Determining the legal status of Board of Directors members in practice: There are still errors

With a large and unlimited number of shareholders in joint stock companies, the Board of Directors assumes a crucial role as the managerial body overseeing the company's operations. Members of the board are elected by the general meeting of shareholders, exercising their rights and duties through resolutions that adhere to the majority principle. Exceptions may arise if the company's charter specifies a different, higher voting threshold than regulations dictate.

Consequently, in certain instances, determining an individual's status as a board member at the time of voting becomes pivotal for the legal validity of board resolutions. This article aims to shed light on this matter by offering analyses based on real cases from the recent period.

The group of shareholders is requesting a change in the members of the Board of Directors

On June 30, 2023, Mr. Tran Hoang Ninh, representing a group of shareholders of Vietnam Export Import Commercial Joint Stock Bank ("Eximbank"), submitted a request to withdraw the nomination of Ms. Do Ha Phuong as a Board of Directors member.

This decision followed Ms. Phuong's election to the position of Chairman of the Board of Directors on June 28, 2023[1] as per Resolution No. 216/2023/EIB/NQ-HDQT. Notably, Ms. Phuong had been previously nominated by Mr. Tran Hoang Ninh's shareholder group.

The group cited concerns that Ms. Phuong failed to earnestly fulfill her role, leading to significant disruptions in Eximbank's operations and an inability to safeguard shareholders' legal rights and interests. They also expressed doubts about her commitment to transparent and stable bank development. Consequently, the shareholder group requested Eximbank to terminate Ms. Phuong's authorizations and proposed her removal from the Board of Directors. They urged Eximbank to follow the appropriate procedures for Ms. Phuong's removal in accordance with regulations regulations[2].

According to the provisions of the Law on Enterprises 2020, a shareholder or a shareholder group owning 10% or more of the total ordinary shares, or a lower percentage as prescribed in the company charter, holds the right to nominate candidates for the Board of Directors. It is crucial to note that this right is limited to the nomination stage; the confirmation of a nominee as a Board of Directors member is contingent upon the decision of the General Meeting of Shareholders.

Therefore, the General Meeting of Shareholders retains the authority to elect, remove, and recall Board of Directors members. In essence, after nomination, the power to decide on the election, dismissal, or removal of a candidate as a Board of Directors member unequivocally rests with the General Meeting of Shareholders.

In the case of Eximbank, there may have been an authorization agreement between the group of shareholders and Ms. Phuong, enabling her participation on the board for the benefit of the shareholder group. The group's recent decisions, as mentioned earlier, could be a result of Ms. Phuong not fulfilling the terms of this agreement.

However, assuming such an agreement exists, it remains an internal understanding between the shareholder group and Ms. Phuong. The removal or dismissal of Ms. Phuong, whether as Chairman of the Board or as a board member, is not contingent upon this agreement. The Board of Directors holds the discretion to decide on the removal or dismissal of the Chairman, while the general meeting of shareholders has the authority over the removal or dismissal of board members.

It's important to note that, alongside the Law on Enterprises, Eximbank's activities must adhere to the provisions of the Law on Credit Institutions. Specifically, if the shareholder or shareholder group represented by Mr. Tran Hoang Ninh is an organization and has authorized Ms. Phuong for the capital contribution portion at Eximbank[3] Ms. Phuong could cease to be a board  of directors member if the shareholder or group decides to change the representative of the shares.

In cases where Ms. Phuong's actions are not governed by existing laws, it appears plausible for the general meeting of shareholders to consider her dismissal or removal from the board of directors.

Implicitly determining the status of members of the Board of Directors

On July 27, 2018, the Hanoi People's Court issued Decision No. 01/2018/QDKDTM-PT, resolving the request to annul resolutions made during the general meeting of Shareholders[4]. Ms. Le Thi Huong G ("Ms. G"), a member of the Board of Directors of Materials and Equipment Import-Export Joint Stock Company D ("Company D"), had previously submitted a request to the People's Court of Hai Ba Trung District, Hanoi City. This request aimed to annul two resolutions passed during the General Meeting of Shareholders on April 4, 2017, and May 5, 2017.

Among the grounds for her request, Ms. G asserted that Mr. Nguyen Bao D ("Mr. D"), serving as the Chairman of the Board of Directors, had failed to adhere to the regulations concerning the convening of Board of Directors meetings before deciding to convene a General Meeting of Shareholders.

