Strategies for Minority Control in a Thai Company

How to Open a Company in Thailand

How to Open a Company in Thailand – What is Important to Know? Thailand has significant restrictions for foreign businesses. Many types of activities require obtaining a license in accordance with the Foreign Business Act (FBA). The licensing process is complex.

Exceptions are provided for projects approved by the Thailand Board of Investment (BOI), the Industrial Estate Authority of Thailand (IEAT), as well as in cases provided for by international treaties or free trade agreements.

For example, U.S. citizens and/or companies established in the U.S. can own 100% of the capital in Thai companies.

The ideal option is to obtain BOI privileges. BOI offers various tax and non-tax incentives.

In other cases, foreigners prefer not to fall under the scope of the FBA. This is achieved by participating in a company, the controlling stake of which (at least 51%) belongs to Thai individuals or legal entities.

Thai Company: Control Strategies

Unless it’s a full-fledged, “real” joint venture with Thai majority partners, the foreign investor faces the problem of ensuring control. The use of nominee Thai shareholders is prohibited by law (Article 36 FBA). Both the Thai nominee and the foreign shareholder can be sentenced to imprisonment for up to three years and/or a fine of one hundred thousand to one million baht.

Periodically, there are reports of checks on companies that, presumably, use the services of nominee shareholders. Examples of such checks, conducted in 2023, can be found in a publication in the Bangkok Post and on the website of the Department of Special Investigation (DSI).

In practice, various methods are used to ensure control in the company (and to circumvent the prohibition on the use of nominees).

Some of these methods are listed below.

Use of Preference Shares

This method involves issuing two types of shares: ordinary and preference. This solution is very popular among foreign investors seeking to ensure control in a Thai company. The issuance of two types of shares is provided for by Section 1108 of the Civil and Commercial Code of Thailand (“CCC”).

Different types of shares may provide different rights to their owners, whether it’s voting rights or the right to receive dividends.

The scope of rights associated with preference shares depends on the provisions of the company’s charter. Such shares may have either greater or lesser voting rights or dividends compared to ordinary shares.

The standard scheme is as follows:

Thai shareholders own 51% of the company’s capital, holding only preference shares. Foreign shareholders own the remaining 49% of the capital, and they have only ordinary shares.

Preference shares owned by Thai shareholders have reduced voting rights (for example, ten preference shares give one vote at the general meeting of shareholders), while each ordinary share provides the right to one vote.

There may also be an uneven distribution of the company’s profits. For example, owners of preference shares are paid dividends of 2% of the profit, while 98% of the profit goes to the owners of ordinary shares.

Thus, despite the larger number of shares held by Thai shareholders, foreign investors retain control over the company and receive a larger share of the profit.

It is also possible to apply the reverse scheme, where enhanced voting rights and dividends belong to the owners of preference shares. For example, each preference share may provide ten votes per share, while each ordinary share gives one vote. In this case, the preference shares belong to foreigners.

If preference shares have already been issued, then the rights attributed to them cannot be altered later (Section 1142 CCC).

How to Switch to the Preference Shares Scheme in an Existing Company

If only ordinary shares were issued when the company was created and subsequently the company wishes to use the scheme with preference shares, it is necessary to increase the authorized capital by issuing new preference shares. Then the shares should be distributed between foreign and Thai shareholders so that the ratio of 49% to 51% in favor of the Thai side is preserved.

Cross-Shareholding

The essence of cross-shareholding is as follows: two Thai companies mutually own 51% of each other’s shares, while the remaining 49% of shares of each company belong to foreign shareholders. Below is a typical scheme of such an ownership structure.

It should be noted that cross-shareholding can cause complexities in the taxation of dividends.

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Typical Scheme of Cross-Shareholding

Blank Share Transfer Instrument

A blank (unfilled) share transfer instrument is signed by a Thai shareholder without specifying the date of the share transfer or the name of the new owner. This document allows the beneficiary to enter the required date at any time and specify the person to whom the shares will be transferred (usually another Thai shareholder), thereby ensuring their safety. This method is popular due to its complete invisibility in corporate documents, although it is not considered the most reliable.

Loan Secured by Share Pledge

A foreign investor provides a loan to a Thai shareholder. This loan, in turn, is secured by a pledge of shares. A loan agreement and a share pledge agreement are concluded. The share certificate is transferred to the custody of the pledge holder (foreign shareholder) until the pledgor fulfills all obligations under the loan agreement. The parties to the share pledge agreement may also agree to grant the pledge holder the authority to vote on behalf of the pledgor at shareholders’ meetings, to transfer dividend rights, to obligate to vote in a certain way, and to demand the transfer of shares to the pledgor or a third party in case of non-fulfillment of obligations by the pledgor.

Two-Tier Ownership Structure (Thai Holding)

In some cases, to enhance control over a Thai company, foreign investors may opt for a ‘two-tier ownership structure’, also known as ‘Thai holding’. The essence of this structure involves establishing a Thai holding company that will hold shares in the operating company (or companies) in Thailand.

The holding company is 51% owned by a Thai partner and 49% by a foreign investor. Conversely, the operating company is 51% owned by the holding company, with the remaining 49% held by the Thai partner.

As the holding company does not engage in operational activities, it doesn’t need a significant authorized capital. The acquisition of shares in the operating company can be financed through a loan from the foreign founder (investor), with the shares acting as collateral for the loan.

This structure ensures that both companies are deemed as Thai entities, thus exempting them from the stipulations of the Foreign Business Act.

This approach effectively allows control over the activities of one or several subsidiaries, while circumventing direct operational obligations. In such setups, holding companies typically utilize preference shares for management control.

A graphical diagram of this structure is presented below.

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Two-tier structure (Thai holding)

Risks and Recommendations

Each method for controlling a Thai company has distinct weaknesses and risks. Foreign investors are advised to rigorously evaluate these risks, especially in sectors like real estate, tourism, hotels, trading, agriculture, and cannabis. Professional consultation is recommended.

In protecting minority shareholder rights, precision in structuring is essential, particularly in aligning with corporate law, focusing on the company’s charter, and contractual law, specifically regarding shareholder agreements.

What Type of Company to Open in Thailand?

Opening a Private Limited Company (Co. Ltd.) is a popular choice for foreign investors looking to start a business in Thailand. This type of company shares similarities with legal structures in other countries, such as Pte Ltd in Singapore or GmbH in Germany. However, a key difference is that in Thailand, a Co. Ltd. cannot be founded by just one person and cannot operate with a single shareholder. As of February 7, 2023, a Co. Ltd. must have at least two shareholders, a change from the previous requirement of a minimum of three shareholders.

The choice of a Co. Ltd. is often due to its limited liability for founders (participants, shareholders), making it a less risky option for business owners. Additionally, the process of setting up and managing a Co. Ltd. is relatively straightforward.

The operations of a Co. Ltd. in Thailand are governed by Section 1096 and subsequent sections of the Civil and Commercial Code of Thailand, providing a legal framework for its functioning and regulation.

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How to Register a Company in Thailand

If you have any questions about setting up a company in Thailand or about Thai corporate law, please email me or use the form below.

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