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Abstention in the ratification of resolutions and decisions of the Boards of Directors of Joint Stock Companies


31-12-2021

[1].  From many perspectives, it can be seen that the Board of Directors (BOD) plays the most important role in the Joint Stock Company model, although it is not the most powerful authority. Due to its nature as a regular executive managerial body, the BOD has a greater frequency of meetings than the General Meeting of Shareholders (GMS), the convening time is shorter, and the resolution-ratifying mechanism has its peculiarities to create simplicity, speed, and efficiency. However, in recent times, some issues related to BOD voting have been raised, causing confusion and awkwardness to many businesses. It can even lead to risks if there is not a unified and comprehensive understanding.

[2].  The BOD has 3 to 11 members, usually an odd number, however, it is not uncommon for the number of BOD members to be an even number. The difference from the GMS is that the election of members of the BOD shall be cumulative voting and each member has one vote (basically equal) without depending on whether it is the vote of the ordinary member or the independent BOD member. The regulation on Voting to ratify resolutions and decisions (hereinafter referred to collectively as “resolutions”) of the BOD is indifferent in the Law on Enterprises 2004, 2014 and the current Law on Enterprises 2020 (Law on Enterprises), whereby: “Unless a higher ratio is prescribed by the company's Charter, a resolution or decision of the Board of Directors shall be ratified if it is voted for by the majority of the participants; In case of equality of votes, the option that is voted for by the President of the Board of Directors shall prevail.” (Article 157.12).

[3].   It will be quite straightforward if members vote only in approval or disapproval. However, in reality, it is not so simple because when participating in voting, the BOD members can have three ways of voting such as: (i) approve; (ii) disapprove; (iii) no opinion or abstention (it should be clarified that the Law on Enterprises considers abstention as a form of voting). In fact, there are invalid votes but since it is not an accepted form of voting, this case shall not be further mentioned. Assuming the BOD has 05 (five) voting members, there might be some cases that play out as follows:

Case 01: 02 members of the BOD approve (the President of the BOD among them); 02 members of the BOD disapprove; 01 member of the BOD has no opinion.

Accordingly: if the ratio of approvals and total votes is 2/5, the resolution will not be ratified; if considering separately for each category, we have 2/5 approvals, 2/5 disapprovals, and 1/5 abstention, the resolution will be ratified because the abstention is in the minority, the approvals and disapprovals are equal, which means the opinion of the President of the BOD will play a decisive role.

Case 02: 01 member of the BOD approves (the President of the BOD approves); 01 member of the BOD disapproves; 03 members of the BOD have no opinion.

Accordingly: if the ratio of approvals and total votes is 1/5, the resolution will not be ratified; if considering separately for each category, we have 1/5 approval, 1/5 disapproval, and 3/5 abstentions, the resolution will not be ratified because the abstentions are the majority but they are not approvals; if the abstentions are not counted, however, the resolution of the BOD will be ratified because the President of the BOD has approved.

Case 03: 02 members of the BOD approve (the President of the BOD among them); 0 members of the BOD disapproves; 03 members of the BOD have no opinion.

Accordingly: if the ratio of approvals and the total votes is 2/5, the resolution will not be ratified; if the abstentions are not counted, the resolution of the BOD will be ratified because no one disapproves.

[4].  At this point, many contrary views are given to defend their opinions:

The party approving the ratification of the resolution may argue that: Abstentions shall not be counted in consideration of majority or minority and only the approvals and disapprovals are counted because not having an opinion means that the voter can take any side without changing the course of the issue to be considered. It can also be interpreted that those votes are split 50/50 between approval disapproval, thus with equal division, the resolution will still be ratified. If the total number of votes is counted toward the ratification of the resolution, the abstentions will be no different than disapprovals.

The party disapproving the ratification of the resolution may argue that: No opinion is also a form of voting that must be counted. Moreover, the law provides that the resolution is ratified when “the majority of the members who attended the meeting approved”, that is, it must be counted toward the total number of votes. In addition, if the abstentions are not counted in the total number of votes, it is considered invalid votes.

