In the practical operation of joint stock companies, shares frozen due to legal disputes is not an uncommon situation, particularly conflicts in ownership rights, transfer transactions, or entries in the shareholder register.

I. Common legal risks associated with shares frozen due to legal disputes

1. Risk of non-recognition or restriction of shareholder status

Pursuant to Article 122 of the Law on Enterprise 2020, the shareholder register serves as the legal basis for determining shareholder status and the scope of shareholder rights within the company. Where shares are frozen due to disputes (e.g., disputes over share transfer agreements, inheritance disputes, capital contribution disputes), individuals who hold shares in practice but are not recorded or whose registration is suspended in the shareholder register may take the risk of not being recognized as lawful shareholders by the company.

As a legal consequence, such shareholders may be unable to fully exercise their rights under Article 115 of the Law on Enterprise 2020, particularly voting rights, the right to attend the General Meeting of Shareholders, and the right to access important corporate governance information.

2. Risk of restriction on share transfer rights

Under Article 127 of the Law on Enterprise 2020, ordinary shares are freely transferable unless otherwise restricted by law or the company’s charter. However, where a dispute arises and a competent authority imposes interim urgent measures (such as prohibiting the transfer of disputed assets), the shares may be frozen, leading any transfer transactions to be invalid or unrecognized by the company.

Such a risk affects not only disputing parties but also exposes bona fide transferees to legal uncertainties, potentially resulting in secondary disputes and compensation liabilities.

3. Risk of inability to receive dividends and financial benefits

According to Article 135 of the Law on Enterprise 2020, shareholders are entitled to dividends and other financial benefits only when they meet all conditions and are recognized as lawful shareholders at the record date. Where shares are frozen due to legal disputes, companies often suspend dividend payments in respect of disputed shares to mitigate legal risks.

It may result in shareholders being deprived of financial benefits for extended periods, particularly in prolonged disputes, leading to actual losses while making it difficult to determine compensation in the absence of a final court judgment.

4. Risk of prolonged disputes affecting corporate governance

The freezing of shares due to legal disputes, especially controlling shares, may directly affect the legality of corporate decisions, including resolutions of the General Meeting of Shareholders or the Board of Directors. In certain cases, resolutions adopted during the dispute period may be subject to invalidation under Article 151 of the Law on Enterprise 2020 if serious violations of shareholder rights are established.

II. Understanding shares frozen due to legal disputes

1. What does it mean for shares frozen due to legal disputes, and how does it affect shareholder rights?

Current legislation does not provide a direct legal definition of “shares frozen due to legal disputes”. However, it may be understood as a situation in which the rights to transfer, dispose of, and/or exercise rights attached to shares are temporarily restricted by a decision of a competent authority during the dispute resolution process.

The primary legal basis derives from Article 121 of the Civil Procedure Code 2015, under which courts may apply interim urgent measures, including prohibiting the transfer of disputed assets. Consequently, shareholders may be restricted in exercising certain rights under Article 115 of the Law on Enterprise 2020, particularly rights to transfer shares, receive dividends, or vote, depending on the frozen content and scope.

2. Who has the authority to decide on the freezing of shares due to legal disputes?

The freezing of shares due to legal disputes does not fall within the company’s unilateral authority. Under applicable law, such authority primarily belongs to:

  • The competent People’s Court, through the application of interim urgent measures during civil proceedings;
  • The civil judgment enforcement authority, during the enforcement of legally effective judgments or decisions.

The company is only responsible for complying with and facilitating the implementation of lawful decisions issued by competent authorities and may not unilaterally freeze shares without a clear legal basis.

3. What is the maximum duration for which shares may be frozen due to legal disputes?

Current law does not prescribe a fixed maximum duration for freezing shares due to legal disputes. The duration depends on:

  • The period during which the court applies interim urgent measures in resolving the case;
  • The duration of enforcement of legally effective judgments or decisions.

Interim urgent measures are maintained only for as long as necessary and may be revoked or modified when grounds for their application no longer exist. Accordingly, shares remain frozen until the dispute is fully resolved or until a new decision is issued by a competent authority.

4. How do shares frozen due to legal disputes differ from shares frozen due to tax debts?

Shares frozen due to legal disputes and those frozen due to tax debts differ in terms of legal basis, authority, and purpose.

Freezing due to legal disputes arises from civil or commercial relationships and aims to preserve disputed assets during judicial proceedings.

In contrast, freezing due to tax debts is an administrative enforcement measure applied by tax authorities under the Law on Tax Administration 2019 to ensure recovery of tax obligations owed to the State.

Such a distinction leads to different legal consequences in terms of procedures, complaint rights, and mechanisms for lifting the freeze, which shareholders and enterprises must clearly distinguish to adopt appropriate handling strategies.

III. Relevant legal provisions governing shares frozen due to legal disputes

1. How does the Law on Enterprise regulate cases of shares frozen due to legal disputes?

The Law on Enterprise 2020 does not contain a specific provision governing the freezing of shares due to legal disputes. However, provisions relating to share ownership, shareholder status, and company obligations serve as the direct legal basis for assessing the legality of such freezing.

Under Article 115 of the Law on Enterprise 2020, shareholders are entitled to full management, financial, and information rights corresponding to their shareholding. Any restriction of these rights is permissible only where provided by law or based on lawful decisions of competent authorities. Additionally, Article 122 confirms that the shareholder register is the basis for recognizing and exercising shareholder rights but does not grant the company authority to unilaterally suspend or revoke such rights without a lawful decision.

