Problems arising when an enterprise has more than one legal representative

The Law on Enterprises 2020 allows limited liability companies (LLCs) and joint stock companies (JSCs) to have one or more legal representatives. This is a point of progress, helping businesses to be more flexible in management and administration. In addition, the law also requires enterprises to always have at least one legal representative residing in Vietnam. This is to ensure that at all times, businesses have an authorized person to represent them in legal transactions and procedures in Vietnam. However, when the law has more than one representative, many legal issues arise, causing a lot of confusion in the management and operation of the business, and even disputes between representatives. Within the scope of this article, the author will if problems arise and propose some solutions so that businesses can solve their problems.

1. Decentralization between legal representatives

The law emphasizes that the company's charter must specify the number of legal representatives, their titles, as well as clearly delineate the rights and obligations of each person in case there is more than one legal representative. Specifically, Clause 2, Article 12 of the Law on Enterprises 2020 states that if a company has many legal representatives, the charter needs to clearly define the rights and obligations of each person. This is the legal basis to avoid overlap or contradiction in representation activities.

In case the charter does not clearly stipulate the scope of powers of each legal representative, each legal representative is considered to have full authority to represent the enterprise before a third party. In other words, any legal representative of the company can make transactions with external parties on behalf of the company if there are no internal restrictions. At that time, in order to protect third parties and transaction reputation, the law implicitly recognizes the signature of any legal representative on the contract or document that is equally binding on the company.

However, the lack of clear demarcation easily leads to overlapping powers and responsibilities between the legal representative. Therefore, enterprises should proactively promulgate internal regulations or stipulate in the charter to assign each legal representative to be in charge of certain fields or limits. Enterprises can consider stipulating that one representative is in charge of signing business contracts, the other representative is in charge of human resources or finance, or stipulating a maximum transaction value limit that each person can sign unilaterally. Such transparent internal decentralization helps to avoid conflicts and increase governance efficiency.

In addition, enterprises may stipulate a number of cases in which coordination between legal representatives is required. In fact, many companies require two legal representatives to sign important documents, such as high-value contracts, large spending decisions, and documents provided to banks to ensure strictness and consensus. This is an effective internal control measure, sometimes also a requirement from a business partner to strengthen the legal binding of the company. We believe that, depending on the strategy of each enterprise, there will be different mechanisms for delegating powers between different legal representatives. However, this decentralization must be clearly established through the company's charter to comply with the law and be in line with the governance needs of the business.

2. Legal liability of each legal representative

When an enterprise has many legal representatives, the determination of the legal liability of each person in the event of a dispute or violation of the law depends largely on the above-mentioned decentralization. If the charter does not clearly stipulate the scope of responsibility of each legal entity, the law defaults to all legal entities that are jointly liable for the damage caused to the enterprise. In other words, when a legal representative commits an act that causes damage to the company such as signing a contract that causes losses or violates the law that leads to the company being fined, all representatives may be jointly responsible for compensating the business. This is a sanction to promote collective responsibility when businesses do not clearly distinguish the tasks of each person.

On the contrary, if a specific assignment has been made according to the charter of responsibility of each legal representative, when a violation occurs, the responsibility will first belong to the person assigned to that field. For example, if the charter stipulates that the first legal representative is in charge of the financial sector and the second legal representative is in charge of signing commercial contracts, if there is a dispute related to the commercial contract, the second legal representative will be primarily responsible. However, it should be noted that for third parties, the company is still responsible for the conduct of any legal representative. The internal liability between the legal representatives will be settled by the company itself according to the agreement or charter. In case of internal conflicts between legal representatives, the company's charter should have the principle of resolving internal disputes to be resolved through voting at the Board of Members/Board of Directors.

In addition to the responsibility to the company, the corporate law clearly stipulates the obligations and personal responsibilities of the legal representative. According to Article 13 of the Law on Enterprises 2020, each legal representative must perform the following obligations:

• Perform the assigned rights and obligations in an honest, prudent and best manner to ensure the legitimate interests of the enterprise. This is a loyal and prudent obligation, requiring the representative to act in the best interests of the company, similar to the principle of fiduciary duty [1]in corporate governance.
• Be loyal to the interests of the enterprise; do not abuse their status and position and use information, know-how, business opportunities and other assets of the enterprise for self-interest or serve the interests of other organizations and individuals. This obligation prohibits the legal representative from taking advantage of their position to benefit themselves or others, ensuring that they put the interests of the company first.[2]
• Promptly, fully and accurately notify enterprises of enterprises in which they or their related persons own or have shares or contributed capital in accordance with law. This is an obligation to be transparent about conflicts of interest, requiring representatives to inform the company if they or related persons participating in other businesses may cause a conflict of interest.

