In difficult fundraising rounds, lead investors increasingly bring a plainly coercive clause: pay-to-play. Existing shareholders who do not buy their pro-rata share of the new round are “downgraded” — their preference shares convert into ordinary shares, losing the liquidation preference, losing anti-dilution, sometimes losing a board observer seat. The first question from a squeezed investor is always: are they allowed to do this to me — does Vietnamese law permit a clause that punishes not putting in more money? The answer lies on a fine boundary that Vietnamese enterprise law draws very clearly: nobody can be forced to contribute one extra dong beyond their committed capital, but the preference rights attached to old capital are creatures of agreement — and an agreement can predefine that they survive only while their holder keeps following the money. This article explains how that mechanism operates in Vietnam, where it must be recorded to be enforceable, and where it becomes excessive pressure on small investors.
The legal boundary: money cannot be forced, only consequences on agreed preferences
The starting point is a foundational principle of Enterprise Law No. 59/2020/QH14: a shareholder’s or member’s capital obligation stops at the portion they have committed and registered — Articles 47 (limited liability companies) and 113 (joint stock companies) both build liability around that committed portion, and no company body can unilaterally impose an additional contribution duty on a non-consenting shareholder. Any pay-to-play version written as “a shareholder who does not follow must pay a penalty” or “is forced to buy the missing shares” is therefore structurally void. The workable version takes a more legal detour: preference rights are not immutable statutory rights, they are the content of a share class and of an agreement. Preference shares (other than voting preference shares) may be converted into ordinary shares under the frame of Article 120 of the Enterprise Law where the charter and a general meeting decision allow it — and the parties can perfectly well agree in advance in the charter that this conversion event attaches automatically to not participating pro-rata in a new round. Pay-to-play then “punishes” nobody: it is a survival condition of preference rights that the shareholder themselves accepted on the investment date, like an option expiring when its condition ceases to be met. Softer consequences follow the same logic: losing anti-dilution for later rounds, losing a private veto, losing extended information rights — all are rights born of the shareholders’ agreement, so the shareholders’ agreement may condition them.
Where it must be recorded to work, and the boundary of coercion
A pay-to-play clause living only in a term sheet or an email is nearly useless when enforcement is needed. It must live in three document layers simultaneously. The charter layer: the mechanism converting preference shares into ordinary shares when a shareholder does not follow the money must be content of the company charter, because the charter binds the company and every shareholder, and converting a share class is a company act under the Article 120 frame of the Enterprise Law — an implementing general meeting decision when the event occurs will rest on this charter basis. The shareholders’ agreement layer: the precise definition of “not following” (failing to buy one’s full pro-rata in that round), how the ratio is computed, the subscription deadline, which rounds count (only rounds issuing to outside investors, or also internal rounds and bridges), and the full list of consequences. The share series terms layer: the terms of the preference series themselves must restate the conversion mechanism, so a later secondary buyer cannot claim they did not know. On the small investor side, civilised drafting practice installs its own safety valves: a minimum participation threshold counted as having followed (for example purchasing at least a defined fraction of pro-rata due to objective financial constraints), an exemption for shareholders below a small ratio, and an exclusion of rounds plainly used as a squeeze tool (abnormally cheap internal rounds organised by the majority itself). Without these valves, pay-to-play remains lawful but becomes an instrument for stripping small investors’ preferences in “manufactured crisis” rounds — and that is when a small investor should negotiate a refusal to sign, because Vietnamese law has no separate minority protection mechanism that automatically voids a charter they themselves approved.
Pay-to-play feasibility in Vietnam: enforcement conditions
- Attach consequences only to preference rights (share class conversion, losing anti-dilution or vetoes) — never write money penalties or forced purchases, because contribution duty stops at the committed portion.
- Record the conversion mechanism in the charter (Article 120 Enterprise Law frame), the tight “not following” definition in the shareholders’ agreement, and restate it in the series terms.
- Define pro-rata, the subscription deadline, and which rounds count (external, internal, bridges) — ambiguity here is the number one dispute source.
- Install safety valves for small holders: a minimum participation exemption threshold, and exclusion of abnormally cheap internal rounds organised by the majority.
- Remember it cuts both ways: the clause will also apply to the lead investor themselves in later rounds if they do not follow.
Frequently Asked Questions
An existing shareholder does not contribute more. Is losing their preferences lawful?
Yes, if the mechanism was agreed properly in advance. Vietnamese law does not allow forcing a shareholder to contribute money beyond their committed capital portion, and any money penalty clause for not following stands on very weak legal ground. But preference rights — liquidation preference, anti-dilution, private rights in the shareholders’ agreement — are content created by the parties and the charter, so they can be conditioned: a preference shareholder who does not join a new round pro-rata has their preference shares converted into ordinary shares and their private rights terminated, under the share conversion mechanism for which Article 120 of the 2020 Enterprise Law provides the procedural frame. Its lawfulness lies in being a condition accepted on the investment date, not a penalty imposed afterwards.
Where must this clause be recorded to be effective?
In three layers at once for reliable enforcement. The company charter must contain the mechanism converting preference shares into ordinary shares when a shareholder does not join a new round, because the charter binds the company and every shareholder and is the basis on which the general meeting implements a conversion under Article 120 of the Enterprise Law. The shareholders’ agreement carries the operational definitions: what counts as not following, how pro-rata is computed, the subscription deadline, which rounds count, and the full consequence list. And the preference series terms must restate the mechanism to bind later transferees. Recorded only in a term sheet, or in a shareholders’ agreement while the charter stays silent, the conversion jams at company level exactly when it is needed most.
Are small retail investors squeezed excessively?
Legally, that risk is real and carries no automatic safety valve: a small investor who approved a charter containing pay-to-play is bound by it like every other shareholder, and Vietnamese law has no separate mechanism to void a clause merely because it is harsh on a minority. A small investor’s protection layer must therefore be negotiated at signing: an exemption below a ratio threshold; counting as having followed if a minimum fraction of pro-rata is purchased; excluding abnormally cheap internal issuances from the trigger round definition; and requiring sufficiently early notice of a new round with documents to decide on a basis. These are common drafting safety valves in well-advised deals — not statutory rights, so not negotiating them at the start means not having them.
How does pay-to-play differ from anti-dilution?
The two mechanisms protect different things and often appear together. Anti-dilution is a price mechanism: when a new round issues below the earlier price, the conversion price of old preference shares is adjusted to offset dilution for their holder — it protects the value of the old investment. Pay-to-play is a behaviour mechanism: it does not care whether the price is high or low, it attaches the survival of preference rights (commonly including anti-dilution itself and the liquidation preference) to whether the shareholder keeps putting money in pro-rata in later rounds. A shareholder fully protected by anti-dilution can still lose that very anti-dilution to pay-to-play if they stand aside in a new round. Simply put: anti-dilution answers “what is my old investment worth after the new round”, pay-to-play answers “what must I do to keep my privileges”.
This article has been quality-reviewed by the FLAW AI Legal Council