A joint-stock company is an enterprise with legal entity status. The charter capital of a joint-stock company is divided into equal portions known as shares. The owner of shares is referred to as a shareholder, who may be an individual or an organization.
So, what is a founding shareholder in a joint-stock company? Below, NPLaw provides legal consultation on matters relating to founding shareholders.
I. Overview of founding shareholders
The Law on Enterprise 2020 classifies shareholders into three main categories corresponding to existing types of shares, including: Founding shareholders, ordinary shareholders, and preference shareholders. Among these, a founding shareholder is a shareholder who owns at least one ordinary share and whose name is recorded and signed in the list of founding shareholders of a joint-stock company. In other words, founding shareholders are those who initially contribute capital to establish the joint-stock company and own the first ordinary shares of such company.
A newly established joint-stock company must have at least three (03) founding shareholders. The founding shareholders must collectively register to subscribe for at least 20% of the total number of ordinary shares offered for sale at the time of enterprise registration.
II. Legal regulations on founding shareholders
1. Definition of a founding shareholder
The definition of a founding shareholder is stated in the Law on Enterprise 2020 and Decree No. 01/2021/ND-CP. Accordingly, a founding shareholder is a person who contributes shares, and participates in establishing, approving, and signing the first Charter of the joint-stock company.
Pursuant to Clause 4, Article 4 of the Law on Enterprise 2020:
- A founding shareholder is a shareholder who owns at least one ordinary share and signs his/her name in the list of founding shareholders of the joint-stock company.
Additionally, pursuant to Clause 1, Article 57 of Decree No. 01/2021/ND-CP:
- A founding shareholder as prescribed in Clause 4, Article 4 of the Law on Enterprise is a shareholder who owns at least one ordinary share and signs his/her name in the list of founding shareholders submitted to the Business Registration Authority at the time of enterprise establishment.
Accordingly, a shareholder is considered a founding shareholder when meeting the following two conditions:
- First, the shareholder owns at least one ordinary share;
- Second, the shareholder is declared and signed in the list of founding shareholders submitted to the Business Registration Authority at the time of enterprise registration.
2. Rights of founding shareholders
A founding shareholder owns at least one ordinary share and therefore enjoys the same rights as an ordinary shareholder.
However, founding shareholders also have certain specific rights. Founding shareholders are entitled to hold voting preference shares. Pursuant to Article 116 of the Law on Enterprise, voting preference shares are ordinary shares that obtain more voting rights than other ordinary shares; the number of votes per voting preference share is determined by the company’s Charter. Accordingly, founding shareholders holding voting preference shares have a greater number of voting rights than other ordinary shareholders. Specifically, they have the following rights:
- Voting on matters falling under the authority of the General Meeting of Shareholders;
- Enjoying other rights similar to those of ordinary shareholders, except for the right to transfer such shares to other persons.
3. Conditions to become the founding shareholder
As stipulated in Clause 4, Article 4 of the Law on Enterprise, a founding shareholder is a shareholder who owns at least one ordinary share and signs in the list of founding shareholders submitted to the Business Registration Authority at the time of enterprise establishment.
Accordingly, a shareholder is considered the founding shareholder when satisfying the following conditions:
- The minimum number of shares required is one ordinary share;
- The shareholder must sign in the list of founding shareholders submitted to the Business Registration Authority at the time of enterprise registration.
In addition, Article 120 of the Law on Enterprise 2020 stipulates that a newly established joint-stock company must have at least three (03) founding shareholders, who must collectively subscribe for at least 20% of the total number of ordinary shares offered for sale upon enterprise registration.
III. Questions regarding founding shareholders
1. Cases of termination of founding shareholder status
Pursuant to Article 120 of the Law on Enterprise 2020, founding shareholder status is terminated in the following cases:
- First, where a shareholder fails to fully pay for the registered shares within 90 days from the date of issuance of the Enterprise Registration Certificate (unless otherwise provided), such shareholder automatically loses membership status and is not entitled to transfer the right to purchase such shares to another person.
- Second, where the shareholder transfers his/her shares to another person, subject to certain statutory restrictions, or where the company repurchases the shareholder’s shares.
- Third, where the shareholder is an individual who dies, or an organization that is dissolved or declared bankrupt. In such cases, the individual or legal entity ceases to be a shareholder of the joint-stock company.
- Fourth, where the shareholder donates shares to another person or uses shares to settle debts. The nature of such transactions is a transfer of ownership of the shares, and accordingly, the donor or debtor is no longer the owner of such shares and thus no longer a shareholder of the joint-stock company.
2. Must a founding shareholder give priority to transferring shares to other founding shareholders?
The transfer of shares by founding shareholders is governed by Clause 3, Article 120 of the Law on Enterprise 2020:
- Within three (03) years from the date the company is granted the Enterprise Registration Certificate, ordinary shares of founding shareholders may be freely transferred to other founding shareholders and may only be transferred to non-founding shareholders upon approval by the General Meeting of Shareholders. In such a case, the founding shareholder intending to transfer ordinary shares shall not have voting rights with respect to the transfer of such shares.
3. Are founding shareholders entitled to purchase preference shares?
Pursuant to Clause 2, Article 114 of the Law on Enterprises 2020, preference shares include the following types:
- A joint-stock company must have ordinary shares. Owners of ordinary shares are ordinary shareholders.
- In addition to ordinary shares, a joint-stock company may have preference shares.
Owners of preference shares are preference shareholders. Preference shares include the following types:
- Dividend preference shares;
- Redeemable preference shares;
- Voting preference shares;
- Other preference shares as stipulated in the company’s Charter and securities laws.
- Persons entitled to purchase dividend preference shares, redeemable preference shares, and other preference shares shall be determined by the company’s Charter or by resolution of the General Meeting of Shareholders.
Accordingly, whether founding shareholders may purchase preference shares depends on the provisions of the company’s Charter or the decision of the General Meeting of Shareholders.
4. Are founding shareholders required to sign the list of founding shareholders?
Pursuant to Clause 4, Article 4 of the Law on Enterprise 2020:
- A founding shareholder is a shareholder who owns at least one ordinary share and signs his/her name in the list of founding shareholders of the joint-stock company.
Therefore, under current regulations, founding shareholders must own at least one ordinary share and sign the list of founding shareholders.
5. Are founding shareholders considered members of a joint-stock company?
Founding shareholders own at least one ordinary share and sign in the list of founding shareholders of the joint-stock company (Clause 4, Article 4 of the Law on Enterprise 2020). Accordingly, founding shareholders are considered members of the joint-stock company.
6. How is the resale of shares by founding shareholders handled upon company establishment?
Pursuant to Clause 3, Article 120 of the Law on Enterprise 2020, within three (03) years from the date of issuance of the Enterprise Registration Certificate, ordinary shares of founding shareholders may be freely transferred to other founding shareholders, and may only be transferred to non-founding shareholders upon approval of the General Meeting of Shareholders.
Accordingly, when a company is newly established, founding shareholders may freely transfer shares to other founding shareholders. Transfers to non-founding shareholders require approval of the General Meeting of Shareholders.
IV. Legal advisory services relating to founding shareholders
The above constitutes the full and detailed information provided by NPLaw to assist clients regarding founding shareholders. Should you have any questions concerning the above matters or other legal issues, please contact NPLaw for direct consultation and guidance.
