Issues to Consider Before Buying Shares in a Private Company Limited in Thailand

Before buying shares in a private company limited in Thailand, a prospective shareholder should consider a broad range of legal issues in order to make sure that their proposed investment is not subject to unnecessary risks and potential problems. This article will point out and discuss several of the more important legal matters which a prospective shareholder should consider before proceeding, including share transfer procedures, share purchase agreements, implications of the Foreign Business Act BE 2542 (1999) (FBA as well as various other issues such as shareholder agreements.

Review of Articles of Association (AoA) and Shareholder Agreements

Two of the most important things which a prospective buyer should investigate are the target company’s AoA and any existing shareholder agreements as they can contain important conditions which can impact the running of the company[1] and impact other important matters such as share transfers.[2] It is worth noting that the AoA shall apply to all shareholders from when they become a shareholder whereas for shareholder agreements, these will not apply to the new shareholder unless they enter into such agreement(s).

If as a condition of buying shares in a company limited, it is necessary to enter into a shareholder agreement, then the prospective shareholder should carefully weigh up the entire contract, especially any provisions relating to:

• Tag-along or drag-along rights;
• Deadlock provisions;
• Put/call options;
• Reserved matters requiring a supermajority;
• Veto rights;
• Exit provisions;
• Non-compete obligations; and
• What minority protections are provided (if the investor shall be a minority shareholder).

Share Transfer Procedures

One of the more important topics to consider is the share transfer procedure for the target shares. Normally a share transfer for a company limited in Thailand involves the buyer and seller executing a share transfer instrument[3] which sets out basic terms of the share sale and purchase.[4] Thereafter, such instrument is lodged with the company and it shall then prepare and submit the necessary application[5] to the Department of Business Development (DBD) and then the company shall need to update its share register and issue new share certificate(s) to the new shareholder and cancel the old share certificate(s). However, the above process can be different if the target company has share transfer conditions in its AoA or shareholder agreement(s) such as requirements for proposed share transfers to be approved by the board of directors or first right of refusal for the existing shareholders etc.

Verify Share Register, Form BorOrJor.5 and Share Certificate(s)

A prospective investor should ask to see the target company’s share register so that they can check and verify several important matters relating to the shares they intend to purchase, such as whether the shares are fully paid up,[6] are subject to a lien or pledge and whether the proposed seller is the actual legal owner of such shares. An investor should also ask to see the share certificate(s) for the shares being sold and check the share register to see if the share numbers align with the details for such shareholder as they appear in the share register. In addition to the above, it would also be prudent to examine a recent form BorOrJor.5 which is issued by the DBD to verify that the proposed seller is reflected as the owner of such shares in the form.

Share Purchase Agreement

Apart from executing a basic share transfer instrument for the share transfer, a prospective investor may wish to consider using a comprehensive share transfer agreement which provides additional safeguards for them and their investment in the target company. A share transfer agreement (if drafted carefully) can provide a range of useful safeguards for the buyer such as representations and warranties from the seller that the target shares are legally owned by them and are not subject to any lien or pledge. An agreement of this type can also offer various other protections such as contractual assurances about the company being properly incorporated, registered, in compliance with all relevant laws and that the target shares are validly issued and fully paid. To protect the legal position of a buyer, it is often be a good idea for a share purchase agreement to include the following types of clauses:

• Indemnification clause which provides for the seller to indemnify the buyer if they breach a representation, warranty or a contractual obligation etc;
• Conditions precedent (i.e. conditions that must be satisfied before the deal closes) such as board of director approval for the share transfer, amendment of the share register and regulatory approvals etc.
• Governing law and dispute resolution clause. If the seller is located outside Thailand (and has no property in Thailand) then it may be prudent to use a suitably drafted arbitration clause for dispute resolution given that arbitration awards can potentially be enforced outside Thailand if such country is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Foreign Business Act BE 2542 (1999) Implications for Non-Thai Shareholders

Foreign (non-Thai) investors should be careful of investing in a private company limited where foreigners own or shall own 50% or more of the shares as this will result in such company being defined as a foreign majority owned company and not a Thai majority owned company.[7] In such case, the company may need to obtain the legal right to operate its business as a foreign majority owned company if its business activities are subject to the FBA. For example if the company conducts business activities which are detailed in List 3 of the FBA such as ‘retailing’, or ‘services’ then the company will need to obtain a foreign business license (FBL) from the Ministry of Commerce.

