Scenario: a Vietnamese subsidiary (70% foreign-owned, 30% Vietnamese investors) receives an “instruction” from its Singapore parent: sign an exclusive 5-year, non-cancellable component purchase contract with a group affiliate at 25% above market. The subsidiary’s director — parent-appointed — is about to sign. What can the 30% Vietnamese shareholders do to protect the subsidiary?
A parent cannot do whatever it pleases
Groups often treat subsidiaries as property to command at will. The 2020 Law on Enterprises disagrees. Article 195 (in force as of 19/10/2026; untouched by Law 76/2025/QH15), Clause 2: where a parent intervenes beyond the authority of an owner/member/shareholder and forces the subsidiary into business contrary to normal business practice or into non-profitable operations without fair compensation in the relevant fiscal year, causing loss to the subsidiary — the parent is liable for that loss.
In other words: the parent has owner rights (appointing personnel, setting strategy via the GMS/members’ council), but no right to use the subsidiary as a cash machine for the group’s private benefit. An exclusive above-market purchase contract with a 5-year lock-in is the textbook “contrary to normal business practice” pattern.
Subsidiary managers: “the parent told me” is no shield
The subsidiary’s director owes duties of honesty, prudence, and loyalty to the subsidiary’s interests (Article 165, 2020 Law on Enterprises) — not to the parent. Signing a deal known to harm the company under management, then pleading “the parent ordered it”, still breaches managers’ duties and triggers personal, joint liability (Article 165(2)). Article 195(3) further holds the parent’s managers liable for the intervention forcing the subsidiary’s hand.
The subsidiary-protection toolkit
- Written objection: minority shareholders and independent directors (if any) formally object, demanding a GMS/members’ council vote instead of a solo signature. The objection letter is pivotal later evidence.
- Independent benchmarking: hire a third party to compare market prices; a 25% above-market gap speaks louder in court than any argument.
- Claim against the parent: Article 195(4) entitles creditors or members/shareholders holding at least 1% of the subsidiary’s charter capital to claim damages from the parent in their own name or the subsidiary’s name. No need to wait for the subsidiary to “dare” sue its parent.
- Sue the managers: in parallel, 1% shareholders may bring a derivative suit against the director under Article 166 if the deal was signed and caused loss.
Frequently asked questions
Can a parent force its subsidiary to sign a contract?
Only within owner authority (via GMS/members’ council). Intervention beyond authority forcing abnormal or non-profitable business without fair compensation makes the parent liable for resulting loss (Article 195(2), 2020 Law on Enterprises).
Is the subsidiary director liable for signing on parent orders?
Yes. Managers’ loyalty runs to the subsidiary (Article 165); “parent orders” is no defense. Breach triggers personal, joint damages liability (Article 165(2)).
How do minority shareholders claim against the parent?
Under Article 195(4): members/shareholders holding at least 1% of the subsidiary’s charter capital may claim damages from the parent in their own or the subsidiary’s name.
Can an already-signed bad deal be undone?
Courts may void/annul it if signed ultra vires or in breach of approval procedures; damages can simultaneously be claimed from the parent and involved managers.
This article has been quality-reviewed by the FLAW AI Legal Council Content prepared by the AI Legal Council of FLAT Law Firm for general reference only; it has not been reviewed by a human lawyer for your specific situation.