Preventing Disputes in Share Transfer Agreements with Foreign Shareholders in Vietnam

When a company involves foreign shareholders in the process of buying or transferring shares, disputes may easily arise without careful preparation. Below is a summary of the most up-to-date regulations in Vietnam and practical measures to help mitigate risks in this process.

1. Key Legal Points to Understand Before Signing a Share Transfer Agreement with Foreign Shareholders

1.1. Applicable Legal Grounds

Law on Investment 2020

This law regulates the market access conditions for foreign investors when contributing capital, purchasing shares, or acquiring equity in established enterprises.

If the share transfer leads to a change in ownership involving a foreign investor, the enterprise must comply with investment registration procedures, required documentation, and sectoral conditions applicable to foreign ownership.

Law on Enterprises 2020 and Its Guiding Decrees

The company’s charter may impose restrictions on share transfers (e.g., for founding shareholders or ordinary shareholders) – these restrictions must be clearly stated in the charter and on registered share certificates (if applicable).

Any change in foreign shareholder ownership must be reported to the Business Registration Office under the Department of Planning and Investment. The expected processing time is approximately three business days after submitting a valid application.

Procedures, Taxation, and Payment Regulations

• Share transfer payments must be made via bank transfer if using cash, or clearly agreed upon in cases involving assets or alternative payment methods, in accordance with foreign exchange laws.

• Personal Income Tax (PIT): When individual shareholders transfer shares, they must declare PIT within 10 days of signing the share transfer agreement. The tax rate may be 0.1% of the transfer price, depending on applicable laws.

Notification of Enterprise Registration Changes

After completing the share transfer, if there is a new foreign shareholder, the company must update the enterprise registration information to reflect this change accurately.

2. Practical Measures to Prevent Disputes in Share Transfer Agreements with Foreign Shareholders

2.1. Prior to Signing the Agreement

Review the Company Charter and Business Sectors

• Check if the charter restricts share transfers to external or foreign parties (e.g., founding shareholders in the first 3 years, registered share certificates, priority sales to internal shareholders).

• Confirm whether the company operates in a business sector subject to foreign ownership limits or specific conditions under Vietnamese investment law.

Legal Due Diligence and Valuation

• Perform audits and evaluate financials, tax compliance, outstanding debts, and any ongoing commitments or risks to determine a fair share price.

• Review legal documents regarding share ownership: whether shares are registered or bearer, voting rights, and internal shareholder agreements.

Clear Contract Terms to Protect Rights

• Define payment methods and timelines clearly. If payment is made in cash or assets, specify valuation methods, proof of ownership, and transfer terms.

• Include seller warranties on share ownership, ensuring shares are free from disputes, encumbrances, or legal restrictions.

• Outline the dispute resolution mechanism: negotiation first, then arbitration or court proceedings. Specify governing law (Vietnamese or foreign) and dispute resolution venue (domestic or international arbitration).

Compliance with Legal Procedures and Registrations

• Submit applications for capital contribution or share purchase by foreign investors before executing the transfer.

• Update enterprise registration post-transfer to reflect foreign shareholder information accurately.

Manage Payment and Foreign Exchange Risks

• If international money transfers are involved, ensure compliance with foreign exchange regulations and any limitations on outbound remittances.

• Specify in the contract the payment method, who bears exchange rate fluctuations, and steps to handle payment breaches.

2.2. When Disputes Arise – Smart Response Steps

Negotiate and Mediate at the First Sign of Conflict

• Early-stage negotiation is often quicker, less costly, and helps preserve business relationships.

Arbitration or Court Proceedings

• If the contract includes arbitration clauses, parties may choose reputable arbitration centers (domestic or international).

• If litigation is pursued, identify the competent court.

• Prepare complete documentation: contract, payment records, correspondence, financial reports, share certificates, enterprise notifications, and investment licenses if applicable.

Enforcement and Implementation – Updating Share Registers and Shareholder Rights

• If a judgment or arbitration award is issued, implement the decision by updating enterprise registration, share registers, and enforcing shareholder rights.

• Internally monitor implementation procedures to prevent post-judgment violations by any party.

Conclusion

Transferring shares with foreign shareholders opens up significant opportunities for enterprises in capital raising, market expansion, and improved governance. However, without proper legal preparation, it also entails considerable legal risks. Understanding the regulations under the Law on Investment 2020, Law on Enterprises 2020, and relevant decrees—combined with thorough due diligence, well-drafted contracts, and compliance with registration and tax procedures—will help businesses effectively prevent disputes in this context.

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