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SUPERVISING RELATED PARTY TRANSACTIONS IN JOINT STOCK COMPANY

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NGUYEN HOAI BAO

MINISTRY OF EDUCATION AND TRAINING
HO CHI MINH CITY UNIVERSITY OF LAW
-----------***-----------MANAGING BOARD OF
SPECIAL TRAINING PROGRAMS

NGUYEN HOAI BAO

BACHELOR‟S THESIS

SUPERVISING RELATED PARTY
TRANSACTION
IN JOINT STOCK COMPANY
BACHELOR THESIS
COMMERCIAL LAW MAJOR
Academic year : 2013 - 2017

HO CHI MINH CITY
2017
2017


MINISTRY OF EDUCATION AND TRAINING
HO CHI MINH CITY UNIVERSITY OF LAW
-----------***-----------MANAGING BOARD OF
SPECIAL TRAINING PROGRAMS

NGUYEN HOAI BAO

SUPERVISING RELATED PARTY


TRANSACTIONS IN JOINT STOCK
COMPANY
BACHELOR THESIS
COMMERCIAL LAW MAJOR
Academic year: 2013 - 2017

SUPERVISOR
AUTHOR
ID
CLASS

: LL.M. NGUYEN HOANG THUY
TRANG
: NGUYEN HOAI BAO
: 1353801011010
: CLC 38C

HO CHI MINH CITY
2017


I hereby confirm that this thesis is my own study under the supervisor’s guidance.
All of the information other than my idea to be used or quoted has been
acknowledged by means of complete references. I would bear full responsibility for
my commitments.

July 18th , 2017

Nguyen Hoai Bao.



LIST OF ABBREVIATIONS

LOE

Law on Enterprise No. 60/2005/QH11 adopted by the
National Assembly dated November 26th, 2014.

LOB

Law on Bankruptcy No. 51/2014/QH13 adopted by the
National Assembly dated June 19th, 2014.

OEDC

Organization
Development

IAS

International Accounting Standards

GMS

General Meeting of Shareholders

BD

Board of Directors


SB

Supervisory Board

for

Economic

Co-operation

and


TABLE OF CONTENT
INTRODUCTION.......................................................................................................1
CHAPTER
1:
THEORETICAL
ISSUES
OF RELATED
PARTY
TRANSACTIONS AND SUPERVISORY MECHANISM OF THEM IN JOINT
STOCK COMPANIES................................................................................................6
1.1. Overview of related party transactions in joint stock companies. ...............6
1.1.1. Definition of “related party transaction” ..............................................7
1.1.2. Characteristics of related party transactions in joint stock company. 11
1.1.3. The necessity of supervising related party transactions......................16
1.2. Supervisory mechanism of related party transaction. ................................19
1.2.1. The internal regulation of the company. .............................................21
1.2.2. The national law. .................................................................................22

1.3. Principles for the effective supervisory mechanism of related party
transactions. ...........................................................................................................29
CONCLUSION OF CHAPTER 1.............................................................................32
CHAPTER 2: REALITY OF SUPERVISING RELATED PARTY
TRANSACTIONS IN JOINT STOCK COMPANIES IN VIET NAM AND
SOLUTIONS FOR THE IMPROVEMENT OF THEM. .........................................33
2.1. Determination of related party transactions. ..............................................33
2.2. Standard and conditions for the manager. ..................................................37
2.3. Rights and obligations of shareholders and managers. ..............................42
2.4. Approval of related party transactions. ......................................................46
2.5. Information disclosure. ...............................................................................49
2.6. Remedies for violations of legal requirements for supervising related party
transactions in joint stock company. .....................................................................52
2.7. Enforcement mechanism of the provisions of supervising related party
transactions in joint stock company. .....................................................................54
CONCLUSION OF CHAPTER 2.............................................................................57
CONCLUSION .........................................................................................................58


1

INTRODUCTION
1. Justification
When Viet Nam opens the market and its economy integrates
comprehensively, at an increasing depth, into regional and international economies,
we deal with lots of challenges, one of them is increasing economic sectors. As
opposed to subsidy period with the core of state economy, at this time, our
economic system is so complex and diversionary with a large number of companies.
Such changes also mean that Vietnamese companies have to face more ferocious
competition pressure. As a result, the government has to promulgate more and more

regulations, in compliance with national regulations and in alignment with
international best practice, to adjust new relations fairly and equitably. But there are
many difficulties that corporations have to face when trying adhere to good
corporate governance standards. One of the major problems is how to make sure
that the entities on behalf of the company can not abuse their rights as well as
powers and positions to expropriate companies resources, which normally is
referred as related party transactions.
In general, companies are founded for the purpose of seeking profits,
members play different roles in the operation of the companies and combine
together for the purpose of maximizing company interest. However, they also have
better incentives to take advantage of their rights in transactions for their own
interest rather than for company‟s. In practice, related party transactions do not
always undermine the integrity of the market as well as are not per se violations of
law. In some specific circumstances, it can be the positive feature which companies
should encourage because it aligns its interest with those of insiders and can be
made for the company interest. That is also the reason why no country finds it
practical to prohibit these kinds of transactions altogether as well as not
promulgating any provisions to supervise them because of its potential risks for the
company as well as for stakeholders.
Therefore, provisions of supervising related party as well as corporate
governance, especially in joint stock companies- the most popular type of the
company in the market, is so necessary to improve in the current. The legal and
regulatory framework, as well as enforcement in this field, is also concerned in
recent year, but it still has to face many difficulties. With the reasons as mentioned,


