Vietnam needs professional investment environment

(ĐTTCO) - The fact that the strategic foreign shareholders at Coteccons Construction Joint Stock Company (CTD) announced an extraordinary shareholders meeting to re-elect a new Board of Directors due to a conflict of interests, is raising questions about Corporate Governance (CG) and professionalism in the investment environment in Vietnam today.

Illustrative photo.

Illustrative photo.

Currently, many investors are paying attention to foreign strategic shareholders of Kustocem Pte. Ltd (Kusto), which holds a 17.55% stake in CTD.

Respect for strategic partners

When it comes to the fact that the strategic foreign shareholders actively requested such an anomalous shareholders meeting, the first issue to discuss is how Vietnamese enterprises must respect their strategic partners.

When looking for a strategic partner to cooperate with, Vietnamese enterprises only think about attracting investment capital, however the issues of CG are larger. When choosing partners, the enterprise must be responsible for bringing certain benefits to them and enterprises have to give up thinking that a partner is only the one who buys enterprise shares.

Because of this concern, investment funds and financial institutions often have binding contracts on terms of commitments and restrictive provisions to manage risks for their investment activities. The case of Ba Huan Enterprise is a typical example which clearly shows weaknesses in the process of seeking partners and understanding partners.

CTD has long chosen strategic partners to execute their projects, and not just for financial purposes. Usually, industry partners cannot sit together, because "one forest cannot have two tigers". Therefore, in this case, the enterprise must understand that if it does not bring adequate benefits to its strategic partners, they will one day acquire it.

Moreover, CTD has non-canonical issues with its subsidiary Ricons, and its strategic partner Kusto has focused on this issue. The group of large shareholders has pointed out that there is a problem in F2 contracts, meaning that if CTD has a large contract then there are many sub-contracts and subcontractors, but who those contractors are is not transparent, and there is no clear pricing.

In fact, Ricons is only one case, and there are many partners around because the main contract has many subcontractors. CTD has made partners unhappy with their benefits. Moreover, Ricons is run by the founding shareholders of CTD. Major shareholders are not happy with Ricons on their financial statements but they have no evidence.

Therefore, they use the rights of major shareholders to audit the contents of other items, not financial statements. Mr. Nguyen Sy Cong, General Director of CTD, did not explain properly, and said that the financial statements have been audited by well-known companies in the Big 4 group.

The story doing the rounds at Eximbank (EIB) recently is similar to CTD at this point. Strategic shareholder Sumitomo Mitsui Banking Corporation (SMBC) submitted a written request to the Board of Directors to convene a separate extraordinary meeting in order to dismiss Mr. Yasuhiro Saitoh and reduce the size of the Board of Directors.

EIB chooses a partner for the purpose of supporting those areas that EIB is weak at. However, up to now, EIB shareholders have split apart and are struggling to compete for interests in EIB, leading to conflicts which are affecting their interests. Unlike CTD, EIB shareholder SMBC is unable to acquire the bank because of Vietnamese Law on Credit Institutions, and they also have offices in Vietnam so they cannot take that step.

Lack of professionalism

At CTD, Mr. Nguyen Sy Cong's explanation counters the opinion of Kusto and shows the weaknesses in professional relations (IR). His explanation contains too many emotions and shows the intention to entice employees to agree with him. In this case, the way he should explain and respond to Kusto's allegations should have been to consider what he had done over the past years, either exceeding the plan or completing the plan, or if after having completed the business plan by what reason can he justify not handing in his resignation.

Removing the General Director is the right of the shareholders, but the General Director himself must communicate so that small shareholders can support him and the investment funds must support him too. Such communication also helps the company to establish credibility with its creditors. For CTD business, creditors are very important. If the creditors do not trust CTD, and when one creditor sends a debt collection letter, the other creditors will be afraid of lending, and CTD projects will not be carried out. In this case, the founding shareholders will want to regain rights without knowing about IR or communication methods.

According to the Enterprise Law of 2014, a shareholder or a group of shareholders with a term of holding shares for six consecutive months has the right to convene an extraordinary shareholders meeting. First, a large group of shareholders send a request to convene the meeting for the BOD to review. After six months, if the content is not reviewed by the Board of Directors, they have the right to convene a General Meeting of Shareholders. Thus, Kusto has followed these rules.

Seven months ago, Kusto requested convening an extraordinary General Meeting of Shareholders which the Board of Directors vetoed and did not approve because the Board had advantage in terms of people. Kusto remained silent but after more than six months proposed to convene an extraordinary shareholders meeting. As stated, they are entitled to convene an AGM, and Kusto sent a dispatch to the Vietnam Securities Depository (VDS) and now VDS must send the list for them to organize the AGM.

Things may not go to this step if the current Board of Directors know the law. By law, it is only after six months that a major shareholder has the right to convene an extraordinary General Meeting of Shareholders, during which time the Board of Directors should hold an annual General Meeting of Shareholders. Usually, the extraordinary General Meeting of Shareholders aims to do something, such as disqualifying the Board of Directors. This content is hard to find success, but when the meeting is extraordinary, they have the right to dismiss the chairman and then the current Board will lose.

At an extraordinary General Meeting of Shareholders, one only needs 80% shareholders to attend, and any group of shareholders holding 40% or 41% if in majority can take all decisions and vote for someone or depose someone easily. This is different from an annual meeting, when the Board of Directors can cancel all status quo because a large group of shareholders cancel the status of the Board without any reason, and the Board of Directors also proposes to cancel all members of the Board of Directors to vote again.

Another point is that CTD has grown very strong, and now has huge financial potential but lacks a long-term advisory legal team. Any well-established business enterprise must have a legal team, so when such cases occur, the enterprise can know how to handle and how to prevent them from being acquired. The budget for this issue is not large compared to what may happen. Volatility caused CTD's stock price to go down, and market capitalization plummeted.

More significantly, from the reaction of Mr. Nguyen Sy Cong, the small shareholders who read the explanation were not satisfied, instead, they found these two groups of shareholders in a long conflict, and thought the best way was to sell their shares and withdraw from the company, instead of asking the founding shareholder to protect them.

Understanding rules

The incidents that happened in the past can be considered as lessons for Vietnamese enterprises in the present as well as in the future. The issue of Corporate Governance is part of the management of a company. The shareholders structure and the interests of shareholders must be in the charters. The CTD's general manager requested to amend the charters, but he did not understand that the company's charter was set up so that no small group of shareholders could edit it freely. In the company's charter, the responsibility of the Board of Directors is immutable.

Therefore, the first issue to consider is that the management of the company must be in accordance with the rules, the operating regulations, the functions and duties of some positions, the rights of some strategic shareholders. If the strategic shareholder gives capital but does not have the right over human resources, it is also required to reach an agreement. When equitizing, finding partners, Vietnamese enterprises only focus on money and price, but forget about other agreements. This is an issue that needs to be unanimously made right from the beginning, and must be done so seriously.

Shareholders who sign the contract must also be responsible, because when an enterprise sells shares to a strategic partner, it is not simply the General Director who signs the agreement, but there are agreements that shareholders have to comply with later. Through this story of CTD, we can draw good lessons in finding partners, especially in these tough times, so that the market becomes more professional in its approach of businesses.

Dr. Le Dat Chi Department of Finance, Ho Chi Minh City University of Economics

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