Choosing organizational structure and management of joint stock companies in accordance with the 2014 law on enterprises

The 2014 Law on Enterprises provides new provisions which allow joint stock companies to choose their organizational and management model instead of complying with a certain model stipulated in the 2005 Law on Enterprises. Accordingly, joint stock companies have the right to choose one of the following organizational models (Article 134 of the 2014 Law on Enterprises):

 - Model 1: The General Meeting of Shareholders, the Board of Management, the Board of Controllers and the Director/General Director. In regard to this model, the law allows that a joint stock company with less than 11 shareholders and its institutional shareholders holding less than 50% of the total number of shares of the Company may not be required to have a Board of Controllers.

 - Model 2: The General Meeting of Shareholders, the Board of Management and the Director/General Director. In regard to this model, the law requires the Company to have at least 20% of the total number of members of the Board of Management being independent members and have an internal audit committee under the Board of Management.

According to the regulations applicable to Model 1, a joint stock company may not set up a Board of Controllers if it meets the following conditions: (i) having less than 11 shareholders and (ii) the institutional shareholders holding less than 50% of the total number of shares of the Company (the “Eligible Conditions”). Then, the organizational model of the Company will include the General Meeting of Shareholders, the Board of Management and the Director/General Director (“Model 1A”). If only one of the above conditions is met, the joint stock company still has to set up a Board of Controllers as regulated.

However, the issue to be posed is that if a joint stock company satisfies the conditions for not forming a Board of Controllers, whether the company is required to organize its structure under Model 2 while Model 1A has an organizational structure similar to that of Model 2. Regarding this issue, in reality, we find two viewpoints as below:

 - The first viewpoint is that in the case of a joint stock company meeting the conditions for choosing Model 1A, it might not have independent members in the Board of Management as in Model 2.

 - The second viewpoint is that if a joint stock company does not set up a Board of Controllers, it will have independent members in the Board of Management in order to ensure a supervisory mechanism in the Company, which means Model 1A does not exist (there is neither Board of Controllers nor independent members in the Board of Management).

Based on the experience of DIMAC on advising its clients asking questions about the choice of organizational and management model for a joint stock company, we agree with the first viewpoint due to the following reasons:

 - Model 1 and Model 2 are independent of each other and legally allowed to be chosen by joint stock companies. Accordingly, if a joint stock company does not meet the Eligible Conditions, it will choose either Model 1 or Model 2 as its organizational structure in the company’s charter;

 - Model 1A is a derivative of Model 1 and is only applicable when a joint stock company meets the Eligible Conditions. Therefore, this model is also considered to be independent of Model 2. The Company then has the right to choose either Model 1A or Model 2;

 - If a joint stock company meets the Eligible Conditions, the law still allows the Company to choose Model 1 with a Board of Controllers. In addition, there is no specific provision whereby the Company will apply Model 2 while meeting the Eligible Conditions to choose Model 1A; and

 - In the case a joint stock company meeting the Eligible Conditions, it is not necessary to set up a Board of Controllers or have independent members to implement the control of the Company's operation. In this case, the law allows the Company to optionally choose the control mechanism of either the Board of Controllers (if Model 1 is selected), independent members in the Board of Management (if Model 2 is selected) or self-control between the shareholders of the Company (if Model 1A is selected).

Therefore, we believe that this first viewpoint is consistent with the purpose of Article 134 of the 2014 Law on Enterprises, namely to allow joint stock companies to choose the organizational structure appropriate to the scope and circumstances as well as demand of the Company in the management of its operation.