Points to Note When a Limited Liability Company Engages in Transactions with Related Parties
2025/10/26
- Nguyen Hong Thuan
Introduction
Transactions between the company and related parties (such as officers, parent companies, and subsidiaries) are generally prone to conflicts of interest. Therefore, various legal requirements have been established to ensure transparency and protect the company’s interests. This report explains contracts and transactions requiring approval between “one-member limited liability companies” (with only one investor) — a structure adopted by many Japanese companies expanding into Vietnam for management flexibility — the procedures for their implementation, and other points to note.
1. Contracts and Transactions with Related Parties
According to the 2020 Corporate Law, unless otherwise specified in the articles of incorporation, contracts and transactions between a company and related parties refer to those conducted with the following entities (Article 86, Paragraph 1).
(i) The parent company and its related parties.
“Related parties” refer to individuals or organizations connected directly or indirectly to the company based on ownership and control relationships, management and representation relationships, or family relationships (by blood or marriage) (Corporate Law Article 23, Paragraph 23). For example, this includes subsidiaries of the parent company, legal representatives of the parent company, as well as spouses and children.
(ii) Executives of the parent company or those with the authority to appoint executives, as well as their related parties.
The following cases can be cited as examples.
- Company A is a subsidiary of Company B, and Company A transfers assets to Mr. X, the president of Company B. This directly benefits the executive of the parent company and thus constitutes a related party transaction.
- Similarly, Company A enters into a sales contract for goods with the spouse of Mr. X, the president of Company B. Since the influence on the parent company’s decision-making extends through the family, this also constitutes a related party transaction.
(iii) Members, company chairpersons, presidents or general presidents, auditors, and their related parties
For example, if a company enters into a vehicle leasing contract with its own president Mr. X, this also qualifies as a related party transaction.
Although corporate law does not uniformly prohibit related party transactions, conflicts of interest may arise, and if the parties prioritize their personal gains, it could potentially harm the company. For example, in a vehicle lease agreement where the company is the lessee and the president personally leases a private car to the company as the lessor, if the rent is set higher than the market price, it will lead to an outflow of the company’s assets. To prevent such situations, the law sets strict conditions such as approval procedures and the validity of the price.
2. Conditions for Conducting Transactions with Interested Parties
In order for contracts and transactions with interested parties to be recognized as valid, the following conditions must be met based on Article 86 of the Corporate Law.
– Necessary conditions: Contracts between the company and related parties must be approved by (i) the chairman of the members’ meeting / the chairman of the company, (ii) the president / general president, and (iii) the auditor.
– Sufficient conditions: The approval authorities mentioned above can only approve the contract or transaction if it meets the following requirements.
(i) The parties are independent legal entities (possessing their own rights and obligations, assets, and profits).
(ii) The price of the contract or transaction must be the “market price.” According to Article 4, Paragraph 4 of the 2023 Price Act, the market price refers to the price formed at a specific time and place based on supply and demand relationships and market factors. The price can be set by the company itself or entrusted to an independent evaluation agency.
(iii) The contract must comply with the 2015 Civil Code and related specialized laws (such as the capability of the contracting parties, legality of the content, voluntariness, and legality of the form).
3. Approval Procedure Flow
When a company enters into contracts or transactions with related parties, the following procedures must be followed.
Step 1: Notification
The person who enters into a contract on behalf of the company must notify relevant parties of their interests with (i) the member meeting or chairman of the meeting, (ii) the president or general president, and (iii) the auditor. They must also present the draft of the contract or the main points of the contract.
Step 2: Approval
Those notified in Step 1 shall decide to approve or disapprove by majority vote within 10 days from the date of notification (one vote per person, and the interested party has no voting rights). The conditions for approval are based on the aforementioned substantial requirements.
4. Legal Implications of Contracts and Transactions with Related Parties When Conditions, Procedures, and Orders Are Not Followed
According to Article 86, Paragraph 5 of the Company Law, transactions that do not adhere to the conditions and procedures stipulated in Paragraphs 2 and 3 above may encounter the following risks.
(i) Under the 2015 Civil Code, they may be declared invalid by a court. In such cases, the contract will be void, the parties must return any benefits received, and the party at fault will be liable for damages.
(ii) The person who signed the contract on behalf of the company and the counterparty shall be jointly and severally liable to the company for damages and the obligation to return profits.
5. Measures necessary to appropriately execute contracts and transactions with related parties
To ensure compliance with laws and regulations while reducing conflict of interest risks, it is desirable for the company to confirm whether the following measures have been implemented and to address any unaddressed items.
(i) Prepare and regularly update the list of related parties
Early identification of management targets helps prevent omissions and avoids contracts that violate regulations.
(ii) Request market price evaluation from a price assessment company.
This ensures the reasonableness and transparency of transaction prices, prevents disadvantages to the company, and meets the legal requirement of “market price.”
(iii) Establish internal processes for notification, approval, and document retention related to transactions.
Centralized management within the company makes it easier to secure approval from authorized personnel before finalizing transaction contracts.
(iv) Stipulate in the articles of incorporation the value and type of transactions that require approval.
The criteria for determining target transactions become clear, and it is expected to streamline internal procedures.
In conclusion
The provisions on related party transactions in a single-member limited liability company are an important mechanism aimed at ensuring transparency, preventing conflicts of interest, and protecting company assets. By adhering to this, not only is the legality of transactions ensured, but the company’s credibility and governance are also enhanced. The company should establish a clear approval process and internal controls to properly conduct related-party transactions.
References
– 2020 Corporate Law
– 2023 Price Act
– 2015 Civil Code
[Contact Information] I-GLOCAL CO., LTD.
Person in charge: Kiriko Kashima kiriko.kashima@i-glocal.com
Ho Chi Minh Office +84-28-3827-8096 Hanoi Office +84-24-2220-0334
This report was translated by Yarakuzen.
