.

Any remaining assets (if any) are distributed to shareholders in proportion to their shareholding ratios. However, it constitutes asset distribution upon dissolution, not profit distribution from business operations. Confusing these two concepts is a common cause of disputes in practice.

5. What are common causes of disputes arising from profit distribution among shareholders?

Disputes relating to profit distribution among shareholders often arise from:

  • Unclear or contradictory provisions in the company’s charter;
  • Lack of transparency in determining profits, accumulated losses, and fund allocations;
  • The Board of Directors or executive management unilaterally deciding on profit distribution beyond their authority;
  • Delay or failure to implement resolutions of the General Meeting of Shareholders;
  • Conflicts of interest between majority and minority shareholders.

These causes demonstrate that profit distribution is not only a financial matter but is also closely linked to corporate governance and shareholder protection.

V. Why should you seek legal advice from NPLaw regarding profit distribution among shareholders?

The distribution of profits among shareholders lies at the intersection of corporate law, finance, accounting, and internal governance, and therefore entails significant legal risks if handled independently by enterprises or shareholders.

Seeking legal advice from NPLaw offers practical benefits, including:

  • Accurate analysis of legal grounds governing shareholders’ rights and obligations;
  • Review of the company’s charter, resolutions of the General Meeting of Shareholders, and financial status to assess the legality of profit distribution;
  • Advice on effective dispute resolution strategies to minimize prolonged risks;
  • Representation in negotiations, complaints, or legal proceedings to protect lawful rights and interests;
  • Provision of preventive solutions to avoid disputes and improve profit distribution mechanisms in the future.

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