Manager liability. It’s a major issue for boards of directors and executives in companies throughout the globe. Insurance companies offer a specific product to protect against costs for such liability. In many jurisdictions, the legislatures and courts have created major obstacles to finding management liable and find that there is a preference to defend management against attacks by shareholders and other stakeholders. The rich–and often that includes management of companies–fund politicians campaigns after all.
But in Vietnam the law is sneaky. There are liabilities that many may not realize and that can create a major hazard for management. The risks here are real, and the law allows for management to be held liable for even minor infractions. I seriously doubt that D&O insurance providers in the country even fully realize the legal risks.
In general, managers in Vietnam owe a series of duties to the company in carrying out their responsibilities. Loyalty, honesty, prudence. For most of these duties there is little different from common law countries where the law governing managers is well developed and in favor of management. There is one duty, however, that creates a whopping hole in the protections offered to management.
And that is, as I like to call it, the undefined duty of strict compliance.
Managers have, according to the Law on Enterprises, the following duty:
To exercise his or her delegated powers and perform his or her delegated obligations strictly in accordance with this Law, in relevant laws, the charter of the company, and the resolutions of the General Meeting of Shareholders.
Why is this a problem? Shouldn’t management be held liable for following the strictures of the law, the governing documents of the company, and the guidance of the shareholders? Of course, they should. The problem comes in the word “strictly” which I italicized in the above. Strictly, in Vietnamese law, is not defined.
In Vietnamese, the word here is “theo dung”. To follow correctly. There is no definition of this phrase in the Law on Enterprises. Not in the Civil Law. Not in any clarifying legislation or administrative decrees. The law simply says that management has the duty to “follow correctly” the rules. Without definition, this seeming strict liability could be devastating. But before I get into the implications, I want to cite one more clause from the Law on Enterprises.
According to the next article, in defining for what violations shareholders can sue management on their own, on on the company’s, behalf, if the members of management:
(b) Fail to implement correctly their assigned rights and obligations; or fail to implement or fail to implement completely and promptly resolutions of the Board of Management;
(c) Implement their assigned rights and obligations contrary to the provisions of law, the charter of the company or resolutions of the General Meeting of Shareholders;
These allowances are in addition to a violation of the above quoted duty of strict compliance and expand the liability of management immensely. In the first provision, the word “correctly” is translated from “thuc hien dung” in Vietnamese, or to accomplish correctly. Again, this is a concept which is not defined by law. And “contrary” is translated from the word “trai” which is correctly translated as contrary. But is there a definition of this term in the law? No, there is not.
Strictly, correctly, and contrary. These terms might seem innocuous at first blush, but they create enormous uncertainty and potential liability for management of companies in Vietnam.
Without legislative definition, as Vietnam is more of a civil than common law country, the interpretation of these terms is left to the courts. And the courts can interpret these terms however they want. The guidelines offered for statutory construction in Vietnam are limited and illusory.
This means that a court, can impose liability on management, for the slightest infraction. A failure to “strictly” comply with the law, the charter or the general meeting of shareholders could signal a hefty court judgment leveled against the infringing management. This could impose a strict liability standard on management that allows for no wiggle room and no business judgment whatsoever.
“Correctly” and “contrary” create similar hazards. Undefined by law, the courts are allowed to interpret them as they may. “Contrary” is particularly dangerous as a decision may be in actual compliance though it may be accomplished in a way different from that expected by the shareholders.
For example, consider a shareholder instruction to hire a provider that is the “largest” in Vietnam. The general meeting of shareholders gives no guidance as to how to determine largest. The general manager decides to follow one set of criteria in making his decision. A shareholder disagrees with his decision and thinks that there should have been another method used in determining the “largest” provider. The shareholder may view the decision of the manager “contrary” to the directions of the general meeting and sue the manager. While this may be disposed of by the courts, the costs of litigation mount and the premiums for D&O insurance rise, creating a situation in which it becomes prohibitive to serve as a manager in Vietnam.
Fortunately–and this is a bright spot for management in the country–the courts have yet to truly use this discretion to hold management liable. We can only find one case in which a shareholder sued management and the grounds did not test these particular questions. The hope is that the foreignness of shareholder derivative suits prevents a large scale attack on management by ownership.
But the risk remains. A savvy shareholder who is disgruntles with management could easily bring suit for any number of reasons. It is a danger that can accrue to management and create vast liabilities. While likely not to happen, the threat is real, and management should be wary in entering into contracts to perform leadership of a company in Vietnam. The law is murky, and the possibility exists for large scale evisceration of management’s discretion.
Be warned, therefore, and tread carefully.