Investment Law · 24.09.2021

NAVIGATING INVESTMENT IN VIETNAM: LEGAL SERVICES FOR EFFECTIVE PROFIT SHARING AND ASSET RECOVERY

NAVIGATING INVESTMENT IN VIETNAM: LEGAL SERVICES FOR EFFECTIVE PROFIT SHARING AND ASSET RECOVERY Investing in a frontier market like Vietnam offers immense potential for growth, but it also presents complex challenges that require a sophisticated understanding of local regulation…

Lawyer UnilawReading time: 11 min

By Lawyer Luu Thi Hue – UniLaw LLC

NAVIGATING INVESTMENT IN VIETNAM: LEGAL SERVICES FOR EFFECTIVE PROFIT SHARING AND ASSET RECOVERY

Investing in a frontier market like Vietnam offers immense potential for growth, but it also presents complex challenges that require a sophisticated understanding of local regulations. For many international and domestic investors, the primary concern is not just entering the market but ensuring that the fruits of their labor—the profits—are shared fairly and that their underlying assets are protected. When disputes arise, whether due to a breakdown in a joint venture or a failure to comply with capital contribution schedules, the path to asset recovery can be daunting without expert guidance from a dedicated law firm in Vietnam. This analysis explores the legal intricacies of navigating investment in Vietnam, focusing on the rights of investors to profit sharing and the mechanisms for recovering assets through the lens of a landmark case resolved by the Vietnamese courts.

The Risk of Being “Ousted”: A Case Study of Disputed Capital and Denied Profits

To understand the practical application of Vietnam investment law, we must look at the real-world struggles of investors who find themselves marginalized within the very companies they helped build. Consider the case of a founding member, Mr. K, who participated in the establishment of a logistics and investment company, which we will call “Company D,” in early 2012. Mr. K initially contributed 550 million VND, granting him a 5.5% ownership stake, for which he was issued a formal certificate of capital contribution. As Company D sought to expand its infrastructure, including warehouses and production workshops, it announced a capital increase from 10 billion VND to 16 billion VND. However, the company imposed a restrictive condition: to contribute further capital to Company D, members were required to purchase shares in the parent company, “Company XNK,” at a specific rate.

Mr. K complied with these requirements, spending an additional 487.5 million VND to purchase 97,500 shares from other shareholders of the parent company, strictly to fulfill the “entry requirement” for further investment in Company D. His total investment reached over 1 billion VND. Despite his commitment and the clear trail of transactions, when Company D registered its second amended business license in late 2014, it intentionally excluded Mr. K’s name from the list of members. The company claimed that Mr. K had voluntarily agreed to divest during a previous meeting, yet Mr. K had never signed any such agreement and was not even present at the meeting in question. Effectively, his ownership rights were erased, his capital was withheld, and he was denied his share of the company’s profits and development funds.

Feeling his rights as an owner and investor were being trampled, Mr. K sought legal service in Vietnam to reclaim what was rightfully his. He sued Company D and the parent company, demanding the return of his initial capital, the reimbursement of the costs incurred to buy the parent company’s shares, and his rightful share of the accrued profits and the “Investment and Development Fund”. This case highlights a critical vulnerability: even with a clear Vietnam investment law framework, investors can be vulnerable to internal maneuvers that attempt to “squeeze them out” of their rightful returns. This is where the expertise of a seasoned Vietnam investment lawyer becomes indispensable.

Analyzing the Legal Protections: Profit Rights and the Sanctity of Ownership

The resolution of Mr. K’s dispute provides a roadmap for how the Vietnamese legal system protects the financial interests of investors. The court’s analysis centered on several key pillars of the Law on Enterprises and the Civil Code, which form the bedrock of Vietnam investment law. For any investor facing similar issues, understanding these specific articles is the first step toward effective asset recovery.

