Supervisory board in joint stock company – how to truly understand?

Thien Tai Joint Stock Company[1] (“Thien Tai Company”) is set up by ten (10) individual founding shareholders. The organizational structure of Thien Tai Company includes: (i) General Meeting of Shareholders; (ii) Board of Directors; and (iii) General Director. On May 1st, 2017, Thien Tai Company submits a notification on change of members of the Board of Directors from three (03) members up to five (05) members attached with new updated Charter to the Department of Planning and Investment (“DPI”). After considering the dossier and the Charter of Thien Tai Company, DPI, based on Article 134.1 of the Law on Enterprises[2], issued a notification requesting Thien Tai Company to adjust its organizational structure to comply with the Law on Enterprises.

Accordingly, DPI holds that if its organizational structure does not have a Supervisory Board, Thien Tai Company must ensure that at least 20% of the members of the Board of Directors are independent members and the Company has an Internal Auditing Board attached to the Board of Directors. Failing this, the organizational structure of Thien Tai Company must have a Supervisory Board.

In the course of advising clients, we see that regarding Article 134.1 of the Law on Enterprises, there are two (02) different interpretations and understandings as follows:

(i) The first viewpoint: If the joint stock company (i) Does not have more than eleven (11) shareholders; and (ii) The institutional shareholders do not own 50% or more of the total number of shares, such joint stock company must establish a Supervisory Board; and

(ii) The second viewpoint: In order for a joint stock company not to fall into the obligatory case to establish a Supervisory Board, it must ensure that (i) At least 20% members of the Board of Directors are independent members; and (ii) It has an Internal Auditing Board attached to the Board of Directors.

Based on our experiences and discussions with the members of the Drafting Board of the latest Law on Enterprises, we need to look at the nature and main functions of the Supervisory Board in a joint stock company to (i) Supervise the Board of Directors and the General Director in managing and operating the company; and (ii) Inspect the rationality, legality, truthfulness and prudence level in managing and operating the business activities of the company. Therefore, where a joint stock company does not have a Supervisory Board, there must be another mechanism to ensure transparency in the management process of the Board of Directors and General Director.

In reality, we see that quite a few small-scale joint stock companies do not have the Supervisory Board. As a result, the management by the Board of Directors and the General Director lacks transparency and the shareholders do not have a mechanism to supervise the company’s activities. For this reason, we believe that the above viewpoint and requirement of DPI are consistent with the spirit and purpose of Article 134.1 of the Law on Enterprises.

Thus, for the joint stock company not subject to establishing a Supervisory Board, the Board of Directors should ensure that at least 20% of members of the Board of Directors are independent members and have an Internal Auditing Board attached to the Board of Directors as prescribed above.


[1] The company’s name is for the purpose of this article only, and we do not mention or imply any actual company.

[2] Article 134. Organizational and managerial structure of joint stock companies

1. Joint stock companies are entitled to choose to organize their management and operations after one of the two following models, unless otherwise prescribed by legislation on securities:

a/ General Meeting of Shareholders, Board of Directors, Supervisory Board and director or director general. If a joint stock company has fewer than 11 shareholders and the institutional shareholders own less than 50 percent of the total number of shares of the company, a Supervisory Board is not compulsory;

b/ General Meeting of Shareholders, Board of Directors and director or director general. In this case at least 20 percent of the members of the Board of Directors must be independent members and an Independent Auditing Board shall be required in the Board of Directors. The independent members shall supervise and control over the management and administration of the company.