Legal regulations related to investors’ veto rights

In investment activities, particularly in enterprises with multiple shareholders, investors’ veto rights play an important role in protecting interests and controlling strategic decisions, thereby contributing to balancing power among participating parties.

I. Current situation related to investors’ veto rights

In the context of increasingly diverse investment activities, especially in enterprises involving multiple shareholders or strategic investors, investors’ veto rights have become an important tool for protecting interests and controlling risks during corporate governance.

• Firstly, in practice, veto rights are often stipulated in shareholders’ agreements or investment contracts, allowing investors to prevent decisions such as amendments to the charter, issuance of additional shares, mergers, or dissolution of the enterprise. However, due to dependence on bargaining power, many investors (especially minority investors) do not obtain such rights or only enjoy it within a very limited scope.
• Secondly, veto rights in many cases lack a balance of interests. If stipulated too broadly, investors may interfere deeply in management operations, reducing the enterprise’s flexibility; conversely, if too narrow, such rights are insufficient to protect investors against unfavorable decisions.
• Thirdly, Vietnamese law currently does not provide specific regulations on veto rights as an independent legal mechanism, but only indirectly recognizes them through provisions on shareholders’ rights and voting ratios under the Law on Enterprise 2020. It leads to implementation being mainly based on agreements, creating potential risks when disputes arise.
• Fourthly, in practice, disputes have arisen relating to the abuse or restriction of veto rights, particularly where one party uses such a right to delay or make pressure during the company’s decision-making process.

In summary, the current situation shows that investors’ veto rights are both an effective protective tool and a potential source of conflict if not properly designed, thereby creating the need to clarify the concept and operational mechanism of such rights in law and practice.

II. Concept of investors’ veto rights

1. What are investors’ veto rights?

Investors’ veto rights are rights that allow one or a group of investors to prevent the approval of a specific corporate decision, even if such decision has already achieved the ordinary voting ratio required under normal regulations.

These rights are usually established through agreements among the parties and apply to important matters that significantly affect investors’ interests.

2. Difference between veto rights and ordinary voting rights

Ordinary voting rights are shareholders’ rights to participate in deciding company matters based on their ownership ratio of shares, and decisions are passed when a certain ratio is achieved according to law or the company charter.

Meanwhile, veto rights are special and superior in nature, allowing investors to prevent a decision even though the required voting ratio has been met. In other words, voting rights represent the right to participate in decision-making, while veto rights represent the right to prevent a decision.

3. Purpose of granting veto rights to investors

Veto rights are established to:

• Protect investors’ interests, especially minority investors, against unfavorable decisions;
• Control strategic corporate decisions such as changes in capital structure or transfer of major assets;
• Minimize investment risks by creating a mechanism for supervision and governance control.

However, if not properly established, such rights may reduce governance efficiency and cause stagnation in decision-making processes.

III. Legal regulations related to investors’ veto rights

1. In which documents are investors’ veto rights usually stipulated?

In practice, veto rights do not arise automatically by law but must be specifically recorded in internal documents and agreements between the parties, including:

• Shareholders’ Agreement (SHA): The most important document, usually detailing the scope, conditions, and methods of exercising veto rights.
• Investment Contracts: Particularly in venture capital transactions, veto rights are associated with disbursement conditions or investors’ control rights.
• Company Charter: Crucial for internal validity and enforceability against third parties.

At the same time, provisions on passing resolutions of the General Meeting of Shareholders under the Law on Enterprise 2020 (for example, voting ratios for adopting resolutions) serve as the foundation for the veto mechanism.

2. Which decisions are usually subject to investors’ veto rights?

In practice, veto rights are usually established for decisions of strategic nature or those directly affecting investment value, including:

• Decisions on amendments to the company Charter affecting governance structure;
• Issuance of additional shares causing ownership changes; 
• Corporate restructuring (merger, division, dissolution);
• Transfer of major assets or projects;
• Changes in business lines or development orientation.

These matters generally fall under the authority of the General Meeting of Shareholders under the Law on Enterprise 2020; thus, adding veto rights essentially creates an additional “layer of control” over decisions that are already significant.

