Legal remedies when a new shareholder is not recognized

Refusal to record a transferee in the Register of Shareholders is one of the most complex legal obstacles arising after M&A transactions or capital transfers. When a new shareholder is not recognized, the purchaser’s entire rights and interests may be effectively frozen. To proactively safeguard legitimate interests, we invite our readers to join NPLaw in examining the relevant legal framework and practical dispute-resolution approaches set out below.

I. Current situation concerning the non-recognition of a new shareholder

The transfer of shares and the recording of a new shareholder are routine corporate activities; however, they take significant legal risks. This section analyzes the practical reasons why a new shareholder may not be recognized and the disputes that typically arise therefrom.

In practice, it is not uncommon for a transferee who has fully performed payment obligations to face delays or refusal by the company in entering their name into the Register of Shareholders. The causes of such situations vary and may include:

• Internal conflicts: Existing shareholder groups may resist the entry of a new party who could alter the balance of power within the company.
• Fear of takeover: The company’s management may suspect that the share transfer constitutes the first step in a corporate acquisition or takeover strategy.
• Defects in the transfer procedure: Either the transferor or the transferee may have failed to comply with transfer restrictions prescribed in the company’s Charter.
• Lack of legal awareness: The company may misunderstand its statutory obligations and assume it possesses absolute discretion to “approve” or “reject” any incoming shareholder.

Such circumstances often give rise to prolonged disputes, causing losses in time, costs, and investment opportunities for the transferee.

II. Legal concept of a non-recognized new shareholder

A clear understanding of the legal nature of non-recognition is essential for protecting rights and interests. This section clarifies the concept, the role of the Charter, and the implications for share ownership.

1. What constitutes a non-recognized new shareholder?

A non-recognized new shareholder refers to an individual or entity that has lawfully acquired shares in a company but whose shareholder status has not been acknowledged through entry in the Register of Shareholders.

Pursuant to Clause 2 Article 122 of the Law on Enterprise 2020, the Register of Shareholders serves as the legal basis for determining shareholder status for the company. Accordingly, the absence of a person’s name from such a register means that shareholder rights, such as voting, dividend entitlement, and attendance at the General Meeting of Shareholders, will not be guaranteed by the company.

In essence, such a situation arises where lawful ownership is disregarded by the company, resulting in the deprivation of fundamental investor rights.

2. What role does the company’s Charter play in recognizing a new shareholder?

The company’s Charter functions as an internal constitution governing the legality of share transfers and directly affecting the recognition of a new shareholder. Specifically:

• First, the Charter may impose transfer restrictions. Although Clause 1 Article 127 of the Law on Enterprise 2020 affirms the general principle of free transfer of shares, it permits exceptions where the Charter provides otherwise. If the Charter stipulates binding conditions, such as a right of first refusal in favor of existing shareholders or restrictions on transfers to competitors, and such restrictions are clearly stated on the share certificates under Point d Clause 1 Article 121, any transaction in breach thereof shall be unenforceable against the company. In such cases, the company is legally entitled to refuse registration of the transferee.
• Second, the Charter prescribes procedural requirements for formalizing shareholder status. Under Clause 6 Article 127 of the Law on Enterprise 2020, a transferee becomes a shareholder only upon full entry of the required information into the Register of Shareholders. The contents of such a register must comply with Clause 2 Article 122 of the same Law. The Charter often details required documents (e.g., share transfer agreement, liquidation minutes, identification documents). Failure to provide complete documentation as prescribed may justify delay or refusal of registration.

Accordingly, the Charter constitutes a critical legal instrument enabling the company to control the admission of new shareholders. Where a transfer violates restrictions or procedural requirements duly established in the Charter, the company is both entitled and obligated to refuse recognition.

3. Does non-recognition extinguish share ownership?

The company’s refusal to register a transferee does not extinguish ownership of the shares; however, it prevents the establishment of shareholder status for the purpose of exercising corporate rights.

• First, regarding proprietary rights, a share transfer is an independent civil transaction between transferor and transferee. If it complies with Clause 1 Article 127 of the Law on Enterprise 2020 and relevant provisions of the Civil Code 2015 on contract formation and validity, ownership of the shares is lawfully transferred upon completion of payment and delivery, irrespective of the company’s registration.
• Second, regarding shareholder status, Clause 6 Article 127 clearly stipulates that shareholder status arises only upon registration in the Register of Shareholders. Thus, while economic ownership may exist, legal recognition for the company remains pending, and rights such as voting, dividend receipt, and meeting participation do not accrue until registration.
• Third, concerning the company’s obligations, Clause 5 Article 122 of the Law on Enterprise 2020 requires the company to update changes in share ownership. Unjustified refusal constitutes a statutory violation, entitling the transferee to initiate legal proceedings to compel registration.

