In the United States and, with some adaptation, in most common law countries, a member of the board of directors has a three-fold fiduciary duty to shareholders. First, he must show good faith in completing his responsibilities. The duty of good faith is a general presumption that the parties to a contract will deal with each other honestly and fairly. Managers assume this contractual duty towards the company and, thus, towards shareholders. Second, he must show loyalty towards the company in making his decisions. This addresses the relationship of the manager to a transaction with the company. If he is in, or related to, a party entering into a transaction that affects the decisions of the board, or must be approved by the board, then he is violating the duty of loyalty. Finally, he must exercise the duty of due care. This means that a director must exercise good business judgment and use ordinary care and prudence in the operation of the business.
These three duties are considered sacrosanct and, so long as the directors reasonably perform these duties, they protect the directors from attack by shareholders. However, should these duties be violated, should the directors act in such a way that violates the duty of good faith, loyalty, or due care, then they can be held liable for their actions by the shareholders. Even then the courts tend to protect the directors from shareholders and require stringent standards of proof. It is difficult for shareholders to sue members of management in companies in the west. And as this principle, called the Business Judgment Rule, is derived from case-law precedent, it rarely exists in civil law countries.
Vietnam is an exception to this, though, and has developed, since the ideas first introduction in the 2005 Enterprise Law, a more sophisticated and permissive definition of exactly what duties management must violate before they may be held accountable by the shareholders. There are four duties imposed on management by the Law on Enterprises, and a violation of these duties in the exercise of responsibilities outlined by law, the charter of the company, or the general meeting of shareholders (GMS) will open that manager to liability.
The first duty is the duty of strict performance. This duty requires the manager to exercise his delegated powers and perform his obligations “strictly in accordance” with the law, the charter, or the resolutions of the GMS. It could be considered similar to a statutory liability in common law countries where any breach of the rule, no matter its intent, is considered a violation, think of statutory rape. This is a broad power granted to the shareholders and could be abused. So far it hasn’t been abused, as there have been very few cases brought before the courts, but it could be interpreted so as to hold management to such a level of obedience that any failure to perform according to set standards would be cause for liability. This grants shareholders an almost dictatorial power over managers and might best be revisited in the upcoming amendments scheduled for next year.
The second duty is the duty of honesty and prudence. In performing a manager’s powers or obligations, she must act “honestly and prudently” to their “best ability” to ensure the “maximum legitimate interests” of the company. This duty is three pronged: 1. Act honestly and prudently, 2. To their best ability, and 3. For the maximum legitimate interest of the company. These three prongs are all very subjective and based on common law legal tests. There is no provision under Vietnamese code to measure whether these standards have been met. And while precedent has been allowed as law, there has yet to be a case examining these standards. They remain ambiguous and ill-defined and more rightly belonging to a system where the courts can easily test the meanings of legislation.
The third duty is the duty of loyalty. This duty is owed to both the company and the shareholders. It requires the manager not to use information, know-how, business opportunities of the company, not to abuse his powers nor to use assets of the company for his own personal benefit or for the benefit of other organizations or individuals. This duty has long been a part of Vietnamese law and is fairly well understood by lawyers in the country. It is a simple test and objectively determinable.
The fourth duty is a branch of the common-law duty of loyalty. It could be referred to as the duty of notice. The manager is required to fully, accurately, and timely, inform the company which he manages of any interest he holds—or a related person to the manager holds—in any enterprise. Again, this duty is also easy to understand and apply. There should be no difficulty for managers in its performance.
This, then, is the Vietnamese Business Judgment Rule. It is wide ranging and ambiguous and offers little guidance, or security, to managers seeking to avoid liability for their actions. Let this be a warning to management of privately held companies, therefore, to beware of their duties lest they fall prey violations of this rule. This is made even more threatening by the simplicity with which shareholders can bring suit against management. The Law on Enterprise 2014 liberalizes this procedure far beyond what is allowed in common-law countries or even continental Europe.
The ease of bringing suit, and the broad liability potentially imposed, need to be limited by Vietnamese legislatures before a slew of cases are filed in the courts. Under the law, managers are treated with very little trust, unlike in the west where they are venerated, but in Vietnam, the preference swings the other way. Beware, therefore, and make sure to take out business insurance.