2

the topic “Supervising related party transactions in joint stock company” is
chosen for the author‟s graduation thesis. Because of limitation in time and

experience, this thesis is not able to introduce all aspects of supervising related
party in joint stock companies. So any comments or advices from all reader are
always received by the author and encourage the author to develop the analysis with
the purpose of improving the Vietnamese laws on corporate governance more and
more applicable and perfect.
2. Literature review
After Viet Nam participates in WTO, the supervision of related party
transactions has been mentioned in several research. Some of them which are
referenced most in this thesis are:
 Le Dinh Vinh (2004), “Supervising related party transactions in companies
under Enterprise law”, Article in Legal Journal No.1/2004, p 54-58;
 Tran Thi Bao Anh (2010),“Handling the transactions with danger of leading
to self-interest under the 2005 Law on Enterprise” (Kiem soat cac giao dich
co nguy co phat sinh tu loi theo luat doanh nghiep 2005), Article in legal
journal No.09/2010, p19-27;
 Nguyen Hoang Duy (2015), “The supervision of related party transaction
under LOE” (Kiem soat cac giao dich tu loi – nhin tu goc do luat doanh
nghiep 2014), Article in democratic and legal journal No.10/2015, p 31-33;
 Ly Dang Thu (2011), Supervising related party transaction made by the
manager of the company under Enterprise Law2005 (Kiem soat cac giao
dich tu loi cua nguoi quan ly theo Luat Doanh Nghiep 2005), Master Thesis
in Law, Ho Chi Minh University of Law;
 Nguyen Thanh Ly (2014), Supervising related party transactions in joint
stock companies under Vietnamese Law (Kiem soat cac giao dich co kha
nang tu loi trong cong ty co phan theo phap luat Viet Nam), Master thesis in
Law, Ha Noi National University;
 Do Thi Thuy Duong (2014), Law on supervising related party transactions
in joint stock company (Phap luat ve kiem soat giao dich tu loi trong cong ty
co phan), Graduation thesis in Law, Ho Chi Minh University of Law.
All of them provide the issues of related party transactions by personal view.

However, it is just an overview and can not give readers an insight knowledge about


3

the related party transaction at the moment. For instance, two article of the authors
“Le Dinh Vinh” and “Tran Thi Bao Anh” just mention about related party
transactions cursorily without deep analysis of characteristics, effects, provisions,
issues, solutions, etc. Theses of the authors, “Ly Dang Thu”, “ Nguyen Thanh Ly”
and “ Do Thi Thuy Duong” resolve weakness above by giving deeper analysis in
related party transactions as well as provisions of supervising them by lots of
manners under Enterprise Law2005 and other laws which are effective at that times.
Since LOE have been effective, it is just an Article of author “ Nguyen Hoang Duy”
that researches this issues under LOE, but it is too short and general for readers to
find information or knowledge of provisions of supervising related party
transactions at the moment.
Up to now, there is still little research about the related party transactions in
the scope of joint stock companies under LOE. Therefore in the scope of this thesis,
it will give readers an insight look on the legal framework of supervising related
party transactions in joint stock company under LOE as well as the recommendation
to improve its.
3. Purpose
The purpose is providing issues of related party transactions‟s theories and
regulations adjusting them in joint stock companies. In addition, illustrating or
estimating current regulations and applications them in supervising related party
transactions in joint stock companies would help us find out the directions or
solutions to perfect the laws in supervising related party transactions in joint stock
companies in Viet Nam. The main purposes include:
 Analysing theoretical issues of related party transactions.
 Analysing provisions of supervising related party transactions in joint stock

company, as well as the enforcement of them, under LOE. Accordingly, the
defects of such provision will help improve the corporate governance in Viet
Nam.
 Giving recommendations as well as suggestions for the improvement of the
supervisory mechanism of related party transactions in joint stock company
in Viet Nam.
4. Objects and scope

Comment [TN1]:


4

The objects of this thesis are related party transactions and the supervisory
mechanism of them in joint stock company under LOE.
Because of time and material limitation, the scope of this thesis concentrates
on joint stock company and its supervisory mechanism of related party transactions
under LOE. Some relevant laws, as LOB, are only mentioned under minimum
degree to help readers have an overview of the relevance of LOE and other current
Laws in the supervisory mechanism of related party transaction. Furthermore, some
foreign rules as well as international standards, or provisions, are also referenced,
especially provisions of UK- a country with modern economy and as a
representation of common law legal system, to clarify some theoretical issues of
related party transactions and to improve the supervisory mechanism of related
party transactions in joint stock company, more consistent with the international
practice.
5. Methodologies.
Some following methods are used to gain the purposes of this thesis as
mentioned above.
Firstly, the traditional legal analysis method is used to illuminate and

systemize provisions of law in the supervisory mechanism of related party
transactions in joint stock companies. Thanks to that, defects of them will be found
and referenced for the improvement of themselves.
Secondly, the comparative method is used to evaluate or demonstrate for the
analysis as well as the arguments and the point of view in this thesis. Especially this
method, in the Sections of theoretical issues, plays an important role when
approaching to both national and international materials.
Thirdly, the inductive method helps to draw the common views, as well as
the conclusion after two methods above, are utilized for the analysis and
comparison of materials.
And finally, the synthetic method plays the most important role in this thesis
because it helps exploit from both legal and academic materials including books,
legal journals and even from websites on the internet, that means all relevant
information from different sources are collected to draw the remarkable conclusion.
6. Structure:

Comment [TN2]:


5

Chapter 1. Theoretical issues of related party transactions and
supervisory mechanism of them in joint stock companies.
Chapter 2. Reality of supervising related party transactions in joint
stock companies in Viet Nam and solutions for the improvement of them.


