There is one situation where every defensive shield is insufficient: the managers — usually the majority’s people — are harming the company itself through tunnelling transactions, and the governance bodies they control will never sue themselves. The derivative action is the statutory mechanism letting a minority shareholder step into the company’s shoes to sue those managers.
Legal basis
Article 166 of the Enterprise Law 2020 provides for joint-stock companies: a shareholder or shareholder group holding 1% or more of total ordinary shares continuously for 6 months or more may, in its own name or on behalf of the company, bring a civil liability suit against Board members and the Director/General Director in the statutory cases — breach of managers’ duties (Article 165), improper exercise of assigned rights and duties, failure or incomplete failure to implement Board resolutions, and other violations of law and charter. The financial outcome of winning belongs to the company: appropriated benefits must be returned to the company and losses compensated to the company — the suing shareholder receives no money directly, recovering value through its stake in a cleaned-up company. LLCs have no equivalent named derivative regime: members rely on statutory member rights, managers’ liability under Article 165 and mechanisms installed in the charter/SHA — a practical reason why an LLC minority charter should pre-install internal machinery for dealing with harmful managers.
Analysis: questions investors actually ask
May a small shareholder sue on the company’s behalf?
Yes — in a JSC, where you (alone or as a group) hold 1% or more of total ordinary shares and have held them continuously for 6 months or more. The right does not depend on the Board’s or the General Meeting’s consent: that is precisely its purpose — it operates even when those bodies are controlled by the defendants themselves. The defendants are Board members and the Director/General Director, for management-duty breaches harming the company. Note the scope: this is a suit over the company’s loss, not the shareholder’s personal loss — if you are personally harmed (for example denied information rights), you sue in your own right under a different mechanism. Before suing, the minority should use its right to have the Supervisory Board inspect and sue internally in statutory cases, because that inspection file is a key evidence source.
What conditions must a derivative action meet?
On standing: reaching the 1% ordinary-share threshold held continuously for 6 months at the time of suit. On defendants and grounds: the defendants must be managers in the Article 166 group, and the acts must fall within management-duty breaches causing the company loss — the file must prove the breach, the company’s loss, and causation. On evidence reality: this is the hardest part because the documents sit with the defendants’ side — the shareholder should build the file in advance through information rights, Supervisory Board inspection demands, and meeting minutes recording dissent. On cost and risk: the derivative plaintiff must budget court fees and litigation costs, and prepare for possible counterclaims if the suit is viewed as baseless and harmful. Because of this weight, the derivative action usually delivers its greatest value when declared and seriously prepared as leverage forcing negotiation — and filed only when negotiation fails.
If the suit wins, who receives the compensation?
The company does. That is the ‘derivative’ nature of the action: the shareholder borrows the company’s right to sue in order to recover for the company — every returned benefit and every compensation amount flows into the company’s assets, not into the suing shareholder’s pocket. The suing shareholder benefits indirectly as the company’s value recovers, their portion rising with their ownership ratio. The practical consequences cut both ways: first, the mechanism cannot be abused for personal extraction because the plaintiff receives nothing separately; second, it creates a ‘one sues, all shareholders benefit’ problem — the small shareholder bears all litigation cost and risk while the benefit is shared by ratio, including by the defendant majority side. The SHA cannot change this statutory nature, but minority shareholders can pre-agree to share costs when suing derivatively for the minority group’s common benefit.
Practical recommendations
Our advice: treat the derivative action as the final weapons tier of the shield system, and prepare it before it is needed — hold shares continuously past the 6-month mark (do not let a technical transaction break the holding period), keep every minute recording your side’s dissent, and build the company’s loss file the moment an abnormal transaction surfaces, using inspection rights. A lawyer’s letter declaring a derivative action, backed by a complete evidence file, often opens a negotiation table that years of verbal complaint could not — because it changes the personal risk balance of the targeted managers themselves.
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FLAT Law Firm advises foreign investors on company formation, capital structure, land and joint-venture governance in Vietnam. Contact us for advice on your specific case.
For general reference only; not a substitute for legal advice on your specific case.
This article has been quality-reviewed by the FLAW AI Legal Council