Methods of resolving disputes among members of a Multi-Member Limited Liability Company

Disputes among members are a common legal issue that arises during the operation of multi-member limited liability companies. If not addressed properly, such conflicts may severely impact the company’s operations, finances and reputation. In this article, TNTP will analyze common causes of disputes, methods of resolution and practical considerations to mitigate legal risks for enterprises.

1.Definition of members and their legal rights in a multi-member limited liability company

Pursuant to Clause 29, Article 4 of the Law on Enterprises 2020, a member of a multi-member limited liability company is an individual or organization that contributes capital to establish the company and owns a corresponding portion of its charter capital. Such ownership must be recorded in the company’s charter and enterprise registration documents. According to Article 49 of the Law on Enterprises 2020, members have certain rights such as: the right to attend Board of Members’ meetings, the right to receive profits, voting rights, the right to dispose of their capital contribution and other rights protected by the company’s charter and law.

2.Common causes of disputes

From the above provisions, members have to rights related to profit and management. Accordingly, disputes often arise when one or more of these legitimate rights and interests are violated, including but not limited to:

• Disputes about management or operational rights;
• Disputes about profit-sharing;
• Dispute about failuring to fulfill capital contribution obligations;
• Dispute about breach of the company charter or capital contribution agreements;
• Dispute about lacking transparency in financial or accounting matters;
• Dispute about the right to equal treatment and protection of legitimate interests.

Besides, other disputes may arise due to different reasons, but in general they originate from conflicts of interest among the members.

3.Methods of dispute resolution

Disputes between members may be resolved in several ways, depending on the severity and content of the dispute:

• Negotiation and mediation (internally or via a third party)

This is the preferred method for maintaining cooperative relationships and avoiding disrupting business operations. Pursuant to Article 49 of the current Law on Enterprises or based on the company’s charter, disputes may be resolved by vote of the Members’ Council, by direct negotiation between the parties, or through independent mediation.

• Commercial arbitration

If an arbitration agreement exists in the charter or capital contribution contract, the dispute shall be settled at a commercial arbitration center in accordance with Articles 2 and 5 of the 2010 Law on Commercial Arbitration.

• Litigation in a competent court

Pursuant to Clause 4, Article 30 of the 2015 Civil Procedure Code, if the parties fail to reach a negotiated, or in the absence of an arbitration agreement, they may file a lawsuit with a competent court for resolution under civil procedure law.

4.Legal liabilities that may arise

When a dispute arises, members who violate their obligations, causing damage to the enterprise or other members, may have their membership terminated according to the decision of the Board of Members or the Judgment/Arbitral Award of the Court, Arbitration and at the same time must bear civil and/or administrative or criminal liability, specifically:

• Liability to compensate for damage to the enterprise or other members according to the provisions of the Civil Code.
• Administrative or criminal liability if the act involves a legal violation, such as fraud to appropriate property (Article 174, 2015 Criminal Code) or abuse of trust to appropriate property (Article 175, 2015 Criminal Code).

Therefore, in the event of a dispute, members may be held civilly, administratively, or even criminally liable depending on the extent of the violation.

5.Recommendations for preventing internal disputes

To minimize the likelihood of internal disputes during company operations, enterprises should:

• Execute a clear and detailed capital contribution agreement specifying the rights and obligations of each member;
• Establish internal regulations on financial management, voting rights, and profit distribution;
• Maintain transparency in accounting and financial reporting;
• Regularly communicate and update members on the company’s operational status;
• Consult a lawyer when signs of conflict appear.

In conclusion, disputes among members of a multi-member limited liability company are a sensitive legal issue. If not resolved appropriately, they will affect the entire operation and existence of the enterprise. Choosing an appropriate dispute resolution method should be based on the nature of the dispute and the long-term objectives of the parties. Enterprises should proactively prevent the dispute by building a solid legal foundation from the beginning and handling internal conflicts promptly, transparently, and effectively.

Above is the article “Methods of resolving disputes among members of a Multi-Member Limited Liability Company” compiled by TNTP Lawyers. We hope this information proves helpful to our valued readers.

Sincerely,