6

CHAPTER 1: THEORETICAL ISSUES OF RELATED PARTY

TRANSACTIONS AND SUPERVISORY MECHANISM OF THEM IN
JOINT STOCK COMPANIES
1.1.

Overview of related party transactions in joint stock companies.
A joint-stock company is a legal entity 1 in which different stocks can be
bought and owned by shareholder. Each shareholder owns company stock in
proportion, evidenced by their shares (certificates of ownership)2. That allows for
the unequal ownership of a business with some shareholders owning more of a
company than others. Shareholders are able to transfer their shares to others without
any effects to the continued existence of the company 3 . However, as a type of
corporation or a legal entity, a joint stock company could only carry out its business
activities through its representatives. According to Lord Chancellor Haldane,
“…a corporation is an abstraction. It has no mind of its own any more than it
has a body of its own; its active and directing will must consequently be
sought in the person of somebody who is really the directing mind and will
of the corporation, the very ego and center of the personality of the
corporation4.”
This “directing will” is embodied in a corporate BD. That means if the
representatives carry out their rights and obligations in a truthful and careful
manner, it would ensure the best interest of the company whereas they would abuse
their rights to make profits for themselves. For instance, Directors of company A
makes a transaction with company B in which he also owns the shares. It will be
good if such activities are carried out because of the best interest of the company, as
favourable conditions for the company A thanks to the relationship of Directors
with company B. But in case that the transaction is made for personal interest, as

1

Legal entity means A lawful or legally standing association, corporation, partnership, proprietorship, trust,

or individual. Has legal capacity to (1) enter into agreements or contracts, (2) assume obligations, (3) incur
and pay debts, (4) sue and be sued in its own right, and (5) to be accountable for illegal activities. This term
is similar to term “pháp nhân” (“juridical person”) under Vietnamese studies because they both are legally
established, responsible for liabilities by their own property and can participate independently in legal
relations. See Black‟s Law dictionary, available at http://thelawdictionary.org/legal-entity/
2
Courtney, Thomas B. The Law of Private Companies (2nd ed.). p. 26. ISBN 1-85475-265-0.
3
"Joint Stock Company". West's Encyclopedia of American Law. Retrieved 4 May 2012.
4
Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705


7

bonuses for the Director or no arm‟s length price5 for company A, it can result in
serious detriments for the company. Therefore, such transactions, which are
involved related parties, are required to be supervised6. Most companies have an
annual review for all employees and require them to submit a related-party
transaction screening form to help self-identify these relationships for supervising,
and it is so consistent with the international practice7.
Following, we will define related-party transactions and discuss the reasons
why they have to be supervised in the joint stock company.
1.1.1. Definition of “related party transaction”
Around the world, the potential for abuse of related party transactions is
viewed as an important policy issue 8 . However, there are not any consistent
definitions of “related party transactions” in in various countries, evenmore most of
them are only implicit in the laws without any definitions 9 . Another issue with
terminology is the overlap among the term “related party transactions” and other
terms including “self-dealing”, “self-interest transactions” and “tunnelling” 10 .

5

Arm‟s length price means a transaction when a seller and buyer have no personal interest in the matter
agree to a price with no pressure placed on them. Black‟s Law Dictionary, available at
http://thelawdictionary.org/arms-length-price/.
6
The American Institute of Certified Public Accountants‟ publication entitled (2001), Accounting and
Auditing for Related Parties and Related Party Transactions, gives three reasons why related parties and
related party transactions are difficult to audit: 1.) transactions with related parties are not always easily
identifiable, 2.) the auditor relies primarily upon management and principal owners to identify all related
parties and related party transactions and 3.) such transactions may not be easily tracked by a company's
internal control. Therefore, although maintaining tight controls over financial supervising requires oversight
of many different business transactions, one such transaction involves related party. See Johnstone and
Bedard (2004) include the existence of related party transactions in their audit risk measure.
7
It is important to have specific standards or rules (in effect, internal regulation) to prohibit behavior that
creates the most serious risk to shareholders, such as related party transactions. See Richard C. Breeden
(2003), "Restoring Trust” Report to The Hon. Jed S. Rakoff, The United States District Court for the
Southern District of New York, On Corporate Governance for the Future of MCI, From the SEC website
(www.sec.gov).
8
OEDC (2013), Supervision and Enforcement in Corporate governance, p. 24.
9
“The law of the countries in the region generally do contain definitions of "related party”, without further
spelling out the meaning of “related party transactions”. And in this case “countries in the region”, save as
otherwise specifically indicated, will mean only the four countries: Romania, Croatia, Bulgaria and Serbia.
See Laura Luputi (2004), Reporting Related Party Transactions And Conflicts of Interest.
10
Because of the overlapping, these terms often are used subject to the objectives and scope of a research and
the opinion of the researcher. Such thing makes it more difficult to have precise definitions of these terms.

