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  Policy & Strategy

Management of foreign-owned firms

Joint venture projects account for up to 30 per cent of the 5,000 projects licensed over the last 15 years under the Law on Foreign Investment in Viet Nam. Joint venture projects also account for 51 per cent of all registered capital. Meanwhile, wholly foreign-owned companies account for over 66 per cent of these projects and 36 per cent of all registered capital.

Although the Government has allowed joint venture and wholly foreign-owned companies to convert into joint stock companies, the country has yet to see a wholly foreign-owned joint stock company.

In practice, however, many joint venture companies have been converted into wholly foreign-owned companies in order to win a more flexible management structure, as a joint venture company works under pretty rigid regulations under the Law on Foreign Investment in Viet Nam. Many such conversions took place from 1998 to 2002. To date, over 150 joint venture companies with a total registered capital of over US$2 billion have been converted into wholly foreign-owned companies.

On the other hand, investment licenses of some joint venture companies have been withdrawn by the licensing authority and some others had to halt operations. Many others suffer from ineffective operations due to internal conflicts which have not been solved.

The cause of these problems comes from the fact that many of these joint venture companies are governed by Vietnamese regulations. Some are made to protect the interests of the Vietnamese party in a joint venture, since the Vietnamese party usually contributes much less capital. Here are some issues:

– The rule of unanimous approval can harm the joint venture’s operations and business. The number of issues that must be decided unanimously by a joint venture company have gradually been reduced with a series of amendments to the Law on Foreign Investment. However, Article 14 of the Law on Foreign Investment dated June 9, 2000 provides that "the most important issues relating to the organisation and operation of the joint venture, namely the appointment and/or dismissal of the General Director or the First Deputy General Director or an amendment to the enterprise’s charter shall be decided by the management board based on a unanimous decision.

Parties to the joint venture may agree to name other issues in the charter to be decided on the basis of unanimous decision." As a result, it is clear that the more detailed the charter is, the more clearly detailed the co-operation among the parties in the joint venture will be and the more issues exist which it can solve based on the unanimous approval rule.

However, according to this regulation, each member of the management board has the right to veto issues that require 100 per cent approval. This might cause the joint venture difficulties in finding solutions to its problems. It will weaken trust as well as co-operation between parties to the joint venture.

In addition, it is provided in Article 122 of the Decree 24/2000/ND-CP and Article 26 of Circular 12/2003/TT-CP that "Where consensus cannot be reached among management board members on the matters which must be approved on the principle of consensus, thus adversely affecting the enterprise’s activities, the management board may propose the licensing body to act as a conciliator.

In case of the failure to solve problems by the licensing body, such a dispute shall be referred to a relevent Vietnamese courts or Vietnamese/international arbitration for settlement." This takes a lot of time, does not produce desired outcomes, easily leads to the release of business secrets and the breakdown of the joint venture.

In conclusion, in the long-term, parties in joint venture enterprises will be allowed to decide issues based on the principle of majority approval instead of unanimous approval as it is done now.

Economic Review - (12/05/2004)

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