Company Division in Vietnam: A Detailed Guide

I. What is the company's division?

1.1. Definition under the Law on Enterprises

According to Clause 1, Article 198 of the Law on Enterprises No. 59/2020/QH14 dated June 17, 2020:

"1. A limited liability company or a joint stock company may divide its assets, rights, obligations, members, or shareholders of the existing company (hereinafter referred to as the divided company) to establish two or more new companies."  

Thus, company division is the process by which an existing company (the divided company) separates its assets, rights, obligations, members (for LLCs), or shareholders (for JSCs) to create two or more new companies. The divided company may subsequently cease to exist or continue to operate with its remaining assets and elements.

1.2. Types of Company Division

Based on the method of division and the existence of the divided company, it can be categorized into:

- Division to establish new companies (total division): The divided company transfers all of its assets, rights, and obligations to the new companies and ceases to exist.

- Partial division to establish one or several new companies (partial division): The divided company transfers only a portion of its assets, rights, and obligations to establish one or several new companies and continues to operate with the remaining part.

1.3. Purposes of Company Division

Businesses may decide to divide their company for various strategic reasons, including:

- Business restructuring: Separating different business segments for more effective management.

- Separate non-core business segments: To focus resources on the core business area.

- Attract investment capital for each separate business segment: To facilitate capital raising for independent business units.

- Facilitate specialized management: Allowing the management team to focus on a specific area.

- Resolve internal corporate issues: Dividing ownership or control among shareholder/member groups.

- Comply with specific legal regulations: For example, satisfy antitrust requirements or restructuring required by regulatory bodies.

1.4. Comparison with Other Restructuring Methods

- Spin-off: A parent company transfers a portion of its assets and business operations to establish an independent subsidiary, but the parent company continues to exist and often retains a controlling or significant interest in the subsidiary.

- Merger: Two or more companies combine to form a new company, and the old companies cease to exist.

- Acquisition: One company (the acquiring company) buys all or a majority of the shares or capital contributions of another company (the target company), and the target company may cease to exist or become a subsidiary of the acquiring company.

II. Detailed Procedures for Company Division in Vietnam

2.1. Preparation Phase

- Research and assess feasibility: Carefully analyze benefits, costs, legal risks, and impact on business operations.

- Develop a company division plan: Draft details regarding the principles and method of dividing assets (including real estate, intellectual property rights), labor/employees, contributed capital/shares, and obligations (debts payable, contracts).

- Gather opinions from relevant parties: Discuss with and obtain opinions from key members/shareholders, the management board, employee representatives, and key creditors.

2.2. Adoption of the Division Resolution/Decision

- Convening and holding meetings of the Members' Council (for LLCs) or the General Meeting of Shareholders (for JSCs) in accordance with the Law on Enterprises and the company's charter.

- The division resolution/decision must clearly state:

• The name and head office address of the divided company.
• The names of the companies to be established.
• The principles, methods, and procedures for dividing the company's assets (including valuation methods).
• The labor utilization plan (transfer, termination, new recruitment).
• The methods, deadlines, and procedures for converting capital contributions/shares/bonds of the divided company into those of the newly established companies.
• The principles for settling the divided company's obligations (allocation of responsibilities among new companies or designation of a primary responsible company).
• The timeframe for implementing the company division.
• The division resolution/decision must be approved by the voting ratios stipulated in the Law on Enterprises and the company's charter (usually over 50% or 65% of the total votes).

2.3. Notification to Creditors and Employees

- The division resolution/decision must be sent in writing to all known creditors and publicly notified to employees within 15 days from the date of the decision's adoption.

- Creditors have the right to demand early repayment or security for outstanding debts from the divided company or the new companies.

- Employees have the right to be informed of the labor utilization plan and to have their rights ensured in accordance with labor laws.

2.4. Establishment of New Companies

- Draft the charters of the new companies.

- Elect or appoint the Chairperson of the Members' Council/Company Chairperson, Board of Directors, Director, or General Director of the new companies.

- Prepare the dossier for enterprise registration of the new companies, including:

• Enterprise registration application form (as per the prescribed template).
• The division resolution/decision.
• A certified copy of the minutes of the Members' Council/General Meeting of Shareholders meeting on the company division.
• The charters of the new companies.
• The list of founding members/shareholders and the list of legal representatives of the new companies.
• Certified copies of the legal documents of the founding members/shareholders and the legal representatives.
• Written confirmation of legal capital (if required for the business lines).
• Other documents as prescribed.
• Submit the enterprise registration dossier to the competent business registration authority.