If the above obligations are violated, the legal representative must take personal responsibility for the damage caused to the enterprise due to his/her violation. In other words, the company has the right to request the legal representative to compensate for damages if they act dishonestly, negligently or abuse their powers, causing losses to the company. This is an important sanction to bind the personal responsibility of the legal representative, ensuring that they perform their duties properly.

In addition, if the illegal act of the legal representative also infringes on the interests of a third party or society, the legal representative itself must be responsible before the law corresponding to the violation like all other citizens. In the case of a company with multiple legal representatives, the person who is not directly related to the other person's violation is usually not liable for the criminal/administrative liability of the other person unless there is an accomplice act. However, as analyzed, in terms of internal regulations, if there is no clear decentralization, legal representatives are still jointly responsible for the consequences of assets to the company.

3. Conclusion of contracts and authority of representation for transactions

The legal representative is an individual who represents an enterprise in civil and economic transactions. Article 12 of the Law on Enterprises 2020 defines an enterprise's legal representative as a person who exercises rights and obligations arising from its transactions on behalf of the enterprise, represents the enterprise as a plaintiff, defendant, person with related interests and obligations before the court, arbitration, etc  and exercise other rights and obligations as prescribed. Therefore, the signature of the legal representative on the commercial contract, labor contract, loan contract, etc. will be legally binding on the company for such transaction.

In case the company has a single legal representative, determining the jurisdiction to sign is quite simple. However, when the company has many legal representatives, it is necessary to determine who has the right to sign a specific contract. As analyzed in Section 1, if the charter clearly assigns the field or type of contract to each legal representative, the assignee has the right to sign within his/her scope. In case there is no specific delimitation, each legal representative has the right to sign any contract of the company as a legal representative. The third party to the transaction has the right to believe that the signatory is a legitimate legal representative, then the transaction is binding on the company. Clause 2, Article 12 of the Law on Enterprises 2020 clearly states that if powers have not been divided in the charter, each legal representative is a competent representative of the enterprise before a third party. Therefore, in principle, any legal representative of the company that signs a contract is valid for the company as long as the transaction is within the scope of operation of the enterprise and complies with the provisions of law. The partner is not obliged to go to the company's internal inspection to see if the signatory is "assigned" to do it or not, but can completely judge based on the name of the legal representative registered on the enterprise registration certificate.

Shareholders of Sacombank did not approve the proposal to appoint Chairman Duong Cong Minh as the legal representative. Source: Zing News.

However, to limit internal risks, enterprises should issue regulations on contract approval. Enterprises should stipulate that contracts with a value above a certain level must be signed by both legal representatives, or must be approved by a resolution of the Board of Directors/Board of members before any legal entity signs large value contracts or important legal documents. In fact, some large partners such as banks and multinational corporations also require both legal representatives to sign important contracts to increase the certainty and commitment of the company. Although in our opinion, this is completely unnecessary, sometimes annoying and can lead to transaction delays between the parties. Moreover, when designing the regulations on representatives in the Law on Enterprises 2020, the lawmaker wishes that when there is more than one legal representative, it is for these individuals to support and "cover" each other to perform the work of the legal representative, not to assign the role of each legal representative as a member of the executive board of the enterprise. But in practice, many businesses may have misunderstood this intention.

Another issue to note is that the legal representative’s execution of transactions exceeds the scope of its assigned authority. According to the provisions of Article 143 of the Civil Code 2015, a transaction established by a representative that exceeds the scope of representation will not give rise to the obligations of the represented person for such excess, except for some special cases. Specifically, if the legal representative signs a contract outside the company's business line, or exceeds the value limit allowed by the internal charter/regulations, the company has the right to refuse to perform the part of the obligation that exceeds the scope. The transaction is valid only for the company in the part that falls within the scope of legal representation. However, there are exceptions if: (a) the business then agrees to the transaction; (b) the enterprise knows without objection to the overrepresentation within a reasonable time; or (c) the business is at fault so that the third party is unaware of the representative's overreach. In these cases, the business is still bound by the transaction beyond the scope.