However, in short, “related party transaction” can be understood as all cases the director or controlling
shareholders or their related party in on the other side of the transactions with the company.“Self-interest
transaction” is often referred to as a transaction between the corporation and its director in which such
director has an interest. See Melvin Aron Eisenberg (1988), Self-interested Transactions in Corporate Law,
Journal of Corporation Law,13,997-1009; Chu-Yang Chien and Joseph C.S.Hsu (2010), The Role of
Corporate Governance in Related Party Transactions.

Comment [TN3]:

Comment [TN4]:
Comment [TN5]:

footnote


8

Variations in definitions and terminology describing related party transactions,
combined with the wide variety of forms in which related party transaction can
occur, highlight the need for specific descriptions in the current study. No
codification of the relevant terminology and legal definitions of related party
transactions are still somewhat equivocal and inconveniently spread over several
bodies of law with complex interrelations, which often makes a proper application
of related party transactions rules difficult for both practitioners and judges 11 .
Therefore, now we will reference the rules of IAS, as an international standard, and
LOE to clarify definitions of “related party transaction”.
Firstly, the evident starting point for identifying and monitoring related
party transactions is the definition of entities or persons who can be considered as a
“related party” 12 . IAS 24 defines a related party as a person 13 , including
management14 and close family members15, or entities16 that is related to the entity

that is preparing its financial statements via control (direct or indirect), joint control
or significant influences. And IAS also states some cases that parties are not

11

OEDC (2014), Related Party Transactions: International Experience and Russian Challenges, p. 18.
OEDC (2014), supra note 11, p. 6.
13
IAS 24.9: A person or a close member of that person‟s family is related to a reporting entity if that person:
(i) has control or joint control over the reporting entity;
(ii) has significant influence over the reporting entity; or
(iii) is a member of the key management personnel of the reporting entity or of a parent of the
supervising entity.
14
IAS 24.9: Key management personnel are those persons having authority and responsibility for planning,
directing and controlling the activities of the entity, directly or indirectly, including any director (whether
executive or otherwise) of that entity.
15
IAS 24.9: Close members of the family of a person are those family members who may be expected to
influence, or be influenced by, that person in their dealings with the entity and include:
(i) that person‟s children and spouse or domestic partner;
(ii) children of that person‟s spouse or domestic partner; and
(iii) dependents of that person or that person‟s spouse or domestic partner.
16
IAS 24.9: An entity is related to a reporting entity if any of the following conditions apply:
(i) The entity and the reporting entity are members of the same group (which means that each parent,
subsidiary and fellow subsidiary is related to the others);
(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a
member of a group of which the other entity is a member);
(iii) Both entities are joint ventures of the same third party;

(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity;
(v) The entity is a post-employment benefit plan for the benefit of employees of either the reporting
entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring
employers are also related to the reporting entity;
(vi) The entity is controlled or jointly controlled by a person identified in (a);
(vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key
management personnel of the entity (or of a parent of the entity).
12

Comment [TN6]: ?


9

related 17 . Back to the situation in Viet Nam, LOE defines “related party” is an
organization or individual that has direct or indirect relationships with the
enterprise, including the prescribed cases under LOE18. In general, related parties
include individuals or organizations which have benefit relations, family relations,
personal relation, etc. The relations may be direct or indirect with the company, but
the law is only possible to adjust family relations and management relations (the
relations which can be investigated or showed by documents), with personal
relations, as mistress, lover, friends, regular client, enemy, rival and so on, the law
can cover them. Briefly, related parties can be understood as well as classified into
following categories19:
 Persons involved in the management of a company: members of
management, key executive officers are qualified as related to the company
in whose management they are involved.
 Persons with participation towards the company‟s share capital:
shareholders who own more than the prescribed threshold of a particular
company‟s shares. A shareholder is considered as a related party if he has

direct or indirect at least a significant interest (but this is not necessary in all
17

IAS 24.11: The following are deemed not to be related:
 Two enterprises simply because they have a director or key manager in common;
 Two persons who share joint control over a joint venture;
 Financiers, trade unions, public utilities, government departments and agencies in the course of their
normal dealings with an enterprise; and
 A single customer, supplier, franchisor, distributor, or general agent with whom an enterprise
transacts a significant volume of business merely by virtue of the resulting economic dependence.
18
LOE Art 4.(17): Related person means any organization or individual that has a direct or indirect
relationship with the enterprise, including the following cases:
a/ The parent company, managers of the parent company and persons competent to appoint such
managers versus a subsidiary company in a corporate group;
b/ A subsidiary company versus its parent company in a corporate group;
c/ A person or a group of persons capable of controlling the decision- making process and
operations of an enterprise through the managing body of the enterprise;
d/ Managers of the enterprise;
đ/ Spouse, natural father, adoptive father, natural mother, adoptive mother, natural children, adopted
children, siblings, brothers-in-law and sisters-in-law of any manager of a company, or of any member or
shareholder holding a controlling capital contribution amount or controlling shares;
e/ An individual who is authorized to act as the representative of the persons and companies defined
at Points a, b, c, d and đ of this Clause;
g/ An enterprise in which the persons and companies defined at Points a, b, c, d, đ, e and h of this
Clause possess holdings to a level that they can control the decision-making process of managing bodies of
such enterprise;
h/ A group of persons who agree to coordinate to take over contributed capital amounts, shares or
interests in a company or to control the decision- making process of the company.
19

Laura Luputi (2004), supra note 9, p. 7-8.