2.5. Termination of the Divided Company

- After the new companies are issued Enterprise Registration Certificates, the divided company must proceed with the procedures for notifying its termination to the business registration authority.

- All tax obligations and other financial obligations must be completed before termination.

2.6. Transfer of Assets, Rights, and Obligations

- Prepare detailed minutes on the transfer of assets (including real estate, intellectual property rights), rights, and obligations from the divided company to the new companies according to the approved plan.

- Carry out the legal procedures for transferring ownership of assets (e.g., registration of changes in land use rights, ownership of houses and other assets attached to land).

- Sign agreements with creditors, customers, and employees to determine the inheritance of obligations and rights.

2.7. Labor Issues

- Develop a detailed labor utilization plan for the new companies (number of employees, positions, compensation regimes).

- Carry out the procedures for transferring employees from the divided company to the new companies (if any).

- Settle the regimes for employees who do not continue working (termination of labor contracts, severance pay in accordance with regulations).

2.8. Tax Issues

- The divided company must fulfill all tax obligations up to the time of its termination.

- The new companies must register for tax and declare and pay taxes in accordance with regulations from the time of their establishment.

- Consider any taxes that may arise during the company division process (e.g., corporate income tax from asset transfer, value-added tax if there is a sale of goods or services).

III. Legal Consequences of Company Division in Vietnam

3.1 For the Divided Company: Termination of legal person status from the time the business registration authority removes the company's name from the Enterprise Registration Book. Any remaining rights and obligations (if any and not yet divided) will be resolved in accordance with the law on enterprise dissolution.

3.2 For the New Companies:

- Become independent legal entities with full rights and obligations in accordance with the law and their company charters.

- Jointly and severally liable for the outstanding obligations, unpaid debts, labor contracts, and other property obligations of the divided company or agree with creditors, customers, and employees for one or several of those companies to fulfill these obligations according to the approved division plan.

- Automatically inherit all rights, obligations, and legitimate interests allocated according to the division resolution/decision and the transfer minutes.

3.3 For Stakeholders:

- Creditors: Have the right to demand that the new companies jointly and severally fulfill debt obligations or act according to the agreement reached in the approved division plan.

- Customers: Contractual relationships with the divided company may be transferred to one or more new companies by agreement.

- Employees: Their rights are guaranteed according to the approved labor utilization plan, including transfer to a new company or termination of labor contracts in accordance with regulations.

IV. Important Notes and Recommendations

- Complexity of the procedure: Company division is a complex procedure, requiring meticulous preparation in terms of legal, financial, and organizational aspects.

- Legal Due Diligence (Due Diligence): Thorough legal due diligence needs to be conducted before deciding to divide the company to assess the risks and opportunities.

- Detailed planning: Develop a detailed plan for each stage of the company division process.

- Strict compliance with legal regulations: Ensure all actions comply with the Law on Enterprises, the Law on Land, Tax Laws, and relevant legal provisions.

- Seek expert advice: It is advisable to seek consultation from lawyers and financial experts experienced in corporate restructuring to receive the best support.

V. DB Legal's Advisory Services

DB Legal is proud to provide comprehensive legal advisory services to businesses seeking to divide their company in Vietnam. Our team of experienced lawyers will assist you in the following stages:

- Consulting on the feasibility and optimal company division plans.

- Drafting and preparing legal documents.

- Representing clients in working with competent state authorities.

- Advising on issues related to labor, taxes, and the transfer of assets, rights, and obligations.

- Supporting the resolution of any arising disputes (if any).

If your company is interested in learning about or carrying out company division procedures in Vietnam, please do not hesitate to contact DB Legal for detailed and professional consultation.

 

The information contained in this article is general and intended only to provide information on legal regulations. DB Legal will not be responsible for any use or application of this information for any business purpose. For in-depth advice on specific cases, please contact us.

For more information: 

📞: +84 357 466 579

📧: contact@dblegal.vn

🌐Facebook:  DB Legal Vietnamese Fanpage or DB Legal English Fanpage 

🐦X(Twitter)

💼Linkedin

🎬Youtube