Furthermore, Article 127 on share transfer affirms that the principle of free transferability may only be restricted where there is a clear legal basis. Accordingly, in cases of shares frozen due to legal disputes, the company may only suspend recognition or transfer upon receipt of a court or enforcement authority decision, and must not impose restrictions arbitrarily in violation of the law.

2. How is the right to claim damages regulated where shares are frozen without legal basis?

Specifically, Clause 1, Article 166 of the Law on Enterprise 2020 recognizes shareholders’ right to request court protection of their lawful rights and interests. In addition, Article 584 of the Civil Code 2015 provides that any party causing damage through unlawful acts must fully compensate for such damage where fault and causation are established.

In practice, damages may include unpaid dividends, lost economic opportunities due to inability to transfer shares, or losses arising from exclusion from voting on main corporate decisions. Where it is proved that the freezing was unlawful and caused actual damage, shareholders are entitled to claim compensation from the company or relevant parties.

3. What are the consequences if the company fails to promptly notify shareholders of the freezing of shares due to legal disputes?

The obligation to provide information and ensure transparency in corporate governance is a fundamental principle under the Law on Enterprise. Pursuant to Article 115, shareholders have the right to receive full and timely information on matters directly affecting their lawful rights and interests.

Where a company fails to notify, or delays notification to shareholders regarding the freezing of shares due to legal disputes, multiple legal consequences may arise.

  • First, shareholders may lose the opportunity to exercise their rights, including transferring shares, receiving dividends, or participating and voting at the General Meeting of Shareholders.
  • Second, such lack of transparency may serve as grounds for shareholders to initiate legal action for damages if actual losses can be demonstrated.

Moreover, failure to comply with information disclosure obligations may expose corporate decisions to lawsuits or cancellation if it is proven that such failure materially affected shareholder rights and the legality of the decision-making process.

IV. Questions regarding shares frozen due to legal disputes

1. When shares are frozen due to legal disputes, are shareholders still entitled to receive dividends? Why?

In principle, shareholders are entitled to receive dividends only when they are recognized by the company as lawful shareholders at the record date in accordance with Article 122 of the Law on Enterprise 2020. Where shares are frozen due to legal disputes, particularly under decisions of the Court or enforcement authorities, companies typically suspend dividend payments in respect of disputed shares to avoid the risk of paying the wrong beneficiary.

Such suspension does not extinguish the substantive right to dividends; rather, it temporarily defers the exercise of such right until the dispute is conclusively resolved. Thereafter, any dividends (if applicable) shall be distributed in accordance with the effective judgment or decision.

2. When shares are frozen due to legal disputes, what should shareholders do to protect their rights and interests?

Upon becoming aware that shares have been frozen, shareholders should take proactive steps to:

  • Verify the legal basis of the freezing (i.e., whether there is a valid decision issued by the Court or enforcement authority);
  • Collect and retain all documents evidencing lawful ownership of the shares;
  • Participate in the proceedings as a person with relevant rights and obligations, or as a plaintiff/defendant in the dispute;
  • Where the freezing lacks legal grounds, request the Court to revoke the freezing measure and claim compensation for damages in accordance with civil law.

Delay or passivity at such stages may result in the loss of opportunities to effectively protect shareholder rights.

3. How should a situation be handled where shares are frozen due to legal disputes but the company still permits their transfer?

If shares have been frozen under a lawful decision of a competent authority but the company nevertheless allows their transfer, such conduct entails significant legal risks. Any transfer transaction in such circumstances may be declared invalid by the Court, and legal liabilities may arise for the company and relevant parties.

Affected parties may initiate legal proceedings to request invalidation of the transaction, restoration of the original status, and compensation for damages, particularly where it can be proven that the company knew or ought to have known that the shares were subject to freezing but proceeded with the transaction regardless.

4. Under what circumstances may shares frozen due to legal disputes be released?

Shares subject to freezing may be released in the following circumstances:

  • The dispute has been resolved by a legally effective judgment or decision;
  • The Court issues a decision to revoke or amend the interim urgent measure due to the absence of grounds for its continued application;
  • The enforcement authority terminates distraint or freezing measures upon completion of enforcement obligations.

In such cases, the company is responsible for promptly updating the status of the shares and restoring the full rights of shareholders in accordance with the outcome of the dispute resolution.

5. What interim measures may be applied to prevent damage upon discovery of shares being frozen due to legal disputes?

To prevent potential damage or preserve disputed assets, the Court may apply interim urgent measures according to Article 114 of the Civil Procedure Code 2015, including:

  • Prohibiting the transfer of rights in respect of disputed shares;
  • Suspending the exercise of rights arising from such shares;
  • Requiring the company to provide and preserve documents relating to the shares.

Although temporary in nature, these measures have significant impact and are intended to ensure that dispute resolution is conducted objectively and effectively.

V. Are you seeking a trusted legal expert to assist with issues relating to shares frozen due to legal disputes?

Shares subject to freezing due to legal disputes present complex issues requiring a combination of expertise in corporate law, civil procedure, and practical experience. Early engagement with legal experts not only enables shareholders to properly assess risks but also to adopt appropriate strategies, mitigate losses, and shorten the duration of disputes.

The above information is provided for reference purposes only. For detailed advice on specific cases, please contact NPLAW for prompt consultation.