There is a class of foreign investors who enter Vietnam with a lender’s mindset but want an equity wrapper: they do not intend to stay forever, they want a pre-set date on which the company buys back their stake and pays the money out, possibly with a fixed-rate dividend during the holding period. Redeemable preference shares are the instrument Enterprise Law 2020 reserves for exactly this need: a class of shares the company must redeem when the holder requests or on the conditions recorded in the charter. But the instrument carries a structural trap foreign term sheets rarely mention: a Vietnamese company’s buyback duty is locked by a solvency condition — the company may pay only if, after paying, it can still pay all its debts. This article analyses the legal mechanics of redeemable preference shares, where they differ from a disguised loan, and how investors protect themselves when the company reaches the date without cash.
The mechanics: the redemption right and the Article 135 solvency lock
Article 114 of Enterprise Law No. 59/2020/QH14 defines redeemable preference shares as shares whose contributed capital the company redeems at any time at the holder’s request, or on the conditions recorded in the share certificate and the company charter. In exchange for that flexibility, the holder of redeemable preference shares has no voting rights, no right to attend the general meeting of shareholders and no right to nominate members of the board or the supervisory board, unless the charter provides otherwise — that is, this is a purely financial capital instrument, not a ticket into the governance room. The lock sits at the execution stage: the company’s repurchase of shares (including redemption under Article 114) is subject to the payment condition in Article 135 — the company may pay the repurchase price only if, immediately after payment, it still ensures full payment of its debts and other property obligations; redeemed shares are cancelled and charter capital decreases correspondingly, pulling a charter capital change registration with it. The practical consequence: the redemption right is not an unconditional maturing debt. On the day the investor requests redemption, if the company fails the liquidity balance, the payment can be lawfully blocked — and the “should have been paid” amount does not turn into a priority debt, because the holder remains a shareholder, ranking behind every creditor in the asset distribution order when the enterprise goes bankrupt under the Law on Recovery and Bankruptcy No. 142/2025/QH15.
How it differs from a loan, and self-protection when the company has no cash to redeem
Three decisive differences separate redeemable preference shares from a shareholder loan. First, position when the enterprise struggles: a creditor queues ahead of every shareholder in dissolution and bankruptcy; the redeemable preference holder queues last whatever the charter promises. Second, cash flow enforceability: loan interest is payable even when the company makes losses (and is a deductible expense within limits), while a preference dividend is distributed only when the company has lawfully distributable profits, and redemption itself is locked by the solvency test; a “fixed dividend” in the charter is therefore much softer than the word “fixed” suggests. Third, tax and the money-out route: money the company pays to redeem shares for a foreign investor is handled under the tax frame of a capital recovery or transfer transaction and must pass through the direct investment capital account (now the investment capital account — ICA under Circular No. 38/2026/TT-NHNN), whereas loan repayment travels through the foreign loan account mechanism of the loan itself.
Because the solvency lock cannot be drafted away, experienced investors build a parallel protection layer instead of relying on the charter alone. The most common is a put option running in parallel but aimed at the remaining shareholders or the founders rather than the company: if the company cannot redeem on the set date, the founders must buy the shares at a formula price — the sanction is then a personal obligation of a party with separate assets, not locked by the company’s solvency test. Auxiliary layers include a redemption schedule in small tranches rather than a single date, an undertaking to maintain a reserve (sinking fund) and to restrict dividends to ordinary shareholders until redemption completes, and a right to convert into ordinary shares as a fallback when redemption fails — turning a stuck financial position into an ordinary shareholder position with a voice to arrange another exit.
Building an exit with redeemable preference shares: five checks
- Record the redemption conditions in the charter and on the shares (Article 114): trigger dates, redemption price, procedure — a shareholders’ agreement alone does not bind the company.
- Remember the instrument’s price: no voting, no GMS attendance, no nominations (unless the charter says otherwise) — negotiate governance voice separately if needed.
- Assess the Article 135 solvency test at each redemption milestone: will the company’s expected cash flow pass it.
- Build a put option toward the founders or remaining shareholders in parallel — a protection layer not locked by company solvency.
- After redemption: cancel the shares, reduce charter capital, register the change; money out via the investment capital account (ICA) with capital recovery tax handling.
Frequently Asked Questions
Can I buy shares with a commitment that the company buys them back after some years?
Yes — that is precisely the redeemable preference share under Article 114 of the 2020 Enterprise Law: shares whose contributed capital the company redeems at any time at the holder’s request or on the conditions written in the share certificate and the company charter, so a redemption schedule after a defined number of years is entirely buildable, provided it is written into the charter and the share terms rather than only into a side agreement that does not bind the company. In return, the holder of this class has no voting rights, no right to attend the general meeting or to nominate managers unless the charter provides otherwise. Redemption reduces charter capital correspondingly and must be registered.
What if the company does not have enough money to buy back?
Then the redemption is lawfully blocked until the company passes the solvency test: under Article 135 of the 2020 Enterprise Law, the company may pay a share repurchase price only if after payment it still ensures full payment of its debts and other asset obligations. The investor cannot force payment by pushing the company into insolvency, and the unredeemed amount does not become a priority debt — the holder remains a shareholder, behind creditors. That is why standard design carries a parallel fallback layer: a put option obliging the founders or remaining shareholders to buy when the company cannot redeem, a redemption schedule in several tranches, and a reserve undertaking — all negotiated on the investment date, not improvised at maturity.
How do redeemable preference shares differ from a loan?
In three core points. Legal position: a creditor stands ahead of every shareholder when the enterprise is dissolved or bankrupt; a redeemable preference holder is a shareholder and stands last in line whatever redemption the charter promises. Cash flow certainty: loan interest is payable even when the company loses money, while a preference dividend is paid only from distributable profits and redemption is locked by the Article 135 solvency condition in the Enterprise Law. Tax and money route: interest paid abroad bears 5 percent contractor tax and is a deductible expense (within the related-party cap), while redemption money travels through the investment capital account and falls under the tax frame of a capital recovery or transfer transaction. Redeemable preference shares feel like debt but carry equity risk — the investor must price them exactly that way.
How is the price at which the company buys back redeemable preference shares set?
By the formula the parties record in the charter and the share issuance terms — the law sets no price. Common practice is the original price the investor paid plus an accumulated “dividend” at an agreed annual percentage rate (in substance a target yield), or a valuation-based price at the redemption date if the parties choose a market mechanism. The points to pin down carefully include: whether the accumulated yield is simple or compounded and runs to the actual payment date; whether the yield keeps accruing during a waiting period when redemption is delayed because the company has not passed the solvency test; and how each tranche’s price is computed when redemption is partial. Without these pins, the number on the term sheet becomes the centre of the dispute at precisely the moment relations between the parties are most strained.
This article has been quality-reviewed by the FLAW AI Legal Council