If the transaction in excess of its jurisdiction is not accepted by the company under the above exceptions, the signed representative shall be solely responsible to the third party for the portion of the transaction in excess of such excess. The third party has the right to request the contractor to compensate for damage or perform obligations for the part of the transaction beyond its authority, unless it knows that the transaction is well understood but still accepts the transaction. This provision is intended to protect bona fide third parties and encourage them to check the authority of signatories in unusual situations.

4. Titles permitted to act as legal representatives

The Law on Enterprises 2020 stipulates that each enterprise must appoint at least one person holding a specific managerial position as a legal representative, depending on the type of company. Depending on the type of company and the number, the legal representative can take on different roles in the company.

• Limited liability company with two or more members: There must be at least one legal entity holding one of the titles of Chairman of the Board of Members (BOD) or Director/General Director of the company. If the charter does not specifically designate any of these people as the legal representative, the Chairman of the Board of Directors is the legal representative of the company by default.
• Single-member limited liability company: There must be at least one legal representative holding one of the titles of Chairman of the company, Chairman of the Board of Members (in case the owner is an organization with a Board of Members) or Director/General Director. If the charter does not stipulate, the Chairman of the Board of Directors or the Chairman of the company (depending on the management model) will be the Legal Investor. This means:
  1. If the owner of the company (a member) is an individual, usually the management structure will consist of the Chairman of the company and the Director. The Chairman of the company (concurrently or appointed by the owner) will automatically be the Legal Representative unless the Director is empowered to take charge of the Legal Representative.
  2. If the owner is an organization, the Members' Council may be set up for management. At that time, the Chairman of the Members' Council is the default legal representative if the charter does not choose another person.
• Joint stock company: There must be at least one legal entity holding the title of Chairman of the Board of Directors (BOD) or Director/General Director. If the company has only one Legal Representative, that person must be the Chairman of the Board of Directors or the Director/General Director; if the charter does not stipulate, the default Chairman of the Board of Directors is the Legal Investor. If the company has more than one legal representative, the Chairman of the Board of Directors and the Director/General Director are automatically the legal representatives of the company. In other words, in the case of multiple representatives, a minimum of these two highest titles must be among the representatives. The company may add other people as legal representatives in addition to the above two titles, but in any case, the Chairman of the Board of Directors and the Director/General Director must always be present on the list of legal representatives. This regulation aims to ensure that the top leaders of the joint stock company have the authority to represent the law, avoiding the situation that the company has many legal representatives but excludes the role of Chairman or CEO.

In addition to the above-mentioned mandatory titles, the company can flexibly appoint many people to hold the same title as the Legal Representative. Many enterprises appoint regional directors, sales directors, external relations directors, and human resources directors,.. is a legal entity for the company along with compulsory business positions. The union may consider appointing and registering various managerial positions to become a legal representative, as long as the company's charter allows and ensures that at least one person resides in Vietnam. The law does not specifically limit the maximum number of legal representatives, so a company can have 2, 3 or more representatives depending on the management needs of its business at each time. However, as analyzed above, having multiple representatives requires appropriate coordination and governance mechanisms to avoid conflicts.

It should also be noted that the person selected as a legal representative must satisfy the statutory conditions for the business manager. Specifically, they are not prohibited from managing enterprises according to Clause 2, Article 17 of the Law on Enterprises 2020 such as minors, people who have lost their behavioral capacity, people who have been convicted of economic infringement crimes that have not had their criminal records expunged, etc. At the same time, for some conditional business lines, the legal representative may need to meet professional standards or practice certificates according to specialized laws such as for specific industries such as law firms, securities companies, banks, notary offices, etc. Enterprises when appointing additional legal representatives should check specialized regulations to ensure that they meet the legal conditions.

In summary, the managerial positions that hold the role of the IR are mainly the positions of the head of the company or the highest executive. The selection of who to be a legal representative should be considered based on the convenience of operation, external prestige, as well as the ability to coordinate with other legal representatives (if any). Enterprises need to clearly stipulate in the charter the list and title of the legal representative, and at the same time comply with full registration with the business registration authority so that these persons have legal effect in relations with external parties.

Having more than one legal representative brings many benefits to the business, such as sharing the burden of management, being flexible in transactions, and ensuring that there is always an operator in one's absence. However, it also raises legal issues that require businesses to be strictly governed so that their operations run smoothly and effectively.

Lawyer Nguyen Van Phuc

HM&P Law Firm