Comment [TN7]: ??


10

cases), even if holding disclosure requirements apply to lower levels of
shareholding (e.g. holdings of 5%).
 Persons with „control‟ direct or indirect: persons exercising control over
another party and that other controlled person; persons controlling together a
third party; persons under the control of a third party.
 Persons with family relations: spouses and relatives; there are differences
as regards the degree of kinship and affinity. Generally, this criterion is also
used for determining indirect involvement in management, indirect
participation towards the share capital or indirect control.
 Persons with other existing relations: the regulations qualify as „related
parties‟ the persons between whom certain relations, other than family
relations, are established: employer and employee, commercial agent and
beneficiary, commercial partners, donor and donee, etc.
 Cross shareholding: companies with cross-shareholdings also qualify as
related parties.
Secondly, after having determined “related parties”, it is easier to clarify the
definition of “related party transactions”. Transaction means an act of carrying out
some form of business between two persons 20 , including: agreement, contract,
exchange, understanding, or transfer of cash or property that occurs between two or
more parties and establishes a legal obligation21. It also brings the will, purpose or
motive of parties of transactions, so the consideration of parties, who take part in
transactions, is also a basis for the legislator to stipulate whether a transaction is a
related party transaction or not. In other words, if parties of transactions are related

to each other, it is highly capable of related party transaction.
IAS defines related party transactions as “a transfer of resources, services or
obligations between related parties, regardless of whether a price is charged 22 ”
while LOE does not have any definitions of “related party transactions”. LOE
determines related party transactions as transactions which are required to be
supervised under its provisions, including: (1) transactions between the company

20
21
22

Webster‟s new world law dictionary, by Susan Ellis Wild, legal editor.
Available at http://www.businessdictionary.com/definition/transaction.html
IAS 24.9


11

and some specific entities23, and (2) transactions whose values are equal to or higher
than 35% of the total asset value written in the latest financial statement of the
company, unless a smaller rate is prescribed by the company‟s charter 24. Specific
entities in LOE include the representatives and their related party as well as the
company of which they own stakes or shares. Company is a legal entity and only
carries out business activities by its representatives. In joint stock company legal
representatives normally are Chairperson of BD or Director/General Director25 and
depend on many sectors, such as business licence, company charter. However,
“representatives” mentioned in this case are the persons who represent the company
to make a transaction or sign a contract, that means representatives include both
legal representative and the persons authorized by them, or could be the controlling
shareholder26. It is completely possible for them to make a related party transaction

and the main consideration to determine, in both IAS and LOE, is whether a
relationship exists, prior to the business transaction, that could affect the decision
making or not. It can be relations between the company and its representatives or
relations between the representatives, who make transactions on behalf of the
company, and their related party.
In conclusion, a related party transaction can be understood in a common
way as “a business deal or arrangement between two parties who are joined by a
special relationship prior to the deal 27 ”, and such relationships normally are
derived from related parties. As a result, the determination of related parties is so
important to determine whether a transaction is a related party transaction or not.
However, many countries have different approaches for such definitions and so we
have to base on any circumstances and applicable laws to determine whether it is a
related party transaction or not.
1.1.2. Characteristics of related party transactions in joint stock
company.
23

LOE Art 162.
LOE Art 135 and Art 149.
25
LOE Art.134.(2).
26
Controlling shareholder is a shareholder who can influence the corporations‟ activities because the
shareholder either owns a majority of outstanding shares or owns a smaller percentage but a significant
number of the remaining shares are widely distributed among many others. Black‟s Law Dictionary 1500
(9th ed.2009).
27
Investopedia dictionary, available at http://www.investopedia.com/terms/r/related-partytransaction.asp.
24


Comment [TN8]:


12

Although commonly viewed as conflicts of interest between firm
managers/board members and their shareholders, there are two alternative views of
related party transactions that are consistent with economic theory. “Firstly, the
conflict of interest view, related party transactions compromise management‟s
agency responsibility to shareholders or a BD‟s monitoring function. Secondly, an
alternative perspective, which we refer to as the efficient transactions view, is
related party transactions fulfill underlying economic needs of the company
between parties who have built up trust and shared private information. The conflict
of interest view portrays related party transactions as potentially harmful to the
interests of the shareholders. On the other hand, the efficient transactions view
maintains that related party transactions do not harm, and perhaps even benefit,
shareholders28..” Only the first view, with high risk for the company, is compulsory
to be supervised and so the author only anlalysed the characteristics, or
requirements for the related party transactions under the first view, as well as the
related party transactions should be supervised.
Firstly, the representatives 29 are authorized to make related party
transactions on behalf of the company
The entities, by which transactions are made for their own interest, will
always act in good faith. Related party transactions only lead to the risk of
detriments if they contain the conflict of interest among the entities. For instance, in
the sole trader or individual household, its owners carry out business activities for
the purpose of making profits for themselves and their liabilities are unlimited with
their own properties, so they could not make a transaction against themselves, even
related party transactions or not. However, a separate legal entity, as the joint stock
company, can only carry out its business activities by representatives and it is

possible to occur related party transactions because of the conflict of interest
between representatives and the company. In theory, owners tend to make
transactions by themselves rather than by another one, but it is impossible for joint
stock company because the numbers of its owners, who own its shares and are
referred as shareholders, in many cases, can reach hundreds, thousands, or even
28

ElizaBeth A. Gordon and Elaine Henry (2005), Related Party Transactions and Earning Management, p.4.
In this case, to clarify the argument, the word “representatives” includes both legal representative and the
persons authorized by them, who made the transactions on behalf of the companies.
29

Comment [TN9]:
không?


