What is a nominee arrangement?
Using a nominee generally requires a structure in which an investor (nominator) puts up money to invest in a company, but another person (a nominee) is owner of record–say, a shareholder in the investment. The intention is that the nominee does not control the investment, is not the beneficial owner of the investment; even so, he bears full responsibility for the investment before the law. The nominator makes and controls the investment and is the actual beneficial owner of the investment, but he bears no responsibility for the investment and has no corporate rights before the law. The agreement between the beneficial owner and nominee is normally set forth in writing.
The nominee arrangement is sometimes adopted when a foreign investor wishes to invest in a business sector that is not open to foreign investment, or that has statutory and practical conditions that do not apply to Vietnamese investors. By engaging a nominee, a foreign investor indirectly accesses a restricted sector while formally complying with the law. In this situation, the nominee holds shares on the record, while control and economic benefits remain with the foreign investor through the parties entering into a set of nominee documents. Of course, the nominee must cooperate if the foreign investor is to achieve its objective.
Is a nominee arrangement legally enforceable?
There are no express Vietnamese regulations that prohibit engagement of a nominee. Nominee relationships, whereby one person acts for another, are generally permitted. However, there is no legal framework for a nominee arrangement under Vietnams laws on investment. If a nominee arrangement were used to overcome restrictions on foreign ownership, it would be seen to be contrary to the spirit of the Law on Investment and the Law on Enterprises and it would probably not be enforced. Both laws require investors to be responsible for their own investment. Specifically, in defining different types of investment, the Law on Investment does not recognize a nominee arrangement as a type of investment in Vietnam. Stated differently, the law will not recognize that there is a difference between a nominee and the so-called actual owner. The nominee–owner of record–will be deemed to be the actual owner irrespective of any agreement between them. That is, there is no legal basis to enforce a nominee agreement. This is likely to be reinforced if the purpose of the investment is to overcome the fact that the investment is barred to foreigners.
In a nominee arrangement under which the investment is not performed by the party actually making the investment, then the ultimate, actual investor will not be recognized as an “investor” and will not be protected as an “investor”. Only the nominee who appears in the legal records of the investment will be treated as the “investor” and will be protected. That is, the investment which is seen to be made by the nominee will be protected, while the nominee arrangement between the actual investor (whose name does not appear) and the nominee falls outside the law and will not be recognized. As such, if such an investment by a foreigner is prohibited, the use of a Vietnamese nominee to circumvent the law will not be given effect.
There is another risk–not from a legal but from a fragile relationship between the parties. The nominee may ignore his role as a nominee and act against the nominator’s instructions despite the nominee’s contractual commitment to give effect to the nominator’s wishes.
There is yet a further issue. The shares held by the nominee may be considered common property of the nominee and his/her legal spouse. As such, the spouse has certain rights over the property, and her rights are protected by law, such as to prevent sale or transfer of any shares subject to their common ownership, etc.
A nominee arrangement is sometimes used to circumvent the law, eg, replacing a prohibited foreign voting shareholder with a Vietnamese voting shareholder. The difference is that the Vietnamese shareholder has agreed to limits on his right to vote. Such an arrangement lacks a legal basis and is inherently unenforceable. If there is a dispute between the nominee and the nominator and the parties bring the case to a court in Vietnam, the nominee arrangement would likely be considered invalid. Even if the dispute is litigated outside of Vietnam and the dispute is resolved in favor of the nominator, it is unlikely that such a ruling would be enforced in Vietnam.
Is it possible to protect the actual investor in a nominee arrangement?
To repeat, a nominee arrangement is risky in both commercial and legal terms. Practically, foreign investors will seek ways to overcome obstacles for a foreign person to conduct investment, ie, to form a company in a foreign-restricted business, to own land, to distribute through multiple-retail outlets, etc. As discussed above a nominee agreement with a Vietnamese person intended to permit the actual foreign investor to manage the investment through the Vietnamese nominee carries a high risk of unenforceability.
There are imperfect structures being used that can provide some protection to an actual investor. Below are two:
- An investment is established between the actual foreign investor and his Vietnamese partner. An investment cooperation agreement is signed and sets forth the principles of cooperation. A loan agreement is signed between the foreign investor to his Vietnamese partner whereby the foreign investor provides a loan to the Vietnamese partner. The Vietnamese partner uses the money to invest in the company and receives the shares. The shares are given to the foreign investor to secure the loan. A legitimate proxy is issued by the Vietnamese partner to the foreign investor. It permits the foreign party to manage and operate the business. Of course, a proxy can be cancelled.
- There is another solution. The foreign party and a Vietnamese party can establish a joint stock company (JSC) with 50% of the shares being ordinary voting shares and they are held by the foreign party. That is, the foreign investor owns 100% of the voting shares. The remaining shares (ie, 50%) are non-voting shares (eg, redeemable preference shares) and they are held by the Vietnamese party. Stated differently, the JSC will be treated as a local investor if it establishes a Vietnamese subsidiary. The JSC will assume the role as a Vietnamese holding company while its Vietnamese subsidiary will be an operating company. Under the law, shareholders holding preference shares do not have the right to be involved in management of the JSC. They have no vote. Only holders of ordinary shares can vote and can control and/or manage the JSC and the subsidiary.
In both structures above, the parties normally put in place mechanisms to require the Vietnamese party to to transfer his shares upon the foreign investor’s instruction.
There are other structures being used in the market. Each arrangement has its advantages and disadvantages. However, nominee relationships are always vulnerable because of the difficulty to enforce them. They are merely enforceable based on documents entered into by the nominator and the nominee, so it is important to ensure that agreements between the parties are well prepared.
Conclusion
While risky, nominee arrangements are still adopted by some foreign investors in Vietnam. If a foreign investor wishes to engage a nominee, well-structured nominee documents need to be created. The main aim in connection with a nominee arrangement is not to eliminate, but to mitigate and to manage the risks and to protect the foreign investor’s rights and interests as much as possible.
Even though some precautions are possible, the underlying reality is that nominee structures are fragile and vulnerable. The trustworthiness of the nominee is critical and probably more important than the legal structure the investor puts in place. The arrangements whereby a Vietnamese party is treated as a real business partner whose interests are aligned with those of the investor would seem to be more reliable.