First and foremost is the fundamental right to share in the success of the enterprise. Under Article 41 of the Law on Enterprises 2005 (which was applicable during the period of this dispute), members of a limited liability company have the explicit right to “be distributed with profits in proportion to their capital contribution” once the company has fulfilled its tax and other financial obligations. In Mr. K’s case, Company D had admitted to having undistributed profits after tax of over 2.1 billion VND by mid-2014. The court ruled that as long as Mr. K remained a member, he was legally entitled to his percentage of those profits, and the company’s attempt to let a parent company decide how those profits were distributed was “inappropriate and unacceptable”. This means that as an investor, your right to dividends is a statutory right that cannot be bypassed by internal board resolutions or parent company mandates.

Furthermore, the court addressed the “Investment and Development Fund”. Companies often retain a portion of their profits to reinvest in the business, buy new machinery, or expand facilities. The court clarified that these funds are the “common property of the contributing members”. When Company D tried to remove Mr. K from the member list without his consent or a valid transfer of capital, they were effectively seizing his share of that common property. Because Mr. K did not voluntarily withdraw or sell his stake, the court determined that the company must pay him his proportional share of the fund. For you, this means that even the profits “retained” by the company for growth still represent value that belongs to you as a shareholder.

The most egregious violation in this case was the illegal removal of Mr. K’s name from the official registry. The Vietnam investment law environment requires transparency and strict adherence to procedures for changing membership. The court applied Articles 166, 169, and 170 of the Civil Code, which protect the rights of owners to reclaim their property and seek compensation for damages caused by the infringement of their ownership rights. The company’s act of re-registering its license without Mr. K was deemed an “illegal appropriation of property rights”. If a company you have invested in attempts to alter its membership structure to exclude you, a Vietnam investment lawyer can help you use these Civil Code protections to force the company to return your assets or pay their fair market value.

Finally, the court addressed the “incidental” losses. Mr. K was forced to buy shares in the parent company just to be allowed to invest more in his own company—a common “soft” coercion tactic in some business circles. The court ruled that since this purchase was a mandatory condition set by Company D, and since Company D subsequently blocked him from exercising his rights, the company must compensate him for the 487.5 million VND he spent on those shares. This underscores a vital point for investors: if you are forced into additional financial commitments to protect your primary investment, and those commitments are then rendered useless by the other party’s bad faith, the law provides a path for recovering those “secondary” losses as well.

Deepening the Conflict: Share Dilution and the Forgery Trap

While the previous case focused on the total exclusion of a member, another common tactic used to undermine navigating investment in Vietnam is the “dilution” of ownership through illegal capital increases. This is often achieved through the manipulation of corporate documents. In a significant dispute resolved recently, Judgment No. 35/2024/KDTM-PT involving “Company V,” we see how a majority shareholder and Chairman, Mr. N, attempted to systematically reduce the influence and financial return of a minority member, Ms. H.

Ms. H was a legitimate member of Company V, owning approximately 19% of the charter capital. However, without her knowledge or presence at any formal meeting, Mr. N registered a capital increase that effectively slashed her ownership percentage to just 10%. When the case reached the court, the defense admitted to a shocking detail: the Chairman had hired a “legal service” specifically to forge Ms. H’s signature on the meeting minutes to facilitate the registration of the new business license. This highlights a dark side of the legal service in Vietnam market that investors must beware of—unscrupulous agents who facilitate corporate fraud. For the investor, this meant years of being denied her rightful “effective profit sharing” as the company refused to distribute dividends based on her true ownership stake.

The court’s reaction to this was firm. Under the Vietnam investment law framework, specifically Article 50 of the Law on Enterprises 2020 (and its predecessor in 2014), members are strictly prohibited from “withdrawing contributed capital from the company in any form” except under specific legal conditions. Conversely, the law also protects members from having their capital rights unilaterally altered. The court applied Article 16 of the Law on Enterprises, which prohibits “preventing owners, members, or shareholders from exercising their rights”. Because the signature was forged and no actual meeting took place, the court declared the capital increase invalid and ordered the restoration of Ms. H’s original ownership percentage. This serves as a vital lesson: if your stake is being diluted without your clear, signed consent, a Vietnam investment lawyer can help you challenge the validity of those corporate changes and secure your asset recovery.

