LEGAL IMPLICATIONS OF NON-COMPLIANCE WITH SHARE TRANSFER PROCEDURES IN STRATEGIC COOPERATION AGREEMENTS

The recent judgment of 09/2023/DS-ST by the People's Court of Cau Giay District underscores the legal consequences of failing to adhere to customary share transfer procedures within strategic cooperation agreements. In this case, Mr. H, the plaintiff, engaged in a strategic cooperation agreement with company E. This agreement entailed Mr. H purchasing a specific quantity of E's shares at an approximate price of 38,000 VND per share. Subsequently, after a 12-month period, E committed to repurchasing the shares acquired by Mr. H and, additionally, offering him a bonus of shares at a predetermined price of around 42,000 VND per share at a specific future date. However, upon the expiration of the contract period, company E failed to fulfill the share repurchase commitment, prompting Mr. H to initiate legal proceedings to recover his investment

23/09/2023

LEGAL IMPLICATIONS OF NON-COMPLIANCE WITH SHARE TRANSFER PROCEDURES IN STRATEGIC COOPERATION AGREEMENTS

Crucial Determination: Absence of Share Transfer Procedures

A pivotal factor in the Court's determination was the absence of the customary share transfer procedures, particularly those outlined in Article 127 of the Law on Enterprise. These procedures typically encompass the registration of share ownership, among other requisites. Given that these essential procedures were not diligently executed, the Court rendered a significant verdict—the Strategic Cooperation Agreement fundamentally constituted a financial transaction. To be more precise, it resembled a loan agreement more than a share transfer agreement.

Recent Parallel Case: Sen Tai Thu and Investor Agreement

In a recent development, a case bearing a striking resemblance to the aforementioned dispute has emerged. The agreement between Sen Tai Thu and the investor, as provided in the attached document, exhibits a comparable structure. While the investor formally holds shares in the company, Sen Tai Thu effectively operates as a proxy, shouldering all the responsibilities and privileges linked to share ownership, including the collection of dividends as specified in Clause 2, Article 1 of the Agreement.

Moreover, Sen Tai Thu commits to repurchasing the investor's shares at a predetermined price, surpassing the current market valuation, as stipulated in Clause 1, Article 1 of the Agreement. In essence, this Agreement, like the one in the previous case, adopts the attributes of a loan agreement. It features a fixed interest rate, estimated at approximately 12%.

Conclusion

These legal precedents serve as a reminder of the significance of complying with established share transfer procedures when entering into strategic cooperation agreements. Failing to do so may lead to a reclassification of the agreement as a financial transaction, potentially impacting the legal rights and obligations of the parties involved. Therefore, businesses and investors engaging in such agreements must exercise due diligence to ensure full compliance with relevant legal provisions to safeguard their interests.

See the Court Award here

See the Agreement of Sen Tai Thu here

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For more information, please contact:

Hoang Pham (James) / Managing Partner at: hoang.pham@vselawyers.com