In summary, ownership is established through a valid transaction, whereas non-recognition constitutes an administrative barrier to the exercise of corporate rights.

III. Relevant legal provisions on non-recognition of a new shareholder

A thorough understanding of statutory provisions is essential to safeguarding rights. This section analyzes the legal conditions, rights, and obligations relating to shareholder recognition.

1. Legal conditions for recognition as a new shareholder

To be officially recognized, the transfer process must satisfy four cumulative legal conditions:

• First, eligibility of the transferee: The transferee must be legally entitled to purchase shares, except in cases prohibited under Clause 3 Article 17 of the Law on Enterprise 2020 as amended in 2025.
• Second, lawful form of transfer: Pursuant to Clause 2 Article 127, the transfer must be effected by contract or through securities market transactions. Contractual transfers must bear the signatures of the parties or their authorized representatives.
• Third, compliance with transfer restrictions: The transaction must not violate restrictions under Clause 1 Article 127 or Clause 3 Article 120 (three-year restriction on founding shareholders’ ordinary shares). Violations may render the transaction void.
• Fourth, registration: Shareholder status is established only upon entry of the required information into the Register of Shareholders in accordance with Clause 6 Article 127.

2. Circumstances in which the company may refuse recognition

A joint-stock company is entitled to refuse recognition of a new shareholder only in cases expressly and specifically provided for by law or by the company’s Charter. Such circumstances include:

• Breach of share transfer restrictions set out in the Charter: Where the Charter imposes restrictions on the transfer of ordinary shares (for example, requiring prior offering to existing shareholders or approval by a competent corporate body) and the transfer transaction fails to comply with Clause 1 Article 127 of the Law on Enterprise 2020.
• Invalid share transfer transaction: If the transfer agreement is not executed in writing (if not conducted through the securities market), lacks the signatures of the parties, or shows signs of forgery or fraud in violation of Clause 2 Article 127 of the Law on Enterprise 2020 and the provisions of the Civil Code 2015 concerning invalid civil transactions.
• Failure of the new shareholder to provide complete or accurate information and documentation: If the transferee fails to submit documents evidencing a lawful transfer or the necessary personal or corporate information required for updating the Register of Shareholders.

It should be emphasized that the company does not have the right to refuse recognition where the transfer is lawful and fully compliant with statutory provisions and the Charter.

The company’s right to refuse recognition of a new shareholder is therefore limited and must be grounded in clear legal and charter-based provisions; it may not be exercised arbitrarily.

3. Does refusal violate the principle of free transferability?

If refusal lacks a lawful basis, it constitutes a violation of the statutory principle of free transfer under Clause 1 Article 127 of the Law on Enterprise 2020. Restrictions must be explicit, lawful, and properly disclosed. Arbitrary refusal amounts to an infringement of shareholder rights.

4. Legal consequences of unlawful refusal

Unlawful refusal exposes the company to serious legal consequences:

• Administrative liability: Under Point b Clause 2 Article 52 of Decree 122/2021/ND-CP, failure to update the Register of Shareholders may result in fines ranging from 30,000,000 VND to 50,000,000 VND, along with remedial measures.
• Civil litigation risk: Pursuant to Clause 4 Article 30 of the Civil Procedure Code 2015, disputes concerning corporate governance fall within court jurisdiction. The court may compel registration.
• Compensation liability: Under Articles 13 and 584 of the Civil Code 2015, unlawful acts causing damage take full compensation. Directors or members of the Board of Directors may take personal liability under Articles 165 and 166 of the Law on Enterprise 2020.

IV. Questions on non-recognition of a new shareholder

In practice, complex situations inevitably arise. NPLaw addresses the most frequently asked questions below to provide clients with a clear understanding and practical guidance in cases where a new shareholder is not recognized.

1. Is it lawful for a company to refuse to recognize a new shareholder without providing reasons?

A company’s refusal to recognize a new shareholder without clearly stating the grounds for such refusal is unlawful. Although the Law on Enterprise 2020 does not expressly require a company to provide reasons when declining to recognize shareholder status, the fundamental principles of transparency, openness, good faith, and honesty in civil transactions under Article 3 of the Civil Code 2015 impose an obligation on parties to act in a clear and transparent manner.

Failure to specify the grounds for refusal prevents the new shareholder from understanding the legal basis for protecting their rights and from remedying any deficiencies, if any exist. Such conduct may be construed as obstructive behavior that hinders the lawful exercise of shareholder rights and may serve as a valid basis for initiating court proceedings. In such circumstances, the court will require the company to present legitimate and lawful grounds for its refusal.

