In recent times, numerous regulations hindering foreign investors' participation in the Vietnamese market have impacted production and business operations, leading to investors seeking transaction structures that ensure maximum control of the target enterprise while circumventing the relevant regulations for foreign investors.
On the other hand, some Vietnamese business owners also desire to create their own playing field and aspire to be the ultimate authority within the enterprises established by themselves and their contributing shareholders. In this article, IVLF Advisors LLC focuses on exploring solutions that can address the aspirations of foreign investors or business owners (collectively referred to as "Controlling Parties") to achieve maximum control in non-public joint-stock companies (referred to as "Target Companies”).
To achieve maximum control in the Target Company with a minority ownership of less than 10% or a higher percentage that does not reach a veto threshold, the Controlling Parties can implement the following strategies:
- Option 1: Structure the share capital into two different classes of shares upon establishment of the Target Company.
For this option, upon establishment, the Target Company will have two different classes of shares, including common shares and preferred shares (comprising dividend preferred shares or redeemable preferred shares). According to the Law on Enterprises 2020, dividend preferred shares or redeemable preferred shares do not grant the Controlling Parties voting rights or the right to participate in General Meetings of Shareholders, or to appoint members of the Board of Directors or the Supervisory Board. However, with respect to common shares or voting preferred shares, the Law on Enterprises 2020 allows holders of these shares to have full voting rights or more voting rights within the target company.
Depending on the desired voting percentage of the Controlling Parties (which could be 50%, 65%, 75%, or higher) in the Target Company, the Controlling Parties will structure the desired number of common shares to achieve the aforementioned percentage, and the remaining shares will be structured as preferred shares, with the remaining shareholders holding fewer common shares. In return, they will hold more preferred shares, and the share ownership percentage of the remaining shareholders will be significantly higher than that of the Controlling Parties
Nevertheless, the structuring of common shares must comply with the statutory requirement that the founding shareholders jointly register to purchase at least 20% of the total common shares authorized for sale when registering the establishment of the enterprise.
Thus, with the first option, after structuring and completing the establishment of the Target Company, the Controlling Parties, as minority shareholders, can achieve maximum control in the Target Company and decide on all matters within the Target Company without interference from the remaining shareholders. In return, the economic benefits related to annual dividend distribution will be less than those of the remaining shareholders, as the remaining shareholders hold a larger number of dividend preferred shares than the Controlling Parties and receive more dividends than the Controlling Parties.
For this option, the Controlling Parties can, either themselves or with an experienced financial team, create a suitable capitalization table (Cap Table) for their desired share ownership ratio before establishing the Target Company, ensuring maximum control in the Target Company after its establishment.
In 2024, IVLF Advisors LLC also assisted and advised several clients in implementing similar capital structures, while providing Cap Tables for clients to review and execute according to IVLF Advisors LLC's recommendations. As a result, one client only owned approximately 10% of the joint-stock company's shares but held 100% of the voting rights, and another client owned 35% of the shares but held 75% of the voting rights in the joint-stock company.
2. Option 2: Offer dividend preferred shares or redeemable preferred shares to investors who are not interested in the management and operation of the Target Company.
With this option, there are financial investors who will only be interested in providing financial support to the Target Company without concerning themselves with the operation, management, or control of the Target Company. According to this strategy, they are only interested in receiving as much annual dividend as possible when they see that the Target Company has good profitability potential.
To implement this option, the Controlling Parties need to understand the intentions and desires of the investors who are investing capital in the Target Company. If they agree to inject a large amount of capital into the Target Company, leading to almost absolute dilution of the Target Company's shares, resulting in the Controlling Parties' share ownership percentage being reduced to a minimum level (below 10% of shares or higher but not reaching a veto threshold), then the Controlling Parties should consider offering dividend preferred shares or redeemable shares to that investor. This will ensure that although the Controlling Parties' ownership percentage is diluted, they still retain maximum control in the Target Company. This entirely depends on the Controlling Parties' strategy and intelligent negotiation with the investor before agreeing to receive investment in the Target Company from that investor.
Once the investor agrees to hold preferred shares in the Target Company, that is the moment when the negotiation results have exceeded expectations, and the remaining task for the Target Company is to receive the capital and register the investor as a shareholder of the Target Company. Depending on the negotiation and bargaining process between the parties, the Controlling Parties should pay attention to the provisions regarding the transfer restriction period or the timing of converting preferred shares into common shares, or the economic benefits related to dividend distribution for investors, to ensure that the Controlling Parties maintain control in the Target Company for as long as possible.
In summary, regardless of which of the aforementioned options is implemented, although the Controlling Parties still maintain maximum control in the Target Company, there will be financial pressure on the Target Company as the annual dividends payable are mandatory obligations to investors or remaining shareholders, regardless of whether the company is profitable or not. Dividends distributed from these preferred shares are no different from a looming debt that must be paid to the remaining shareholders and cause many consequences for the Target Company if the business operations are not effective and do not have better growth development each year.
The above are some insights on structuring share capital to help business owners or investors consider when establishing a company in the form of a joint-stock company, or injecting investment capital, or when structuring capital for certain investment fundraising goals, or implementing a VIE structure for IPO or overseas listing purposes, to help the main business lines of the Target Company not be affected by various factors. If you need further discussion or require related consulting services, please contact me via email nghia@ivlf-advisors.com or visit the website: www.ivlf-advisors.com.