13

higher, and they can not usually altogether carry out company business activities.
Besides the reason of qualifications as well as experiences also requires joint stock
company to authorize representatives for the convenience of operation.
The legal representative of the sole trader is its owner and he, or she, can
employ another person as Directors to manage business operations 30. In this case,
we only mentioned about the Director who is hired by its owners because the
owners will always seek to their best own interest. In theory, related party
transactions leading to the risk of detriments can occur because of the conflict of
interest. However, it is hardly in practice because the law still requires unlimited
liability for owners, so owners will not gamble his life for other persons rather than
themselves, and even if owners do so, their relations must have deep, as family
relations, enough to ensures that there are not any conflicts of interest among them.

One more reason is that the size of the sole trader is so small that the owners can
supervise Director effectively and ensure the safety of themselves. Meanwhile, joint
stock company because of its big size, can occur the conflict of interest between
representatives and shareholders as well as the company, which results in related
party transactions leading to the risk of detriments.
In addition, to be considered as related party transactions, they must be made
within authority or power by representatives. If representatives make a wrong
transaction, out of their jurisdictions, it will only be a wrongful act and not to be
adjusted by the supervisory mechanism of related party transactions. In other words,
related party transactions only occur in case that representatives are authorized to
make transactions on behalf of the company and such transactions must be within
their jurisdictions.
Secondly, the representatives abuse their rights as well as powers or
positions in the transactions
The representatives could be legal representative or any persons who are
authorized to make transactions with other entities on behalf of the company. In
joint stock company, they normally are: shareholders and authorized representative
of shareholders that own a large number of shares (more than 10% of ordinary
shares of the company)- controlling shareholders; authorized representatives of

30

LOE Art 185.(4).

Comment [TN10]: ??


14

shareholders being organization; members of BD; The Director/ General Director31.

With great powers and positions in the company, it is so easy that they could engage
in related party transaction to expropriate firm resources instead of exercising their
rights and fulfilling their obligations for the best interest of the company.
The representatives can abuse their rights as well as powers or positions in
various ways. In general, it is conducted under the type of contracts or unilateral
legal behaviours, especially big value contracts. The contents of contracts in that
cases are so diverse, it could be setting the price higher than that in the market,
selling goods of the company at the lower price, hiring related parties instead of
other individuals with the lower price for the same positions, etc. In addition,
unilateral legal behaviours such as waiver of real rights, waiver of debt claims,
deferment of debts, etc, are also a common type of the abuse because up to now,
such transactions of this type are still not concerned more in many countries 32. In
many cases, performing that behaviours causes damage to the interest of the
company and is normally behind a veil of liquidation of assets or listing a
company‟s debt to be bad debt, etc.
Thirdly, the purpose of transactions is personal interest instead of
company‟s interest
The nature of related party transactions is that the representatives abuse their
rights as well as powers or positions for self-interest purpose which could be the
interest of representatives themselves or of their related party or of a third party. For
instance, the Director may hire their related parties for a position in the company
with the higher salary than the others in the same position. In this case, the issue is
that whether the interest of the company is transferred to related parties as well as
the Director or not. Instead of the same pay as other persons, the company has to
pay higher pay than for Director‟s related parties. Therefore, if the Director hires
their related parties because of appropriate reasons for the best interest of the
company, as the new employee has a higher degree, with special skill and could
make more profits for the company than the others in the same positions, it is not
related party transaction and vice versa.
31


Nguyen Thanh Ly (2014), Supervising Related Party Transactions in Joint Stock Companies under
Vietnamese Law (Kiem soat cac giao dicj co kha nang tu loi trong cong ty co phan theo phap luat Viet Nam),
Master thesis in Law, Ha Noi National University, p. 14.
32
Nguyen Thanh Ly (2014), supra note 31, p. 29.

Comment [TN11]:

Comment [TN12]:


15

Transfers of such interest occur especially in big value contracts because the
more value is the more personal interest can be got, and so it is highly capable of
constituting related party transactions. There are two methods to determine whether
it is a big value transaction or not: (1) Comparing with total asset value of the
company and (2) comparing with market price. With the first method, the advantage
is easy to understand and apply but the disadvantage is that it can not cover all
related party transactions which their values are less than prescribed level, while the
second method is in contrast because of differences in case by case.
And lastly, related party transactions will cause damage to the company
The transfer of company interest into personal interest normally leads to
damages to the companies. If a transaction does not cause damages to the company,
it can not be related party transactions. However, it is difficult to determine such
damages because they may not occur prior to the enforcement of themselves in
practice. As a result, the legislators should consider transactions, which contain the
potential risk of damage to the company, as related party transactions and supervise
them appropriately. For instance, when the representatives abuse their rights to sign

a contract with a company instead of other companies with the same conditions for
the bonuses as well as incentives from contractual company, and do not cause any
damages to the company, that transaction is not related party transaction because in
the same conditions without the loss or damage to the company, representatives can
choose the company which bring more benefits, even it is only personal benefits for
themselves.
Related party transaction not only causes damages to tangible assets 33 but
also intangible assets34 of the companies as well as loss of property or reducing the

