Can the representative of the parent company’s capital contribution become an independent member of the Board of Directors at the subsidiary?

Can the representative of the parent company’s capital contribution become an independent member of the Board of Directors at the subsidiary?

Pursuant to Clause 1, Article 137 of the Law on Enterprises 2020, regulations on the organizational and management structure of joint stock companies are as follows:

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Organizational structure of joint stock company management
1. Unless otherwise prescribed by securities laws, a joint stock company has the right to choose a management organization and operate according to one of the following two models:
a) General Meeting of Shareholders, Board of Directors, Supervisory Board and Director or General Director. In cases where a joint stock company has less than 11 shareholders and institutional shareholders own less than 50% of the company’s total shares, a Supervisory Board is not required;
b) General Meeting of Shareholders, Board of Directors and Director or General Director. In this case, at least 20% of the members of the Board of Directors must be independent members and there must be an Audit Committee under the Board of Directors. The organizational structure, functions, and tasks of the Audit Committee are specified in the Company Charter or the operating regulations of the Audit Committee issued by the Board of Directors.
….

In addition, according to Clause 2, Article 155 of the Law on Enterprises 2020, regulations on organizational structure, standards and conditions for being a member of the Board of Directors are specifically as follows:

Organizational structure, standards and conditions for membership of the Board of Directors
….
2. Unless otherwise prescribed by securities laws, independent members of the Board of Directors as prescribed in Point b, Clause 1, Article 137 of this Law must have the following standards and conditions:
a) Not a person working for the company, parent company or subsidiary of the company; not be a person who has worked for the company, parent company or subsidiary of the company for at least 3 consecutive years;
b) Not a person receiving salary or remuneration from the company, except for the allowances that members of the Board of Directors are entitled to according to regulations;
c) Not a person whose spouse, biological father, adoptive father, biological mother, adoptive mother, biological child, adopted child, biological brother, biological sister, or younger sibling is a major shareholder of the company; is a manager of the company or a subsidiary of the company;
d) Not a person who directly or indirectly owns at least 01% of the total voting shares of the company;
dd) Not a person who has served as a member of the Board of Directors or Supervisory Board of the company for at least 05 consecutive years, except in cases of consecutive appointment for 02 terms period.
……

Through the above regulations, in case the parent company and subsidiary organize the management of a joint stock company according to the model: General Meeting of Shareholders, Board of Directors and Director or General Director, it must ensure that at least 20% of the members of the Board of Directors must be independent members and have an Audit Committee under the Board of Directors.

Accordingly, the representative of the parent company’s capital contribution is a person who is working for the parent company so will not be an independent member of the Board of Directors at the subsidiary.

What company is considered a parent company?

Pursuant to Article 195 of the Law on Enterprises 2020 Regulations on parent companies and subsidiaries are as follows:

Parent company, subsidiaries
1. A company is considered a parent company of another company if it falls into one of the following cases:
a) Owns more than 50% of the charter capital or total common shares of that company;
b) Has the right to directly or indirectly decide to appoint a majority or all members of the Board of Directors, Director or General Director of the company that;
c) Has the right to decide on amendments and supplements to the Charter of that company.

Thus, a company is considered a parent company if it falls into one of the following cases:

– Own more than 50% of the charter capital or total common shares of that company;

– Have the right to directly or indirectly decide to appoint a majority or all members of the Board of Directors, Director or General Director of that company.

– Has the right to decide on amendments and supplements to the Charter of that company.

What rights and obligations does the parent company have towards its subsidiaries?

According to regulations Article 196 of the Law on Enterprises 2020, the parent company has the following rights and obligations for its subsidiaries:

– Depending on the legal type of the subsidiary, the parent company exercises its rights and obligations as a member, owner or shareholder in the relationship with the subsidiary according to the corresponding provisions of the Law on Enterprises 2020 and other relevant laws.

– Contracts, transactions and other relationships between the parent company and its subsidiaries must be established and implemented independently and equally according to the conditions applicable to independent legal entities.

– In case the parent company intervenes beyond the authority of the owner, member or shareholder and forces the subsidiary to carry out business activities contrary to normal business practices or to carry out unprofitable activities without reasonable compensation in the relevant financial year, causing damage to the subsidiary, the parent company must be responsible for that damage.

– The parent company manager responsible for intervening in forcing the subsidiary to carry out business activities according to the provisions of Clause 3, Article 196 of the Law on Enterprises 2020 must jointly bear responsibility for that damage with the parent company.

– In case the parent company does not compensate the subsidiary, creditors or members or shareholders who own at least 01% of the subsidiary’s charter capital have the right, on their own behalf or on behalf of the subsidiary, to request the parent company to compensate the subsidiary for damages.

– In case a business activity contrary to normal business practices carried out by a subsidiary brings benefits to another subsidiary of the same parent company, the beneficial subsidiary must jointly work with the parent company to refund the benefits to the damaged subsidiary.