Preference shares sound like a bargain: higher dividends, capital redeemed first, or voting rights multiplied several times over. Yet among the three preference classes in Vietnamese law, one is practically beyond the reach of foreign investors money, the voting preference share. Understanding that boundary before negotiating is essential, because an ownership structure built on the assumption of buying voting preference shares collapses at the very first legal diligence step.
The Legal Framework You Need
The Law on Enterprises 59/2020/QH14, at Articles 114 to 118, divides preference shares into three main classes. Dividend preference shares carry a right to higher dividends than ordinary shares but, in exchange, no voting, meeting or board nomination rights. Redeemable preference shares carry a right to have capital refunded by the company at any time on request or on the conditions printed on the share certificate, and likewise carry no voting rights. Voting preference shares are the mirror image: they carry more votes than ordinary shares, in the number set by the charter.
The decisive point sits in Article 116 of the Law on Enterprises 59/2020: voting preference shares may be held only by organisations authorised by the Government and by founding shareholders. Holders of these shares may not transfer them to others, except in cases of inheritance or under a court judgment or decision. Moreover, founding shareholders voting preference shares are effective only during the first three years from the Enterprise Registration Certificate date; after that period they convert into ordinary shares. The consequence is that a foreign investor, organisation or individual alike, is not an eligible holder of this share class through an ordinary purchase.
Applying the Rules to a Real Deal
So what can a foreign investor still buy? The answer is dividend preference shares and redeemable preference shares, provided the company charter provides for those classes and the issuance respects sector market-access conditions and foreign ownership ratios. These two classes suit financial investors wanting stable cash flow and a clear exit mechanism without control rights. A strategic investor needing voting power above its capital ratio must instead achieve it through ordinary shares combined with a shareholders agreement, board composition and charter veto rights, never through voting preference shares.
Another common misconception is that a foreign organisation could qualify as a Government-authorised organisation to hold voting preference shares. That reading has no basis: the concept refers to organisations designated by the Vietnamese State in specific cases, mainly connected with equitised state enterprises, not to any organisation holding a commercial authorisation letter. A foreign investor also cannot validly receive voting preference shares from a founding shareholder, because the law bans transferring this class outside the two narrow exceptions of inheritance and enforcement of a court judgment or decision.
Illustrative example: A Japanese strategic investor negotiated entry into a recently equitised water utility where Vietnamese founding shareholders still held voting preference shares in their second year. The investor proposed buying part of that very class to obtain influence quickly. Counsel confirmed the class could not be transferred and the investor was not an eligible holder. The deal was rebuilt with ordinary shares plus charter amendments giving the investor a board seat, a veto list over capital expenditure and dividend policy, achieving governance comfort without touching the prohibited share class.
Procedure and Documents to Prepare
First: identify exactly which preference class the target shares belong to under the company charter: dividend, redeemable or voting. Next: if they are voting preference shares, stop the direct purchase structure and switch to ordinary shares with charter governance rights. After that: check whether the charter provides for the intended preference class and the conversion conditions between classes. Then: cross-check the sector maximum foreign ownership ratio and share purchase registration where legally required. Finally: write the financial rights, voting limits and redemption conditions of the preference shares into the contract and share certificates.
- identify exactly which preference class the target shares belong to under the company charter: dividend, redeemable or voting.
- if they are voting preference shares, stop the direct purchase structure and switch to ordinary shares with charter governance rights.
- check whether the charter provides for the intended preference class and the conversion conditions between classes.
- cross-check the sector maximum foreign ownership ratio and share purchase registration where legally required.
- write the financial rights, voting limits and redemption conditions of the preference shares into the contract and share certificates.
Common Risks and How to Prevent Them
The first risk is building a deal on the assumption of buying voting preference shares, a class with restricted holders and a transfer ban. The second risk is assuming dividend preference shares carry voting rights like ordinary shares, producing false control expectations after the deal. The third risk is a charter silent on the intended preference class, forcing charter amendments and a shareholders meeting for the issuance. The safeguard is reading the charter against Articles 114 to 118 of the Law on Enterprises 59/2020 from the first negotiation round.
Preferred shares only protect an investor when that share class actually exists in the target company’s charter; more than a few deals have stumbled on exactly this seemingly obvious assumption. Read the charter against Articles 114 to 118 of the Law on Enterprises from the very first negotiation round, before price is even discussed.
Frequently Asked Questions
Can foreign investors buy preferred shares and voting preference shares?
Foreign investors may buy dividend preference shares and redeemable preference shares like other investors, if the company charter provides for those classes and the deal meets market-access conditions. For voting preference shares, however, the answer is no through an ordinary purchase: Article 116 of the Law on Enterprises 59/2020/QH14 limits holders of this class to Government-authorised organisations and founding shareholders. A foreign investor wanting governance voice above its capital ratio must use ordinary shares combined with a shareholders agreement and charter veto rights instead.
What restrictions apply to voting preference shares for foreign investors?
There are three core limits. First, the holder class is closed: only Government-authorised organisations and founding shareholders may hold voting preference shares. Second, these shares may not be transferred to anyone else, except through inheritance or under a court judgment or decision. Third, the preference of founding shareholders lasts only the first three years from the Enterprise Registration Certificate date, after which the shares convert into ordinary shares. For a foreign investor, the practical consequence is that any proposal to buy voting preference shares must be rejected at diligence stage, and voting needs must be solved by another structure.
Can a foreign organisation hold voting preference shares?
No. The concept of an organisation authorised by the Government in Article 116 of the Law on Enterprises 59/2020/QH14 refers to organisations authorised by the Vietnamese State to hold this share class in specific situations; it does not cover foreign organisations generally and cannot be created by a private commercial authorisation letter between parties. A foreign organisation therefore cannot place itself into the eligible holder class. If an intermediary claims a workaround exists for a foreign organisation to hold these shares, that is a risk signal to halt the deal and re-examine the entire structure.