However, if the scope of veto rights is too broad (for example, applying even to ordinary management decisions), it may lead to “governance paralysis”, where every decision is delayed or depends entirely on one investor.

3. Are investors’ veto rights limited by time or ownership ratio?

Veto rights do not exist permanently or unconditionally but depend on agreements and legal provisions:

- Regarding ownership ratio (Quantitative limitation):

• Under the Law on Enterprise 2020, to have an “automatic” veto right over important decisions, investors generally need to hold more than 35% of total voting shares (for joint-stock companies) or more than 25% (for limited liability companies).
• However, such a ratio may be lower (for example, 10% or 15%) if specifically recorded in the company charter or shareholders’ agreement.

- Regarding duration (Time limitation):

• The law does not impose a time limit on holding veto rights.
• However, in investment transactions, such rights may terminate if the investor’s ownership ratio falls below a certain threshold (due to divestment or dilution).

In summary, veto rights are conditional and flexible rights that may change depending on ownership structure and agreements between the parties at different stages of the company’s development.

4. In which cases may investors’ veto rights be invalidated?

Veto rights may be declared invalid if they violate the validity conditions of civil transactions under Article 117 of the Civil Code 2015, specifically:

• Illegal content: For example, completely depriving the General Meeting of Shareholders or Board of Directors of decision-making power;
• Violating prohibitions of law or distorting the legal nature of the enterprise;
• Causing serious imbalance of interests among shareholders, thereby infringing upon the rights of other shareholders;
• Not being recorded in the company charter: Resulting in difficulty in enforceability against third parties.

In addition, in judicial practice, if veto rights are abused to obstruct the normal operations of the company or cause damage to the enterprise, they may be restricted or not recognized.

IV. Questions related to investors’ veto rights

1. Can an investor holding less than 35% of charter capital still have veto rights?

The law does not require veto rights to be attached to a specific ownership ratio. The 35% threshold only relates to statutory veto thresholds (for example, resolutions requiring ≥65% approval under the Law on Enterprise 2020).

Meanwhile, veto rights by agreement may be granted to investors holding a lower percentage, based on the principle of freedom of agreement under Article 3 of the Civil Code 2015. However, such rights are only valid if properly recorded in agreements and the company charter.

2. Can veto rights apply to all company decisions?

Veto rights usually apply only to important decisions under the authority of the General Meeting of Shareholders or the Board of Directors under the Law on Enterprise 2020. If applied to all decisions (including daily operational matters), it may:

• Paralyze governance operations;
• Be considered contrary to the principles of corporate organization and operation.

Therefore, veto rights must be reasonably limited in scope.

3. How should situations be handled where investors abuse veto rights to obstruct company operations?

Such cases may be handled in several ways:

• Applying the shareholders’ agreement: If there are provisions on limitations or mechanisms for handling abuse;
• Requesting court intervention: If abuse causes damage to the company, it may be considered a violation of the duty of good faith and honesty under Article 3 of the Civil Code 2015;
• In some cases, civil liability may be considered if damages are caused.

Thus, veto rights are not absolute rights but are subject to the principle of lawful and good-faith exercise of rights.

4. Can veto rights be amended or removed after the company has been operating for some time?

Veto rights can be amended or cancelled if: 

• There is consent from relevant parties under the shareholders’ agreement;
• The amendment/cancellation is approved in accordance with procedures for amending the company charter under the Law on Enterprise 2020;
• It does not violate previously committed obligations.

This is consistent with provisions on contract amendment under Article 421 of the Civil Code 2015.

5. If an investor does not attend a meeting, is the veto right considered waived?

If the agreement stipulates that attendance is required to exercise veto rights, absence may be considered a waiver of such rights in such specific cases. If there is no such provision, non-attendance does not automatically mean waiver of veto rights, and decisions must still comply with the voting mechanism prescribed by law.

V. Why should you seek legal advice from NPLaw regarding investors’ veto rights

Because veto rights directly relate to corporate power structures and control mechanisms, improper design and application may lead to legal risks and disputes. Lawyers at NPLaw assist in drafting strict clauses, assessing legality, handling disputes, and protecting the interests of both investors and enterprises.

The above information is for reference purposes only. If you require detailed advice for your specific case, please contact NPLaw Firm for immediate consultation.