State-owned enterprise(s)’ contracting authority – regularly neglected problem

Trường Lăng

June 6, 2022


State-owned enterprise(s)’ contracting authority – regularly neglected problem

Trường Lăng

June 6, 2022

The practice shows state-owned enterprise(s) (SOE)’ influence and domination and extensive participation ability in real estate projects. This poses a need for public-private partnership between SOEs and private investors (INT) in this field.

Upon cooperating, investor(s) will be, of course, able to receive profits from the exploitation of the land fund under the use of state-owned enterprise(s). However, there have been a series of real estate projects that have been blown up, and that many leaders, managers of state-owned enterprise(s) and related parties have been criminally prosecuted for crime of violating regulations on management and use of state owned assets.

Profit always comes with risk when conducting any business. Therefore, identifying, analyzing and evaluating to minimize risks is always one of the important factors contributing to the success of any project. In this article, the author will analyze the risk aspect related to state-owned enterprise(s)’ contracting authority in transactions related to real estate, one of the basic legal matters, but It’s often an unknown blind spot.

Legal provisions on contracting authority

One of the valid conditions for a civil transaction is “the entity with civil legal capacity and civil act capacity consistent with the identified civil transaction”(1). In order to satisfy the requirements on contracting capacity as prescribed by the law, for enterprise(s), the above decisions must be approved by competent entities according to the company’s articles of association or corporate legal regulations.

Specifically, for a limited liability company (LLC) with two or more members, unless the company’s articles of association provide for a lower ratio, contracts for borrowing, lending, selling assets and other contracts valued 50% of total value of assets or more is recorded in the company’s latest financial statements under the approval authority of the Members’ Board as provided by the company’s articles of association (2).

For joint stock companies, the decision on investment or sale of assets valued from 35% or more of total value of assets recorded in the company’s latest financial statements must be approved by the general assembly of shareholders, unless the company’s articles of association provide a different value (3). The Board of Directors of a joint-stock company has the authority to approve contracts for purchase, sale, borrowing, lending and other contracts and transactions valued from 35% or more of total value of assets recorded in the company’s latest financial statements, unless (i) the company’s articles of association provides a different ratio or value; (ii) Contracts and transactions under the decision-making authority of the general assembly of shareholders; or (iii) Where the company transacts with related persons in accordance with article 167 of the 2020 Enterprise Law (4).

The above-mentioned internal approvals have an important meaning in expressing the contracting will of the enterprise as a legal entity, as well as a condition for determining the validity of the transaction conducted by the enterprise(s)’ relevant representative.

For state-owned enterprises, the management and use of state owned assets is not only subject to the general regulation of the Law on Enterprises and the Law on Securities, but also subject to specific administrative regulations. For example, Article 24 of the Law on Management and Use of State owned capital for Investment in production and business in Enterprise(s) stipulates that the decision-making authority for investment projects or the purchase and sale of fixed assets within 50% of equity belongs to the members’ board or the company’s chairman. For projects and assets with value more than 50%, the reviewing and approving authority of the owner’s representing agencies (5).

In addition to the above provisions, owner’s representing agencies in state-owned enterprise(s) and the leaders themselves at these agencies must also comply with the regulations on management and use of such agency or party committee’s assets upon reviewing and approving projects and this contract.

It can be said that state-owned enterprise(s), as a legal entity, are subject to many legal regulations, so they must subject to a legal compliance level higher than non-state owned enterprise(s). In fact, parties often feel more secure when cooperating with SOEs as they mistakenly believe that SOEs are state representing agencies or because of “soft power” owned by SOEs.

These misconceptions leading to the research and review stages of partners are often ignored, not carried out rigorously. This inadvertently also makes state-owned enterprise(s)’ personnel subjective when they are trusted by partners or they even take advantages of investors’ beliefs, thence the approval of internal agreements is not strictly followed.

There are mistakes derived from the most reputable individuals, at the most basic steps, which are the cause of very serious damages to investor(s) in the developing and implementing process of the project later.

One of the recent cases attracting public opinion is that Mr. Tat Thanh Cang and a series of leaders of Tan Thuan Investment and Construction Company Limited (Tan Thuan) were prosecuted for violations related to the transfer of more than 32 hectares of compensated land belonged the use right of Tan Thuan Investment and Construction Company Limited to Quoc Cuong Gia Lai Joint Stock Company (Quoc Cuong).

According to the conclusion of the Standing Board of the City Party Committee, in this case, the City Party Committee’s Office has not properly and fully fulfilled their responsibilities as the owner’s representing agency at Tan Thuan Investment and Construction Company Limited. For Tan Thuan, this conclusion says that Tan Thuan has caused serious damages to the State by violating Article 22.1 of the Government’s Decree No. 91/2015/ND-CP stipulating investment of state owned capital in enterprise(s) and management and use of capital and assets at the enterprise(s). For Mr. Tat Thanh Cang only, the conclusion says that approving the policy of transferring land to Quoc Cuong is out of their authority and not in accordance with the law (6).

From the legal aspect, from the errors in Tan Thuan’s approval and internal agreement steps according to the above investigation conclusion, Tan Thuan is determined to be incompetent to make and sign a transfer contract for 32 hectares of land at Phuoc Kieng project to Quoc Cuong. Accordingly, the contract between the two parties in this case may be null as not satisfying the provisions of article 117 of the Civil Code (7) and the legal consequences are that the parties restore the original status and return each other what received by them (article 131 of the Civil Code).

Bitter pills may have blessed effects

In the marketplace, it can be said that prestige is the one creates, maintains and determines the value and survival of a brand.

For investing in a real estate project, investor(s) want not only a project that earns as much profit as expected, but also a project which is clean, different, and legally guaranteed, without bad public opinion affecting the reputation of investor(s).

To achieve the goals, it is thought that investor(s) should skillfully take advantages of the strengths gained from cooperation relation with state-owned enterprises, and must ensure the principles of risk management and compliance with the law. For the long-term interests of the parties, a civil denial better than a rede grant, clarity and frankness right from the time the parties discuss cooperation matter is the most important thing.

Accordingly, ensuring that the parties have full authority to sign contracts and carry out related transactions is a prerequisite. Therefore, in addition to other legal documents and aspects of the project, investor(s) should be careful in legal review of documents, approvals and permits related to the partners’ legal status.

The legal review in the early stage or at the material stages helps investor(s) get an overview of the risks that may arise in the next stages, thereby preparing the risk handling and control plans. The legal verification, especially for real estate projects, is often complicated.

For highly accurate verification results, investor(s) can hire experienced and professional law consultants. Based on the results of the legal review, the consultants will assist in dissecting the legal regulations governing each operation of state-owned enterprises, thereby proposing terms and conditions as well as reasonable governing range of such conditions in the contract between the parties.

Source : SaiGon Times Online

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