Accordingly, to ensure transparency and to afford the shareholder an opportunity to safeguard their legitimate interests, the company is obligated to clearly state the reasons for refusing recognition.

2. If the company delays updating the Register of Shareholders, is the new shareholder considered not yet recognized?

Where the company delays updating the Register of Shareholders, the new shareholder is not deemed to have been officially recognized by the company, notwithstanding that their ownership of the shares has been lawfully established.

Pursuant to Clause 5 Article 122 of the Law on Enterprise 2020, the company is required to update the Register of Shareholders upon any change in share ownership. If the company fails to perform this obligation in a timely manner, the new shareholder’s name will not appear in the register and, consequently, the shareholder will be unable to exercise shareholder rights for the company. Such delay may expose the company to administrative sanctions under Point b Clause 2 Article 52 of Decree 122/2021/ND-CP.

Therefore, although delayed registration does not negate the transferee’s proprietary rights, it seriously affects the exercise of shareholder rights, and the company must take legal responsibility for such failure.

3. Does the non-recognition of a new shareholder affect the validity of the share transfer agreement?

The company’s refusal to recognize a new shareholder does not invalidate the share transfer agreement, as these constitute two distinct legal relationships.

First, in respect of the relationship between the transferor and the transferee, a share transfer agreement is a civil transaction. Pursuant to Article 117 of the Civil Code 2015, such an agreement becomes legally effective when the parties satisfy the conditions relating to legal capacity, voluntariness, and lawful subject matter and purpose. Where the agreement has been duly executed, payment has been made, and the shares (or equivalent documents) have been delivered, the agreement is legally binding upon the parties regardless of the company’s position.

Second, in respect of the relationship between the transferee and the company, Clause 6 Article 127 of the Law on Enterprise 2020 provides that the transferee becomes a shareholder only from the time their information is fully recorded in the Register of Shareholders. Accordingly, the company’s refusal or failure to register the transferee merely prevents the exercise of shareholder rights (such as voting rights or dividend entitlement) for the company, but does not negate the lawful acquisition of the shares from the transferor.

In conclusion, the share transfer agreement remains legally valid and may serve as the legal basis for the transferee to initiate legal proceedings. If the company’s refusal is unlawful, the transferee is entitled to rely on the agreement to request the court to compel the company to complete the shareholder registration in accordance with applicable law.

4. Where the share transfer has been completed but not yet registered, what should the new shareholder do?

When the share transfer has been completed from a civil law perspective (i.e., the agreement has been executed and payment has been made) but has not yet been recorded in the Register of Shareholders, the transferee should undertake the following legal steps to establish shareholder status:

• First, the transferee should promptly submit a formal written request, together with complete and valid transfer documents, to the company’s head office. Accordingly, the transferee should invoke Clauses 5 and 7 Article 127 of the Law on Enterprise 2020, pursuant to which the company is obligated to update changes in the Register of Shareholders within 24 hours from receipt of a valid request. Referring to this statutory 24-hour deadline constitutes a strong legal basis to compel the company to act without delay.
• Second, if the company deliberately delays or refuses registration, the transferee should submit a written complaint demanding that the company provide lawful grounds for its refusal in accordance with Clause 6 Article 127 of the Law on Enterprise 2020. This provision clearly stipulates that shareholder status arises only upon registration; therefore, the company’s failure to record the transferee directly infringes upon legitimate rights and prevents the exercise of shareholder rights such as attending meetings and receiving dividends.
• Third, if negotiation efforts prove unsuccessful, the final remedy is to initiate legal proceedings before the competent court. Such a dispute is categorized as a dispute between the company and its members relating to the establishment, operation, or dissolution of the company, including recognition of membership status. Pursuant to Clause 4 Article 30 of the Civil Procedure Code 2015, the court will examine the validity of the transfer documentation and may order the company to complete the shareholder registration in accordance with the law.

5. Does non-recognition affect charter capital?

Charter capital, as defined in Clause 34 Article 4 of the Law on Enterprise 2020, represents the total value of issued shares. A transfer merely changes ownership, not the total charter capital.

V. Why seek legal counsel at NPLaw?

A share transfer is a significant transaction, and non-recognition may trigger complex legal and financial consequences for both shareholders and the company. Given the intricate statutory framework and diverse factual scenarios, self-handling may entail considerable risk.

If you are a transferee facing refusal of recognition, or a company confronted with a disputed recognition request, contact NPLaw today for professional legal assistance.

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