33

Tangible asset means in accounting, any asset that can be seen and touched. Tangible assets include things
that can be reproduced, such as widgets or a widget factory, and things that cannot be reproduced, such as the
land upon which the widget factory is built. Tangible assets are comparatively easy to price, and therefore
they are often used to express the value of a company. However, because they do not include intangible but
still valuable things like patents and brand recognition, they may not truly express a company's value. Less
commonly, tangible assets are called hard assets. See Farlex Financial Dictionary. 2012 Farlex, Inc. All
Rights Reserved
34
Intangible asset means In accounting, any asset that cannot be seen or touched. Intangible assets include
things like patents and brand recognition, that add value to a company, but are difficult to price. Intangible
assets explicitly do not include actual things, such as widgets, a widget factory, or the land upon which the
widget factory is built. Because of the difficulty in pricing, intangible assets are sometimes not included in a
company's valuation. However, not including them may not express the company's true value. See Farlex
Financial Dictionary. 2012 Farlex, Inc. All Rights Reserved

Comment [TN13]:

Comment [TN14]:
không?



16

reputation of the company and so consequently it results in negative consequences
for shareholders or clients of the companies. In addition, related party transactions
affect business environment, socio-economic badly or negatively. Furthermore, they
also lead to detriments for other entities, such as shareholders, stakeholders,
employees, society, etc. Insightful analyses about the damage as well as the
detriment for such entities, or the company, will be stated in Section 1.1.3 of this
thesis.
In conclusion, a transaction becomes a related party transaction when it
satisfies all requirements above. However, it is difficult to determine, especially
whether a representative abuse their rights as well as powers or positions for
personal interest or not. Therefore, having the thorough grasp of such characteristics
of related party transactions, which lead to the risk of detriments, will help us
determine whether a transaction is a related party transaction which is compulsory
to be supervised or not.
1.1.3. The necessity of supervising related party transactions.
Based on agency theory35, management may not act in the best interest of
their shareholders. Managers may resort to opportunistic behaviour that will amount
to self-enrichment at the detriment of the owners of the firm36. It is so reasonable
that both shareholders and representatives want to maximize their own interest,
which is completely possible in contrast. If the owners carry out business activities
by themselves, it will never be related party transactions. Therefore, related party
transactions usually appear in state-owned companies or joint stock companies in
which owners only can authorize representatives to carry out business activities.
Furthermore, related party transactions are usually behind a veil of a legal
transaction and rationalized by representatives via high pay and bonuses for
employed family members and associates, inappropriate bonuses, systematic biases

in business decisions and a change in the capital structure through the special
issuance of shares favouring the controlling shareholder, etc. joint stock company
is a popular corporate model with the complex structure of capital, shareholders and
35

Agency theory postulates that because people are, in the end, self-interested they will have conflicts of
interests over at least some issues anytime they attempt to engage in cooperative endeavours. See Michael C.
Jensen (1994), Self-interest, Altruism, Incentives, & Agency Theory.
36
ISSC Zaharaddeen Salisu Maigoshi-Rohaida Abdul Latif-Hasnah Kamardin (2016), Related Party
Transactions and Earning Management, p 47.


17

management. In many cases, it has millions of shareholders whose liability limit on
shares invested in the company and these shares entitle their owners to a
proportionate part of the distributed profits of the corporation and to aliquot
portions of the corporation property. Therefore, joint stock companies have to build
a governance structure to protect benefits, or rights, of shareholders as well as to
promote the development of the company.
Related party transactions could benefit and fulfil company demands such as
the need for in-depth company knowledge and expertise or the need for alternative
forms of compensation. And as a bonding mechanism, such transactions would tie
the related party to the company, decreasing incentives for the related party to
engage in risk-taking behavior such as earnings management that might jeopardize
the company or the related party‟s relationship with the company37. However, in
case that representatives abuse their rights as well as powers and positions for
personal interest instead of company‟s.
Related party transactions have a high potential of risks which may result in

detriments for comany as well as other entities as follow:
Firstly, detriments for the company
As mentioned above in section 1.1.2, it may cause direct damage to both
tangible and intangible assets of the company if related party transactions do not
satisfy requirements of law in supervision, as transparency. The consequences of
loss tangible assets could be the limitation, or even elimination, of the capital which
is used for reinvestment of the company as well as shorten the existence and prevent
the development of the company. As a result, the more business is made, the more
damage is done. About the loss of intangible assets of the company, it is too diverse,
or hard, to determine the value of it. For instance, related party transactions result in
discredit as well as the loss of company, which makes the company difficult to do
business, raise capital, sign contracts, etc. And consequently, the company will lose
a lot of business opportunity.
When rights and benefits in the company are abused by the majority of
shareholders, the minority of shareholders will find a way to leave the company,
small investors will hesitate to buy stocks of the company and the assets will flow
into the pocket of the majority, that means the company will lose the chance to
37

ElizaBeth A. Gordon and Elaine Henry (2005), supra note 28, p. 2.

