73. The Historical Background of Vietnamese Company Law and Corporate Governance

by Bui Xuan Hai and Chihiro Nunoi

This document is excerpted from the below paper, pp.45-48.

Full citation: Bui Xuan Hai and Chihiro Nunoi, ‘Corporate governance in Vietnam: a system in transition,‘ Hitotsubashi Journal of commerce and management, 2008, vol. 42, issue 1, pages 45-66.

Note: All footnotes omitted.

Historical influences have the potential to leave their mark on corporate governance practices and the development of a corporate governance system. Before considering the existing Vietnamese corporate governance system, it is necessary to understand the history of Vietnamese company law and its corporate governance law regimes. The historical development of company law and corporate governance law regimes in Vietnam can be divided into three stages: the period of French colonisation, the period 1945-1990, and that from 1990 up to the present.

Corporate forms and company law did not exist in Vietnam until the French occupation in the late 19th century. Following the French legal tradition, Vietnamese company legislation in this period appeared in civil and commercial codes. Hence, corporate forms and their corporate governance rules were prescribed by the North Civil Code 1931 and the Central Vietnam Commercial Code 1942. The two Codes provided for two company forms as copies of French company models: (1) human associations (cong ty hop nhan ̶ société de personnes or sociétés de personnes ou par interest) and (2) capital associations (cong ty hop co ̶ sociétés de capitaux).

After declaring independence in 1945, the Vietnamese government continued to implement company laws, which were enacted under French colonial rule. In July 1954, after nine years of struggle against the French, the Geneva Agreement for peace in Indochina was signed. Accordingly, Vietnam was temporarily divided into two regions ̶ North and South ̶ with the 17th parallel as the common border. This resulted in the 21-year partition of the country, and, subsequently, the Vietnam War.

In the North, the Labour Party of Vietnam (Dang Lao dong Viet Nam) became the single leading party of the state. A centrally-planned economy based on socialist ownership was gradually introduced to replace the private economic sectors; hence, private business entities were converted to socialist economic organisations. Consequently, from the late 1950s, the Northʼs economy was a command economy dominated by state-owned organisations and cooperatives without private business entities. Without a market economy and business freedom, neither company forms nor company law existed in North Vietnam.

In the South, contrary to the development of the North, a market economy was encouraged to develop. The company legislation enacted before 1945 continued to be implemented until the Commercial Code 1972 (Bo Thuong luat) was effective. Upgrading the former law, this Code provided for five corporate forms (the so-called ʻhội’): (1) partnerships (hoi hop danh); (2) simple share capital associations (hoi hop tu don thuong); (3) joint capital associations (hoi du phan); (4) limited liability associations (hoi trach nhiem huu han), and, (5) shareholding associations (hoi cong tu or hoi co phan) as shareholding companies. Yet with the reunification of Vietnam after the victory of the North in April 1975, and as a result of the Communist Partyʼs command economic policies, the Commercial Code 1972 of the South was abolished. Disappointingly, business freedom, corporate elites and company law were completely absent nationwide.

From 1975 to 1990, as a result of the socialist economic policies of the Communist Party, no private businesses or company law existed in Vietnam, hence corporate governance was not a topic in law or in the literature. This, for instance, is mirrored in the socialist Constitution 1980, under which the Communist Party continued to be the sole party to lead the state and country, and the main objective was also a command economy without private economic entities. The state owned most national property while a market economy and private commerce were ʻofficially discouragedʼ. Under the so-called socialist economic reform, the private business entities of the South were re-organised to match the models of the North, as state-private cooperation enterprises or state-owned enterprises. Business freedom and private economic forms were neither recognised under law nor the Communist Partyʼs policies. As a consequence of the Partyʼs command economic policies and the serious economic damage after the Vietnam War, Vietnam faced a serious socio-economic crisis in the late 1970s and 1980s. This, together with the collapses of some East European socialist regimes in the 1980s, pushed the Communist Party to seek new policies and economic reforms (Đổi Mới) in the late 1980s. 
In December 1986, the Communist Party adopted sweeping economic reforms, the so-called Đổi Mới or “renovation” policy, in which it abandoned the command economy and started building a multi-sectored market economy. Đổi Mới aimed to liberalise the economy, increase the potential for economic development, and encourage the development of the private economic sectors. Since Đổi Mới, Vietnamʼs transition economy has grown rapidly and the legal system, including the law on business associations, has been reformed to enhance the rights of business freedom and create the legal foundations of the so-called socialist-oriented market economy (kinh te thi truong theo dinh huong xa hoi chu nghia).

Under Đổi Mới policies, a multi-sectored market economy and business freedom were two objectives in the Constitution1992. In order to open up the economy, Vietnam passed the Law on Foreign Investment in Vietnam 1987 (Luat Dau tu nuoc ngoai tai Viet Nam) in December 1987 to admit foreign investors into many areas of the economy. Similarly, to encourage the development of private economic sectors, the Company Law 1990 (Luat Cong ty), the Law on Private Enterprises 1990 (Luat Doanh nghiep tu nhan), the Law on Encouragement of Domestic Investment 1994 (Luat Khuyen khich dau tu trong nuoc), and the Co-operative Law 1996 (Luat Hop tac xa) were enacted by the National Assembly. Since then, domestic and foreign investors have had the right to operate business under various forms such as limited liability companies, shareholding companies, proprietors, private enterprises, partnerships, co-operatives, and joint venture companies.

With just 46 articles, the Company Law 1990, which was largely based on French law and former corporate statutes, provided for two popular company forms: limited liability companies (LLCs) (cong ty trach nhiem huu han) and shareholding companies (cong ty co phan) (SCs). In order to enhance business freedom and create a convenient business environment for the private economic sector, the Enterprises Law 1999 (Luat Doanh nghiep) was passed to replace the Company Law 1990 and the Law on Private Enterprises 1990. Relying on the former company statutes and borrowing increasingly corporate legal rules from Western jurisdictions, especially Anglo-American law, the Enterprises Law 1999 provided various forms of business associations. The implementation of this Law was much more successful than the former laws as, for example, shown by the increased number of companies registered. There are, however, certain problems with the corporate governance regime provided by this Law, such as the inflexible corporate governance structures, unclear functions of the management board and the managing directors, and “poor” investor protection mechanisms. The Enterprise Law 1999 was subsequently replaced by another corporate statute after just six years of implementation.

Under the Đổi Mới policies of the Communist Party, in order to upgrade the law on business associations and create a convenient legal environment for investors in the context of international economic integration, especially the WTOʼs accession, in November 2005, the National Assembly of Vietnam enacted the new Enterprise Law. This Law came in force on 1st July 2006 to replace the Enterprise Law 1999, the State Enterprise Law 2003, and provisions on the management organisation and operation of FDI (foreign direct investment) companies in the Law on Foreign Investment in Vietnam 1996. Even though the Enterprise Law 2005 is largely based on the Enterprise Law 1999, it also contains other legal principles borrowed from Anglo-American law. This Law is the most important corporate legislation and forms the foundation of the Vietnamese corporate governance system.


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