The Bridge Between Statutory Rights and Judicial Reality

When we compare “what the law says” with “how the court acts,” we find that while the Vietnam investment law is comprehensive, the burden of proof is heavily placed on the investor. For example, Article 50 of the Law on Enterprises 2020 explicitly grants members the right to “be distributed with profits in proportion to their capital contribution”. On paper, this is a clear-cut right. However, in reality, as seen in the disputes involving Company V and Company D, companies often hide their actual “after-tax profits” or reinvest them into “Development Funds” to avoid payouts.

The courts generally rule that as long as a member maintains their legal status and the company has fulfilled its tax obligations under Article 69 of the Law on Enterprises, the profit distribution must occur. However, “effective profit sharing” is often hindered by management’s refusal to provide access to financial records. This is where Article 16 of the Law on Enterprises becomes a “shield” for the investor, as the court uses it to penalize managers who obstruct a member’s right to information. In practice, the court will not only look at the business license but also at the “Member Register” (Sổ đăng ký thành viên) and actual “Capital Contribution Certificates” (Giấy chứng nhận phần vốn góp) to verify an investor’s standing. If these internal documents are missing or incorrect, the law (Article 52 of the Law on Enterprises) mandates that the company must issue them and maintain them correctly, or face administrative penalties.

Furthermore, in asset recovery scenarios where a company has been illegally closed or its assets “squeezed out” by a manager (as seen in the case of Mr. Moon Jung J), the court applies the principle of “personal liability”. Under Article 71 of the Law on Enterprises, managers who fail to act honestly or in the best interest of the company are personally liable for damages. While the law provides this pathway, the practical difficulty lies in tracing the dissipated assets. This is why investors are increasingly seeking legal service in Vietnam that includes “interim relief” measures—such as freezing bank accounts or prohibiting the transfer of land rights—at the very start of a dispute to ensure there is actually something left to recover once the final judgment is issued.

Strategic Pathways for Asset Recovery and Profit Protection

For international investors, navigating investment in Vietnam requires a proactive rather than reactive legal strategy. Based on the judicial precedents and the evolving Vietnam investment law, we recommend three key pillars for protecting your interests:

Vigilant Monitoring of Corporate Registry: As shown in the “forgery trap” case, a company can change its ownership structure behind your back. A law firm in Vietnam can perform periodic “health checks” on your company’s filing with the Department of Planning and Investment (DPI) to ensure no unauthorized amendments have been made to your charter or list of members.
Formalizing Profit Distribution Policies: Do not rely solely on the general provisions of the law. Your company’s Charter (Điều lệ) should have specific, non-ambiguous clauses on how and when profits are distributed. If management refuses to hold a meeting to discuss dividends, you should immediately exercise your right under Article 115 (for JSCs) or Article 50 (for LLCs) to demand a meeting or even petition the court to cancel invalid board resolutions.
Securing Physical and Digital Evidence: In cases of asset recovery, the court relies heavily on the “original” Member Register and “signed” contribution certificates. Ensure these are in your possession or stored in a secure, independent location. If the company management “loses” these documents, it becomes significantly harder—though not impossible—to prove your rights in court.

The Vietnamese legal landscape is becoming increasingly protective of investor rights, but it remains a “paper-driven” system where the quality of your documentation determines the success of your asset recovery. Whether you are facing a subtle dilution of your shares or a blatant seizure of your capital, the intervention of a specialized vietnam investment lawyer is the most effective way to turn statutory rights into tangible financial returns.

At Unilaw, we specialize in the “heavy lifting” of corporate disputes. From investigating forgeries and freezing assets to enforcing profit-sharing agreements, our team provides the comprehensive legal service in Vietnam that modern investors need to thrive. Contact us today to ensure your investment remains secure and your profits remain yours.