 

In the past, businesses did not pay much attention to cases without opinion, as such, the company’s charter does not clarify this situation, even the operating regulations of the BOD (very common in large companies, public companies, state-owned enterprises) only prescribes that the situation shall be handled according to the law without specifying a measure if the abstentions appear. Currently, with the unpredictability of the Covid-19 pandemic, the business investment decisions cannot be made hastily and some can easily be a disastrous mistake or become a “white elephant”[1](Many businesses have implied that the current pandemic is unprecedented to deal with and in a developing market like Vietnam, there is no accurate, complete and reliable data system for businesses to rely on in the policy-making process). Therefore, “dormancy” at this stage can also be a “not the worst” choice that is also “not offending anyone” and that is why abstentions appear more in the BOD meetings.

 

[5].  Let us return to the issue of voting for ratifying resolution of the BOD, I believe that it is necessary to consider three (03) basic factors as follows:

[5.1]. Firstly: The BOD is the regular executive body and upholds the role of the President

Accordingly, decisions need to be made relatively quickly and in a timely manner so that the businesses do not fall into stagnation or miss business opportunities. For that reason, the BOD has a greater frequency of meetings, a shorter convening time, and thevoting rate specifically upholds the rights of the President of the BOD even though each member has the same vote.

[5.2]. Secondly: The BOD works on the principle of collectivity and is decided by the majority

This may contradict the argument above, but if we take a closer look, it will flow logically because: The BOD represents the company’s shareholders, and the resolution shall be ratified when the “majority is in approval”. By regulating that the decision of the President of the BOD to be substantial as above, it helps avoid a “deadlock” situation and it is also only applied once the minimum condition is achieved which is equality in the voting results.

[5.3]. Thirdly: The value of abstention is always acknowledged

The appearance of abstention is reasonable because it is also a way to express the will of the BOD members before each decision. The abstention also allows BOD members to “validly exclude themselves” from influencing decisions in which they do not have in-depth knowledge (e.g. expanding the business into a completely new field) and it serves to expand the field for most other members to easier decide. However, in the case that the abstention takes majority, it is also necessary to understand that the issue raised by the BOD is not convincing enough and should be “shelved” for further discussion in the next meeting rather than issuing a hasty decision with inadequate information which can easily lead to severe mistakes and costly pay (it should be noted that invalid votes will not be counted and abstention will still be counted in the voting ballot). If the law only gives BOD members 02 (two) choices of approval or disapproval, it is no different from forcing them to choose between right or wrong, and by only right or wrong, they may be held responsible for their decisions.

[6].  From the above analysis, I believe that the provisions on voting through the resolution of the BOD mentioned in Article 157.12 of the Law on Enterprises are quite appropriate and should be interpreted as follows:

        There are three (03) separate types of votes:

        (i) in case there is no abstention, based on the majority of votes of approval/disapproval, if the ratio is equal, the party with the vote of the President of the BOD has the decisive value;

        (ii) in case the abstentions are the majority, the resolution will not be ratified, but it can still automatically be reviewed at the next meeting (eg: 04/06 members abstain from voting, the resolution is not ratified); and

        (iii) in case the abstentions are in the minority or the votes are of equal, then the group of votes with the opinion of the President of the BOD will be the decision (e.g. 02/6 members approve (President of the BOD among them); 02/6 members disapprove; 01/6 or 02/6 abstentions).

 

Thus, if any of the above 03 (three) types of votes prevail when compared with each of the remaining types of votes, the decision will belong to the majority group. In case the majority is abstention then it can be understood that it is disapproval because it has not yet produced an approval/disapproval result, but needs further review to convince the “neutral” members that a clear decision is needed, this is also the goal that any BOD desires and is consistent with the spirit of the Law on Enterprises.

However, it should also be not allowed to combine abstentions and negative votes into one category because such action will devalue the abstention (the implication of the disapproval and abstention are quite different). in case the abstentions are in a minority/non-majority but the remaining 02 (two) types of votes have the same percentage of votes, the vote of the President of the BOD will play a decisive role.

Nguyen Duc Long - IBPRO Legal Co., Ltd

 

[1] The White elephant is a term for an object that its owner cannot dispose of has to pay a cost, especially the maintenance costs, which is not proportional to its usefulness. In modern usage, it is an object, construction project, plan, joint venture, facility, and so on, that is considered expensive but has no use or little value.

Post by: IBPro
31-12-2021

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