Comment [TN15]:

Comment [TN16]:


18

develop the capital. Moreover, if related party transactions are made once, it may be
repetitive by the same ways with the same persons. That means the scope of

investment channel of the company will be narrowed by the representatives.
The survival of the company depends on two elements: capital and business
conditions, and related party transactions eliminate both of them gradually. On the
other hand, damage to tangible and intangible assets of the company interacts
together and result in the end of the company.
Secondly, detriments for stakeholders.
Stakeholders are anyone with that has a legal, financial or social interest in a
company such as shareholders, managers, suppliers, directors, government,
employees and the community38. In this section, the entities, that make related party
transactions such as directors, controlling shareholders, etc, are not mentioned
because of the transfer of interest for themselves.
With the characteristic of the limited company, the joint stock company is a
fair and equal place for the investors. When making a capital contribution to the
company, the shareholders voluntarily make an agreement to share benefits and
risks by the amount each has invested in the company as well as the benefit of
shareholders will depend on the portion of stocks they owned in the company and
the target of shareholders is the best interest of the company. Loss of interest, or
detriments, of the company, will cause direct damages to shareholders, as well as
the legal rights and benefits of them.
Result from the loss of benefits of the company, the employees are damaged,
it affects to the salaries, work opportunities, preferential policies of the employees.
Outside the company, the clients are also possible to be damaged. For instance, if
consequences of related party transactions are goods, constructions, services in low
quality, it will cause direct damage to the clients of the company. In addition, the
partners of the company also lose fair business environment and the creditors are
damaged because of the insolvency of the company.
And lastly, detriments for economy and society.
Related party transactions result in a lot of serious consequences for the
business environment and social economy of the countries. State-owned enterprises
play an important role in the economies of the nations, aim at the interest and

38

Black‟s Law Dictionary (2th ed). Available at http://thelawdictionary.org/stakeholders/

Comment [TN17]:


19

development of the nations. But in practice, they are the best places for related party
transactions and make a heavy state budget deficit, that affects negatively and
directly to the social economy of the nations. Besides related party transactions
express the weaknesses in management or operation of the company or legal holes
of the nations, which increases the risk of investors when they invest in an
economic market of a country, especially the foreign investors. Foreign investors
are potential investors with a large amount of capital, but they are so hard and
careful. Therefore, when they find out that the economic environment of a country
is not strong enough to keep their safe, they will not invest in them.
Related party transactions also lead up to social stratification, enrich some
individuals illegally and even breach the law of the market. It is not fair and
competitive among business entities as well as influences not only the economy but
also the society of the nations – business morality, corporate culture, faith and
justice.
In conclusion, related party transactions cause damage not only to the
company but also to economy and society. With such detriments, we will lose a lot
of opportunities for development if related party transactions continue to be popular
in corporations, especially joint stock companies- the most numerous type of
corporations. As a result of analyses above, promulgation of regulations regarding
supervising related party transactions is very necessary. Law always is one of the
best tools to supervise or punish violations of entities and protects the best company

interest as well as legal rights, or benefits, of shareholders, and business
environment. When looking at a legal system of a country, we can evaluate the
development of that country. In the current integration period, appropriate and
effective supervisory mechanism creates more opportunities for development and
protects national economy.
1.2.

Supervisory mechanism of related party transaction.
It's no surprise that when an individual's remuneration and incentives are
attached to company interest, they will operate the company in the manner that
could make the best interest of the company as well as for their best own interest.
The best interest of the company means in the same conditions the representative
will choose transactions which make more profits than that of the others, even if
they are related party transactions. As mentioned above, in principle, the related


20

party transaction could benefit the company, even more than normal transactions, in
many circumstances, as protection of business secrets, insightful cooperation,
favourable conditions, etc. In other words, related party transactions are also quick
and easy means to reach the goals as well as the best interest of the company. For
instance, companies may have strategic investments in joint ventures or other
companies to obtain access to supplies or markets (vertical integration). In such
cases, the company would also have transactions with these investments 39 .
However, the potential wealth transfers in related party transactions can lead to
serious detriments, an appropriate and effective supervisory mechanism of them is
very necessary.
In general, there are two methods to supervise related party transactions: (1)
Prohibition, and (2) specifying conditions for making related party transactions40.

The first method- prohibition means completed exclusion of related party
transactions whereby the law prohibits transactions between the company and their
related party or among companies where the representatives or directors of one
company have any direct interest from the other companies. This method will
eliminate completely the potential risk of abuse as well as of the transfer of interest.
However, it is really not popular in many countries because related party
transactions themselves also have good aspects and such exclusions will result in
many disadvantages, such as restrictions on property rights of representatives who
are also the shareholder, loss of business opportunity or legal interest resulting from
appropriate related party transactions, etc.
The second method- specifying conditions for making related party
transactions, promulgation of regulations regarding the conditions or requirements
of performing related party transactions- such as information disclosure, approval of
BD as well as GMS and so on, overcame disadvantages of the first method. In
theory, the second method is more reasonable because it not only supervises related
party transactions but also allows transactions among company, representatives or
managers as well as related parties of them in case that they make the best profits
for the company. However, to establish an effective supervisory mechanism for
related party transaction, it has to perform on two sides simultaneously: (1) internal
39
40

Mark Kohlbeck and Brian Mayhew (2004), Related Party Transactions, p. 2.
Nguyen Thanh Ly (2014), supra note 31, p. 24-25.

Comment [TN18]:

Comment [TN19]: Conditions for what?



×