Legal regulations on parent company – subsidiary company

1. Legal regulations on parent company – subsidiary company

a) Explain about parent company, subsidiary company

According to Article 195 of Law on Enterprises 2020, parent companies and subsidiaries are regulated as follows:

• A company is considered parent company of another company if:

  • It holds more than 50% of charter capital or total ordinary shares of the latter.

  • It has the right to directly or indirectly designate most or all of the members of the Board of Directors and Director/General Director of the latter.

  • It has the right to decide revisions to the latter’s charter.

• A subsidiary company must not contribute capital to or purchase shares of the parent company. Subsidiary companies of the same parent company must not contribute capital to or purchase shares of each other to establish cross ownership.

• Subsidiary companies of the same parent company with at least 65% state capital must not contribute capital to or purchase shares of other enterprises or to establish new enterprises, including the following cases:

  • Contribute capital to establish a new business.

  • Jointly buy contributed capital, buy shares of established enterprises.

  • Jointly receive the transfer of shares and contributed capital of the members and shareholders of the established enterprise.

b)  Rights, obligations and responsibilities of the parent company to its subsidiary companies

Article 196 of Law on Enterprises 2020 stipulates the rights, obligations and responsibilities  of the parent company towards its subsidiaries as follows:

• Depending on the type of the subsidiary company, the parent company shall perform its rights and obligations as its member, owner or shareholder in accordance with corresponding regulations of this Law and relevant laws.

• All contracts, transactions and relationships between the parent company and the subsidiary company shall be established and executed independently and equally under conditions applied to independent legal entities.

• In case the parent company makes intervention beyond the power of the owner, member or shareholder and forces the subsidiary company to operate against its ordinary business practice or do non-profit activities without paying compensation in the relevant fiscal year and thus causes damage to the subsidiary company, the parent company shall be responsible for such damage.

• The executive of the parent company shall be responsible for its intervention and shall be jointly responsible for the damage caused together with the parent company.

• In case the parent company fails to pay damages, the creditor, member or shareholder that holds at least 01% of the subsidiary company’s charter capital is entitled to, in their own names or in the subsidiary company’s name, request the parent company to pay damages.

• In case the intervention is beneficial to another subsidiary company of the same parent company, that subsidiary company and the parent company shall jointly provide the benefit for the subsidiary company that suffers damage.

c) Financial statements of the parent company and subsidiary companies

Article 197 of Law on Enterprises 2020 provides for the financial statements of parent companies and subsidiaries as follows:

• At the end of the fiscal year, in addition to the reports and documents prescribed by law, the parent company shall prepare the following reports:

  • The consolidated financial statement of the parent company prescribed by accounting laws.

  • The consolidated annual income statement of the parent company and subsidiary companies.

  • The consolidated report on administration of the parent company and subsidiary companies.

• Whenever requested by the parent company’s legal representative, the subsidiary company’s legal representative shall provide reports, documents and information that are necessary for preparation of the consolidated financial statements and other consolidated reports of the parent company and subsidiary companies.

• The person responsible for preparing the parent company’s reports shall use the reports to prepare the consolidated financial statements and other consolidated reports if the reports prepared and submitted by the subsidiary companies are not suspected to contain incorrect or fraudulent information.

• The person responsible for preparing the report must not prepare and submit the report if the subsidiary companies’ financial statements are not fully received. In case the parent company’s executive is not able to obtain necessary reports, documents and information after all necessary measures within his/her power have been taken, he/she shall prepare and submit the consolidated financial statement and other consolidated reports with or without information from the subsidiary company. Explanation shall be provided to avoid confusion or misunderstanding.

• Annual financial statements, reports, consolidated financial statements and consolidated reports of the parent company and subsidiary companies shall be retained at the parent company’s headquarters. Their copies shall be retained at the parent company’s branches in Vietnam.

• In addition to the reports and documents prescribed by law, the subsidiary companies shall prepare reports on purchases, sales and other transactions with the parent company.

2. Legal basis

Law on Enterprises 2020.