Avoid risks in the process of removing company's board members

The Board of Directors (“BOD”) is the governing body that plays a crucial role in a joint-stock company, acting on behalf of the company's shareholders to oversee its operations. Each member of the BOD holds significant responsibility, influencing whether the resolutions and decisions of the BOD are approved or not.

The rights of each BOD member are clearly demonstrated through BOD meetings, where their votes directly influence the board's decisions. For this reason, the law stipulates the obligation of BOD members to attend these meetings, providing a basis for the General Meeting of Shareholders to consider the dismissal of members who frequently fail to attend. However, in practice, many companies, including publicly listed ones, often misinterpret and improperly apply the legal provisions when dismissing BOD members for not attending or inadequately attending BOD meetings. This can pose significant legal risks for the company.

Confusion between dismissal and removal?

On November 28^th, 2024, the General Meeting of Shareholders of Vietnam Export Import Commercial Joint Stock Bank (“Eximbank”) convened an extraordinary session and issued a resolution approving the removal of Ms. Luong Thi Cam Tu and Mr. Nguyen Ho Nam from their positions as members of the Board of Directors (BOD).[1] Notably, the Proposal presented by Eximbank's BOD to the General Meeting of Shareholders regarding the handling of a petition from a group of major shareholders cited frequent non-attendance at BOD meetings as the basis for the removal (“BOD Proposal”). Specifically, in a Petition dated November 19^th, 2024, a group of shareholders holding more than 5% of Eximbank's total common shares requested the inclusion of a proposal to remove Ms. Luong Thi Cam Tu and Mr. Nguyen Ho Nam from the BOD in the agenda of the extraordinary General Meeting of Shareholders meeting on November 28, 2024. The reason cited was Ms. Luong Thi Cam Tu’s absence from 4 out of 21 BOD meetings and her failure to participate in 23 out of 243 written voting sessions in 2023. Meanwhile, although Mr. Nguyen Ho Nam attended all BOD meetings, he did not participate in 2 out of 38 written voting sessions in 2024.[2] Without delving into the legality of the grounds for dismissal or removal of these members, a review of the content of the BOD Proposal raises the question: in this case, was there confusion between the concepts of dismissal and removal of BOD members?

Specifically, pursuant to Clauses 1 and 2, Article 160 of the 2020 Law on Enterprises, the General Meeting of Shareholders may remove a BOD member in the following cases: (i) The member no longer satisfies the qualifications and conditions stipulated by the Law on Enterprises; (ii) The member submits a resignation letter that is approved; or (iii) Other cases as stipulated in the company’s Charter; and dismiss a BOD member in the following cases: (i) The member fails to participate in the BOD's activities for six consecutive months, except in cases of force majeure; or (ii) Other cases as stipulated in the company’s Charter. Meanwhile, Article 46 of the 2024 Law on Credit Institutions provides regulations on the dismissal and removal of BOD members akin to the provisions in the Law on Enterprises. However, upon reviewing Eximbank's Charter, internal governance regulations, and the regulations on the organization and operation of its BOD, these documents do not clearly regulate the circumstances under which the mechanisms for removal or dismissal should apply.[3] Instead, they provide general grounds applicable to both removal and dismissal of BOD members. This lack of clarity in defining the grounds for dismissal and removal has resulted in Eximbank, in the aforementioned case, removing BOD members due to their failure to attend BOD meetings or participate in written consultations. However, such grounds should have been applied for dismissal as stipulated by the 2020 Law on Enterprises and the 2024 Law on Credit Institutions.

What are the limits on provisions in the company’s Charter?

As mentioned above, the 2020 Law on Enterprises and the 2024 Law on Credit Institutions provide similar provisions regarding the removal and dismissal of BOD members, allowing the Charter of a credit institution to specify additional grounds for dismissal and removal. Notably, Clause 3, Article 60 of the 2020 Law on Enterprises also stipulates that the General Meeting of Shareholders has the authority to decide on the removal or dismissal of BOD members as deemed necessary, beyond the cases outlined in Clauses 1 and 2, Article 60 of the 2020 Law on Enterprises. Thus, it can be seen that the law permits companies in general, and credit institutions in particular, to establish additional grounds for dismissing or removing BOD members within their Charters.

Returning to the case of Eximbank, it appears that the bank relied on other provisions in its Charter to remove/dismiss BOD members. Specifically, the bank cited the provisions in Point e, Clause 4, Article 47 of the Charter, which stipulate that a BOD member may be dismissed or removed if the competent authority responsible for electing or appointing members (in this case, the General Meeting of Shareholders) deems it necessary.

Citing provisions in the Charter to dismiss or remove a BOD member, or to base any other decisions on such provisions, is within the company's rights, as long as these provisions do not conflict with the law. However, in the case of Eximbank, the question arises whether citing the Charter's provisions as the basis for the dismissal/removal of BOD members is legally valid. The reason provided by Eximbank's major shareholders for removing/dismissing these members was their frequent non-participation in BOD meetings and failure to participate in written voting, leading to the conclusion that their removal was necessary. Attending BOD meetings or participating in written voting is considered part of the BOD's activities. Therefore, it could be argued that the removed/dismissed members had not fully engaged in the BOD's activities. However, it is important to note that the 2020 Law on Enterprises and the 2024 Law on Credit Institutions specifically require that to dismiss a BOD member for failing to participate in BOD activities, the member must have “failed to participate in BOD activities for six consecutive months, except in cases of force majeure”, as such, the General Meeting of Shareholders' reliance on the provisions in the Charter regarding necessary cases for dismissing BOD members could potentially conflict with the statutory requirements outlined in the law.

In the author's view, the law’s allowance for a company’s Charter to stipulate additional grounds for the dismissal or removal of BOD members is meant to empower shareholders to decide on other cases in which BOD members, who manage and operate the company, should be dismissed or removed. This provision helps to best protect the rights and interests of shareholders. However, fundamentally, the provisions in the Charter must not contradict the law. In the case of Eximbank, particularly regarding Mr. Nguyen Ho Nam, the evaluation for his removal was based on a two-month period (from April 26^th, 2024, to June 30^th, 2024), which clearly does not meet the requirement of the member failing to participate in BOD activities for six consecutive months. Therefore, it seems that removing Mr. Nguyen Ho Nam based on the reasons provided contradicts the provisions of the 2020 Law on Enterprises and the 2024 Law on Credit Institutions. The specific time limit for a BOD member's inactivity (six consecutive months) as a basis for dismissal is likely intended to maintain stability in the company's governance and management, avoiding frequent changes in personnel. It also serves to protect minority shareholders from the potential manipulation of BOD changes by major shareholders for their own benefit. Therefore, if this regulation is not strictly followed, possibly through other regulations in the Charter as above, the stability of the management structure and the rights of minority shareholders would be a big concern for the company.

As mentioned above, the dismissal of a BOD member is an action that can bring significant risks to the company’s operations, not only from a legal standpoint but also in terms of the company’s brand and reputation. Therefore, careful consideration is necessary to make a legal and convincing decision in this case, which is something the company must do.