The decision from the court of first instance did not uphold Ms. G.'s claims. Dissatisfied with this outcome, Ms. G filed an appeal, urging the Court of Appeal to reconsider and accept her request to annul two resolutions of the general meeting of shareholders of Company D. However, the Court of Appeal, in Decision No. 01/2018/QDKDTM-PT, upheld its decision not to accept Ms. G's requests.

A crucial aspect in the Court of Appeal's decision pertains to the composition of the Company D Board of Directors during the 2016-2020 period. The board originally comprised five members: Mr. D, Mr. Nguyen Kim P ("Mr. P"), Mr. Tran Anh T ("Mr. T"), Mr. Nguyen Hoang H ("Mr. H"), and Ms. G. Before the extraordinary general meeting on April 4, 2017, Mr. H transferred shares to others.

Mr. D, Mr. P, and Mr. T initially represented the State's capital share in Company D. However, after the State withdrew 100% of its capital, Mr. T, Mr. H, and Mr. P submitted resignation letters, effectively terminating their roles as board members. This action, according to Article 156, Clause 1, Point c of the Law on Enterprises 2014, required a General Meeting of Shareholders for proper dismissal.

Regarding Mr. D, despite no longer representing the state capital share, he remained a shareholder holding a 0.6% share ratio. Consequently, Mr. D retained his status as a member of the board of directors and chairman of the board of directors of Company D.

Both the Law on Enterprises 2014 and the Law on Enterprises 2020 explicitly state that the authority for the election, dismissal, and removal of Members of the Board of Directors resides with the General Meeting of Shareholders. While this regulation appears straightforward, some companies and jurisdictions still encounter confusion in its application. For instance, in the aforementioned case, the Court of Appeal failed to determine the appropriate timing for terminating the status of Members of the Board of Directors. There was also a lack of distinction between the status of Board Members and the authorized representative for the State's capital portion in the company, even when acting as a shareholder of the company. Specifically:

Firstly, the authorized representative for the State capital portion in the company is an individual designated in writing to act on behalf of the capital owner (referred to as the State). This representative carries out the rights and obligations as specified in the Law on Enterprises.

As mentioned earlier, a shareholder or group of shareholders with ownership of 10% or more of total ordinary shares (or a percentage defined in the company charter) has the right to nominate Board of Directors candidates. Notably, the nominee does not necessarily have to be the authorized representative mentioned earlier. In practice, shareholders, often organizations, frequently delegate both roles to one or more individuals concurrently, depending on the share ownership ratio. This arrangement is convenient for organizational management and, if elected to the Board, the nominee is likely to consider the interests of the shareholder organization due to their dual role as an authorized representative.

It is essential to highlight that if a Board Member also serves as the authorized representative for a shareholder organization, their Board status remains unaffected if the shareholder withdraws or transfers all capital in the company. This remains true, except in the case of a company considered a credit institution, as previously mentioned.

Secondly, a scenario analogous to the aforementioned involves an individual shareholder who simultaneously holds the position of a Member of the Board of Directors in the company. In the event that this shareholder withdraws or transfers all capital in the company, it's crucial to note that their status as a Member of the Board of Directors will not be automatically forfeited.

Thirdly, in the aforementioned case, the Court relied on the provisions in Point c, Clause 1, Article 156 of the Law on Enterprises 2014 to assert that a Member of the Board of Directors' status would terminate upon the submission of a resignation letter. However, this conclusion may lack a robust legal foundation. As previously mentioned, the authority to dismiss Members of the Board of Directors still rests with the General Meeting of Shareholders. Therefore, the existence of a resignation letter is a prerequisite, signaling the need for the General Meeting of Shareholders to convene and decide on the dismissal.

It is essential to highlight that the Law on Enterprises 2020 has modified this regulation to explicitly require the General Meeting of Shareholders' approval for resignation letters. Nevertheless, in our interpretation, the essence of the Law on Enterprises 2014 also clearly articulates the authority of the General Meeting of Shareholders.

In conclusion, the cases discussed above illustrate that confusion in determining the status of Members of the Board of Directors is not merely a common issue within companies; it can also pose challenges for jurisdictions handling civil cases. The misidentification of a Board Member's status not only impacts the legal validity of Board Resolutions, as previously mentioned, but it also influences decisions and actions taken by relevant parties within companies and judgments made by jurisdictions. Therefore, to ensure effective corporate governance, addressing issues related to the status of Board Members is a crucial consideration for companies. Shareholders and shareholder groups eligible to nominate candidates to the Board of Directors should exercise careful consideration when selecting nominees to uphold the integrity of the corporate governance structure.