Internal enterprise disputes are conflicts and disagreements when practicing rights and obligations between entities in the company. These disputes mainly involve economic interests, decision-making and company management rights. In fact, internal disputes are unavoidable, but businesses can still implement solutions to limit disputes from occurring. In the following article, TNTP sends readers solutions to limit internal disputes.

1. Choosing the right type of business

Choosing the type of business is very important to start a business, because this will affect the ability of the founding members in managing and making decisions. At the same time, each type of business will have a different organizational management structure and ability to raise capital.

Based on the provisions of the Enterprise Law 2020, there are 04 (four) types of enterprises that organizations and individuals can choose when establishing a company. These include: Joint stock companies (“JSCs”), one-member limited liability companies or limited liability companies with two or more members, partnerships and sole proprietor enterprises (“SPEs”).

Accordingly, at the time of starting business, when the business model is small, to save the costs and the founding members need to manage the entire business activities of the company, individuals can establish SPEs or one-member Limited Liability Company or Limited Liability Company with two or more member.

At a later time, when the business has grown and needs to expand its business activities, the founding member(s) in the company can raise more capital from other organizations and individuals. At that time, enterprises may have to carry out procedures to change the type of business, especially for enterprises that initially have only one founding member but later mobilize more capital from other organizations and individuals.

Thus, choosing the right type of business at each time not only helps businesses operate firmly but also can limit possible internal disputes.

2. Building a strict company charter

• The company’s charter is a mandatory document when submitting an enterprise establishment registration dossier at the Business Registration Office, which is an internal document of the company, regulating the establishment, management, organizational structure, operation, organization, dissolution and other aspect of the company. Therefore, a valid and strictly drafted charter will contribute in limiting possible internal disputes in the future.
However, in the current situation, many enterprises, when preparing business establishment registration dossier, do not prepare a charter in accordance with the organizational structure of the enterprise but copy the template charter from other enterprises. This is one of the reasons why the charter of that company is ineffective.

• Accordingly, by the provisions of law, enterprises build a company charter to apply within their enterprises. The company’s charter must ensure to contain main contents specified in Clause 2, Article 24 of the Enterprise Law 2020. In addition, the company may have additional contents but must not be contrary to the provisions of law.

In order to limit internal disputes, when building the company’s charter, founding members/shareholders should pay special attention to the following contents:

 Select the legal representative(s) of the company, clearly specify the number of representatives, the authority and scope of each person to avoid disputes and conflicts.

 Clearly stated in the charter: “charter capital, percentage of contributed capital, total number of shares, types of shares and par value of each type of share”. Because these are the legal basis for establishing the membership/shareholder status of the company. It is also the basis for establishing the rights and obligations of members/shareholders in the company.

 Specific rights and obligations of members, shareholders; the mode and rate of approval of the company’s decisions, cases in which the company buys back the contributed capital of members or shares of shareholders; principles of profit distribution after tax and handling of losses in business; modalities of amending or supplementing the company’s charter; dissolution and liquidation of company assets, internal dispute settlement mechanism in the company’s charter; standards and obligations of company managers.

 In addition, the company’s charter may recognize additional mechanisms for increasing rights, such as increasing voting rights by issuing voting preference shares and binding the responsibilities of the founding members to ensure that they will stick and run the company’s activities in accordance with the strategy and business plan that the company has set out.

3. Establish agreements between founding members

In addition to the company’s charter, the founders (or some members and shareholders in the company) can sign one or several individual agreements with others. The purpose is to agree on issues related to the management of the company, as well as protect their legitimate rights and interests to ensure that the company will operate in accordance with the goals and business ideas previously defined by the founders.

This agreement is often referred to by names such as “shareholder agreement”, “capital contribution agreement”, “membership agreement”, “founding shareholder agreement”,… These written agreements, if clearly established, will have an important impact in the internal management of the company, limiting disputes or be an effective way for settlement when a dispute arises.

Above is the content of the article “What should enterprises do to mitigate the potential consequences of internal disputes”. We hope the information shared above will be useful for our readers.

Best Regards,