This article provides a high-level overview of the nature of shares and different classes of shares and is meant for first - time entrepreneurs of Vietnam startups. Note that this is neither a comprehensive compilation of all relevant information on this topic nor a substitute for professional advice.
In a nutshell, shares represent ownership in a company. When a company is created, the founders of the company must determine who owns the company. Often the founders also become the first shareholders of the company. The first and most important, step in establishing a company with Vietnam is to determine who owns how many shares. This is usually expressed as a percentage of the total number of shares and it is this percentage that is very important to each founder.
Nature of Shares.
The most popular definition of a company’s share was originally voiced by the honourable judge in the English High Court of Borland’s Trustee v Steel Brothers and Co Ltd: A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se in accordance with the Companies Act.
Essentially, the definition characterises shares as a bundle of rights and obligations that are given to the shareholder in return for investing in the company. The shareholder does not have a legal or beneficial interest in the company’s property, since a fundamental principle of company law is that the company is a separate legal entity. Instead, the shareholders, by virtue of their ownership of the shares, are entitled to participate according to the terms of the company’s constitutional documents as long as the company is a going concern and they are entitled to participate in the assets of the company if and when the company winds up.
Shareholders can be issued with shares at any point, whether at the time of incorporation or subsequently as the company grows and their ownership of the shares is evinced by share certificates that are issued to them.
Shares - being a bundle of rights and obligations, may confer varying rights to different shareholders. In general, most companies would issue only one type of shares, known as ordinary shares. That said - the Vietnam company law is flexible and allows for the creation of different types of shares, so that the respective shareholders are given varying rights to the company. The main rights that attach to shares are:
- To attend general meetings and vote : The right to vote is one of the shareholder’s fundamental rights; and normally, ordinary shares each carry one vote at general meetings. However, there may be shares that carry non-voting rights, additional voting rights or restricted voting rights.
- To share in the company’s profits: The company’s profits are distributed by paying a certain amount on each share, known as a dividend. Dividends are paid if the company has made profits and to the extent that it decides to distribute them and in the absence of any provision to the contrary, dividends are paid in proportion to the shares held by each shareholder. It is becoming increasingly common for a company’s Articles of Association to provide that the company’s shares are divided into different classes and for the directors to be able to vary the dividends allocated to these classes.
- To a final distribution on winding up: If the company is wound up, the shareholders are entitled to any remaining assets after all the company’s debts and costs are cleared. Generally, residual assets are divided among the members in proportion to their respective interests in the company’s share capital. If the shares are divided into different classes, the company’s Articles may provide for some shares to be given priority in the distribution of the residual assets.
Classes of Shares.
Although share classes are more common in public limited companies, it is not uncommon for private limited companies to issue shares of different classes, especially as it flourishes, in order to accommodate the needs of various stakeholders. For instance, a private limited company may wish to vary the dividends payable to the different shareholders, to create non-voting shares for family members or redeemable preference shares for employees.
Since the law in Vietnam is flexible in the creation of share classes, there are no special restrictions on issuing shares with different rights. Share classes can be referred to by any name - such as preference shares with no voting rights, management shares with extra voting rights, alphabet shares such as A-shares and B-shares. These share classes do not have any legal definition, so their associated rights would need to be defined in the Constitution, or in the Resolution that creates the particular class of shares.
Some typical classes of shares and their attached rights - are:
- Ordinary shares: Most companies have just ordinary shares. These shares entitle the holder to 1 vote per share, participate equally in dividends and a share in the surplus capital if the company is wound-up.
- Non-voting shares: These shares carry no rights to attend general meetings or vote. Preference shares are often non-voting. Non-voting shares are commonly issued to the company’s employees and the main shareholders’ family members.
- Redeemable shares: These shares are issued on terms that the company will or may, buy them back at some future date. These shares give the holders a right to repayment of their capital either at a fixed date or at the option of the company.
- Preference shares: These shares have preferential rights over ordinary shares, usually in respect of dividends. These shares may also be given priority on return of capital on winding up - but not entitled to share in surplus capital. Often, preference shares are non-voting, and can be redeemable.
- Deferred ordinary shares: These are shares on which no dividend is paid until other classes have received a minimum payment.
- Management shares: These are shares that carry extra voting rights, in order to enable certain shareholders to retain control of the company. Such shares are often used to allow the company’s original founders to retain control after additional shares have been issued to outside investors.
- Alphabet shares: Some companies may wish to create different classes of ordinary shares (commonly known as Class A, Class B, Class C and so forth) in order to create small differences between the shareholders - or - to divide certain rights between shareholders.
Or we can refer to setting up a non-profit entity in vietnam part 2
Although most small startups tend to give its shareholders an equal bundle of rights per share, there is great freedom and flexibility for the founders and investors to be bestowed with varying degrees of management control and varying degrees of entitlement to the company’s profits or capital. Investment-seeking companies and even startups that are not raising outside money at the outset may find it worthwhile to establish an equity framework that would accommodate investment at a later time and that communicates a degree of sophistication on the part of the founders.
Vietnam law continues to inspire a welcoming jurisdiction for the establishment and growth of businesses, by offering this flexibility to capture the desires of different types of investors - who may or may not need greater control in the management of the company - or - who may or may not need the assurance of a fixed return on their investment in the company. Anyone who contemplates the creation of multiple share classes should consider the motive for the different classes and fully evaluate the rights afforded to each class.