Quorums. I’m currently researching an instance in the Cherokee Nation, a Native-American tribe in the United States, where a question of the quorum requirement for the legislative branch created a constitutional crisis that put the entire Cherokee government into paralysis.
When I was in-house counsel in Lao, we made some major changes without the minority shareholders simply because we could, because the quorum requirement was stated in such a way as to allow for the majority shareholders to satisfy it, and to conduct the business of the company without the participation of those controlling less than 51% of the shares.
Quorum requirements can be a major boon for majority investors, as they obviously control sufficient voting rights to fulfill the default quorum requirements to convene a generam meeting of shareholders (GMS) in Vietnam. However, for plurality shareholders who do not hold a simple majority of shares, there are problems posed by the current Enterprise Law.
The law requires to that a GMS be convened with a quorum of at least 51% of the voting slips issued present at the time and place of the meeting. Voting slips are issued in the invitations to attend the GMS sent to shareholders based on their shareholding ratio. The slips are counted either through the physical presence of the shareholder, through proxy, electronic attendance, or through the mail.
If the quorum requirement is not met at the appointed time and place pursuant to the invitations sent to shareholders by the Board, then a second attempt may be made to fulfill a reduced quorum requirement of only 33% of the voting slips in attendance. This second attempt must occur within 30 days of the first attempt.
If this second attempt fails, then a third attempt may be made within 20 days of the second attempt. At this third attempt there is no requirement for voting slips in attendance to form a quorum.
Now, a quick analysis. The time limits for each of these attempts may be stipulated in the charter of the company. However, the percentage of voting slips in attendance may only be amended by charter for the first two attempts. There is no allowance for changing the quorum requirement at the third attempt. That means that regardless of how many people show up at the third try, the business of the company may be conducted.
This sudden death approach to quorum requirements in shareholder meetings is dangerous. It is a roundabout, and somewhat cumbersome, means of providing the minority shareholders with the ability to override the decisions of the majority shareholders or, as is often the case, of the foreign investor. At least in sectors that aren’t restricted to foreign ownership.
For investors with a 51% control of the enterprise, there should be no problem as they can provide a quorum at the first instance. However, if there is a plurality of ownership, and no one controls more than 33% of the shares of the company, even if there are other shareholder protections outlined in the shareholders agreement, then a decision on business may be taken by a minority shareholder on the third instance.
This creates additional danger for preference shareholders who do not have a preferential voting right. Especially as there is no separate voting mechanism for different classes of shares in Vietnam.
Perhaps the best way to protect against this is the voting preference share. This allows a plurality shareholder with less than 33% of the shares of the company to obtain more than 33% of the voting slips and thus fulfill quorum requirements by the second attempt at a GMS.
Another solution lies in the charter of the company. The quorum requirement for the second attempt at a GMS is fungible according to charter. For plurality shareholders who happen to have more shares than anyone else, but who still possess fewer than 33% of the total issued shares, an amendment of the charter at formation can be beneficial. In essence, they can insist that the quorum requirement for the second attempt be lowered to allow for a unilateral fulfillment. This solution requires some foresight on the part of the plurality investor to ensure that the quorum requirement is less than their ownership share but greater than the ownership share of any other single shareholder.
Even then, this solution requires finesse to meet demands of going public or other exit on the part of any of the shareholders as shareholding ratios are apt to change in these scenarios.
Ultimately, the goal is to circumvent or obviate the third attempt at convening a GMS. If the plurality shareholder can either change the quorum requirement or their own percentage of voting slips, then they can fulfill the requirement on either the first or second attempt, and avoid the third attempt where any shareholder can form a quorum and conduct business of the company without the plurality shareholder.