When a joint stock company increases its charter capital by issuing additional shares, minority shareholders risk seeing their ownership percentage — and with it their voting power — diluted. The law, however, does not leave them empty-handed: the Law on Enterprises grants them pre-emptive rights and a set of collective tools to challenge an unfair issuance. This article analyzes those tools under the Law on Enterprises 59/2020/QH14 (as amended by Law 76/2025/QH15, effective 01/7/2025).
1. The main shield: pre-emptive right to buy new shares pro rata
Under Article 115.1(c) of the Law on Enterprises, ordinary shareholders are entitled to priority in buying newly issued shares in proportion to their ordinary shareholding. The procedure for offering shares to existing shareholders is set out in Article 124 (note: the correct article is 124 — Article 121 governs “share certificates”, not offerings):
- Article 124.1: offering to existing shareholders means selling all additionally issued shares to all shareholders in proportion to their current holdings;
- Article 124.2: the company must send written notice to the contact address in the shareholder register no later than 15 days before the end of the registration period (note: the 15 days run to the end of the registration period, not to the issuance date); the notice must contain mandatory particulars (current shareholding, total shares to be offered, entitled quantity, price, timeline…) with a registration form; failure to return the form on time is deemed a waiver; shareholders may transfer their pre-emptive rights to others;
- Article 124.3: remaining shares not taken up may be sold by the Board of Directors to company shareholders and others on terms no more favorable than those offered to shareholders, unless the General Meeting of Shareholders approves otherwise or securities law provides otherwise.
In short: minority shareholders are not diluted if they fully exercise their pro rata pre-emptive rights. A breach of the notice procedure is grounds to attack the legality of the issuance.
2. Unfair dilution scenarios and countermeasures
- No notice or defective notice → grounds to seek annulment of the issuance resolution (see section 4);
- Offering conditions that only the target investor can meet → shareholders have a practical way out: transfer their pre-emptive rights to someone who meets the conditions (Article 124.2(c));
- Leftover shares sold to outsiders on better terms → breach of Article 124.3;
- Private placement bypassing existing shareholders → Articles 125–126 still require the pre-emptive notice procedure for existing shareholders first (per Article 124.2), except in mergers and consolidations; the Board of Directors decides the timing, method and price.
3. The collective weapon: reaching 5% and the 90-day time trap
Shareholders or groups holding 5% or more of total ordinary shares (or a smaller ratio per the charter) enjoy the rights under Article 115.2: inspecting company documents, requesting the convening of the General Meeting of Shareholders, and requesting the Supervisory Board to inspect specific matters.
The strongest weapon is the right to seek annulment of a GMS resolution under Article 151: within 90 days from receipt of the resolution/minutes (note: counted from receipt, not the meeting date), shareholders under Article 115.2 may request a court or arbitration to annul the resolution if its adoption procedure seriously violated the Law or the charter (except resolutions passed by 100% of voting shares — Article 152.2) or if its content violates the law or the charter.
Two time traps to remember:
- After 90 days the annulment right is lost (though a damages claim may still be brought within the 3-year limitation — Article 429 Civil Code);
- While the court/arbitration case is pending, the resolution remains effective until the annulment decision takes effect (Article 152) — so consider applying for interim emergency measures.
4. Limits: when minority shareholders are not protected from dilution
- Mergers and consolidations: pre-emptive rights do not apply to capital increases resulting from merger or consolidation;
- Failure to exercise: a shareholder who does not return the registration form on time is deemed to have waived the right — no later claim is possible;
- Dilution from a lawful capital increase: the law does not prohibit a drop in ownership percentage from a procedurally proper capital increase — pre-emptive rights only give shareholders the opportunity to maintain their ratio, not a veto over the increase.
5. Additional note for public companies
Public companies issuing additional shares must also comply with the Securities Law 54/2019/QH14 (as amended by Law 56/2024/QH15, effective 01/01/2025) and Decree 155/2020/ND-CP (amended by Decree 245/2025/ND-CP, effective 10/9/2025): private placements are limited to strategic investors and professional securities investors, with 3-year / 1-year transfer restrictions. Always cite the amended versions in force, not the original texts.
Frequently asked questions
Are minority shareholders automatically diluted when the company increases capital?
No. Shareholders have pre-emptive rights to buy new shares pro rata (Article 115.1(c), Article 124 of the Law on Enterprises); dilution only occurs if they fail to exercise the right or in a merger/consolidation.
Which article governs offerings to existing shareholders?
Article 124 of the Law on Enterprises 2020 (not Article 121 — Article 121 governs “share certificates”).
How is the 15-day notice period counted?
No later than 15 days before the end of the purchase registration period, not before the issuance date (Article 124.2).
What is the deadline to seek annulment of a resolution?
90 days from receipt of the resolution/minutes (Article 151) — the right is lost after expiry.
Does paying dividends in shares require an offering procedure?
No. Article 135.6 provides that share dividends do not require an offering procedure; the company registers the corresponding charter capital increase within 10 days.
Sources
- Law on Enterprises 59/2020/QH14 (effective 01/01/2021; amended by Law 03/2022/QH15 and Law 76/2025/QH15, effective 01/7/2025): Article 115.1(c) and 115.2 (shareholder rights), Article 124 (offering to existing shareholders), Articles 125–126 (private placement), Articles 151–152 (annulment of resolutions);
- Securities Law 54/2019/QH14 (amended by Law 56/2024/QH15, effective 01/01/2025); Decree 155/2020/ND-CP (amended by Decree 245/2025/ND-CP, effective 10/9/2025).
Conclusion
Dilution from a capital increase only becomes “unfair” when the company breaches the procedures protecting existing shareholders — pro rata pre-emptive rights, the 15-day notice duty, and the no-more-favorable-terms rule for leftovers. Minority shareholders should exercise their rights on time, aggregate to 5% to use the collective weapons, and above all not miss the 90-day deadline to seek annulment when a serious violation is detected.
Are your shareholders facing a potentially unfair issuance? Contact FLAT Law Firm for advice.
For reference only; not legal advice. This content was prepared by AI and will undergo quality review by the AI Legal Council of FLAT Law Firm before any publication consideration; it is not the legal opinion of a licensed human lawyer. Laws and regulations may change; verify the current legal texts before applying them.