A non-public company (private company) can be understood as a joint-stock company that does not fulfil the conditions for becoming a public company in accordance with the provisions of the Law on Securities 2019. On the basis of these conditions, it can be seen that the private company may meet restrictions due to the actual paid-up charter capital, the number of shareholders of the company, or even because the company does not have an initial public offering of shares. In general, these factors often stem from the desire of the company's shareholders to keep the company in an internal state.
However, in order to diversify and increase the sources of capital for the company's development activities, the company's shareholders must also consider the plan to raise capital from other investors through a private offering of shares. This activity is quite clearly regulated by law, however, many companies still misunderstand or make mistakes when carrying out procedures related to this activity in reality. In this article we will make some observations based on our experience in advising clients on conducting private share offerings for private companies.
1. Conditions for private placement of shares
Pursuant to the Law on Securities 2019, the private offering of shares (private placement) of a private company shall comply with the Law on Enterprises and other relevant laws. In addition, pursuant to Article 125 of the Law on Enterprises 2020, the private placement of a private company shall adequately and fully comply with the following conditions:
- No offering through mass media;
- Offering to less than 100 investors other than professional securities investors or only offering only to professional securities investors.
It can be seen that the above conditions are aimed at ensuring that the private company does not become a public company after the private placement is completed, which is different from the initial public offering of shares referred to in the provisions of the Law on Securities 2019.
If a private company carries out the private placement, it is necessary to pay attention to the above conditions in order to ensure that the private placement is carried out for its intended purpose and to avoid confusion with other forms of share offerings.
2. Private placement procedures
Compared to the Law on Enterprises 2014, the Law on Enterprises 2020 has significantly changed in regulating the procedures for private placement of private companies which is also a common mistake that many private companies often make. According to the provisions of the Law on Enterprises 2014, after the decision to offer private shares (including the plan to offer private shares) has been made, the private company must notify the Business Registration Authority of the private placement. Within 05 working days from the date of sending the notification, if there is no rejection from the Business Registration Authority, the private company has the right to conduct the private placement. However, the Law on Enterprises 2020 has made important changes. Pursuant to the provisions of Point b Clause 2 Article 125 of the Law on Enterprises 2020, existing shareholders of private companies are entitled to preferential rights to purchase shares in the new private placement, except for the merger or consolidation of the company.
Therefore, if existing shareholders or pre-emptive rights holders register to purchase all shares in a private placement, the purpose of the private placement may not be fully achieved. As mentioned above, the purpose of a private placement is to increase capital (private companies may choose to offer shares to existing shareholders) and to attract new investors to the company. It can be seen that if existing shareholders or pre-emption rights holders register to buy all the shares in a private placement, the private placement has the same meaning as an offer to existing shareholders, which is only to increase the company's capital.
In this article, we do not discuss the appropriateness of this change, but only focus on the important considerations for private companies. Accordingly, private companies, when conducting the private placement, must pay attention to the procedures for notifying existing shareholders before offering to other investors. Under the current rules, a private company must send a written notice to its shareholders in such a way as to ensure that the notice is delivered to the contact address of the shareholders as shown in the register of shareholders at least 15 days before the deadline for registering to purchase shares and enclosing the share purchase registration form. The content of the notice must include a deadline for registration. If this deadline expires and the share purchase registration form is not sent to the company in time in accordance with the notice, the shareholder will be deemed not to have received the preferential right to purchase. This deadline is quite long, so in many cases it will be a challenge if a company needs to raise capital in a short period of time.
In reality, many private companies, when holding a general meeting to decide on the private placement, often include content about existing shareholders exercising their pre-emption rights or transferring pre-emption rights or refusing to buy shares. In our view, it is perfectly legal for shareholders to attend the general meeting and exercise the pre-emption right and transfer the pre-emption right or refuse to buy shares. This can help private companies to reduce notification procedures for existing shareholders, as existing shareholders have already expressed their views at the general meeting of shareholders. However, it should be noted that not all the shareholders of the company are always present at the general meeting of shareholders. If a shareholder does not attend the general meeting, that shareholder is deemed not to have exercised the pre-emption right, transferred the pre-emption right or refused to purchase shares. Therefore, the private company at that time still had to carry out the procedure of notifying shareholders who did not attend the general meeting of shareholders so that they could exercise their pre-emption right.
3. Conditions of carrying out the private placement to new investors
According to the applicable laws, if the shareholder and the beneficiary of the pre-emptive rights do not purchase all the shares, the remaining shares will be sold to others in accordance with the private placement plan on less favorable terms than those offered to the shareholders, unless otherwise approved by the General Meeting of Shareholders.
This provision clearly states that the General Meeting has the full right to determine the terms and conditions of the private placement to new investors after the offered shares have not been purchased by the existing shareholders and the beneficiaries of the pre-emptive rights. In this case, if the private company wishes to offer shares with better conditions (in terms of selling price and restrictions on the shares) to new investors, the private company must obtain the approval of the general meeting of shareholders, which means that the shareholders themselves, through the general meeting of shareholders, have at this point agreed that the offering conditions for new investors are more favorable than the conditions for themselves.
4. Administrative procedures that that private companies must follow when conducting the private placement
As mentioned in Section 2, at present, private companies are not required to notify the business registration authority when conducting the private placement. However, within 10 days from the date of the completion of the offering, the private company is required to carry out registration procedures to amend the content of the business registration in relation to the increase of the charter capital corresponding to the amount of additional capital after the private placement of the private company.