If the Company is Thai majority owned, then it would be prudent for a foreign investor to check whether the Thai majority shareholders are legitimate and bona fide shareholders[8] and not nominee shareholders given that if the company is using nominees then  this would constitute a serious breach of the FBA and could result in the company, its directors and shareholders being subject to serious legal repercussions such as fines and jail.

Percentage of Shares Held and Risks Posed by Special Resolutions of the Shareholders Meeting

One of the more important matters which prospective investors should weigh up before investing in a private company limited in Thailand is what percentage of shares will they purchase in the target company. This issue is important because under Thai law, a special resolution of the shareholders requires a minimum of 75% of the total votes of shareholders present and entitled to vote at a shareholder meeting (Annual General Meeting or Extraordinary General Meeting). Thus, if an investor purchases less than 25% of the shares then individually they cannot block a special resolution which could potentially result in their shareholding being diluted[9] given that share capital increases must be approved by a special resolution of the shareholders. Hence, if a prospective investor wants to better safeguard their position and stop their shareholding being diluted, it would be sensible to consider purchasing at least 25% of the shares in the company so that they have the ability to block special resolutions.

Share Capital Structure

In addition to the above issues, a prospective investor should also investigate various other matters relating to the shares of the company, including:

• Registered capital versus paid-up capital;
• Par value of shares;
• Total issued shares; and
• Classes of shares (ordinary, preference eyv) and the rights asnd obligations attaching to each class of share.

Financial Due Diligence

Financial due diligence of the target company is a prudent course of action to take before investing in a company limited in Thailand. As part of this process, it is recommended to have a suitably qualified financial expert examine various matters relating to the company, including:

• Audited financial statements (if available);
• Management accounts;
• Tax filings with the Revenue Department and other filings such as Social Security Office fund payment etc;
• Debt/ Loan agreements (such as shareholder of director loans etc);
• Contingent liabilities;
• Related-party transactions; and
• Insurance coverage etc.

Legal Due Diligence (LDD)

This is arguably one of the most important actions which a prospective investor should undertake before deciding whether to buy shares in a target company in Thailand. An LDD study can be thorough or less detailed but for significant investments it is advisable to carry out a detailed investigation of the target company and the seller of the shares. A typical LDD investigation of a company should examine various matters, including the following:

• Corporate status and registration of the target company;
• Share capital and ownership structure;
• Licenses and regulatory compliance;
• Material contracts to which the company is a party;
• Litigation and disputes;
• Employment and labour law compliance;
• Intellectual property etc.

Capital Gain Tax Implications

Taxation in Thailand with respect to capital gains derived from the sale of shares in private limited companies that are not listed on the Stock Exchange of Thailand by individuals and juristic persons varies. The key principles can be summarized as follows.

In the case of an individual who is a Thai tax resident[10] and invests in shares of a private limited company in Thailand, gains derived from the sale of such shares are treated as assessable income under the Thai Revenue Code. Such gains are subject to withholding tax at progressive tax rates (0%–35%). The gains must also be included in the personal income tax calculation and taxed at the applicable progressive rates, with any withholding tax already deducted creditable against the final tax liability.

However, if the seller is a non-resident individual, capital gains from the sale of shares in a Thai company are generally considered Thai-sourced income and are subject to a 15% withholding tax, unless the applicable rate is reduced under a Double Tax Agreement (DTA).

Where a Thai juristic person sells shares in another Thai company limited, the capital gain is treated as ordinary business income and is subject to Corporate Income Tax (CIT) at the rate of 20%.

If a foreign juristic person (without a permanent establishment in Thailand) sells shares in a Thai company limited, the capital gain is considered Thai-sourced income and is subject to 15% withholding tax. However, an applicable DTA may provide for a reduced tax rate or an exemption.

Capital gains are generally calculated based on the selling price less the cost basis of the shares. For juristic persons, the selling price should generally not be lower than the net book value.

Dharmniti Law Office Co., Ltd.

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[1] For example, the AoA could increase voting thresholds for ordinary and special resolutions of the shareholders.

[2] Such as share transfer restrictions, for example transfers requiring board of director approval or pre-emption rights.

[3] The share transfer instrument is subject to stamp duty which is calculated at the rate of 1 baht per 1,000 baht or fraction thereof of the paid-up value of shares, or of the nominal value of the instrument, whichever is greater.

[4] Basic terms such as details of buyer and seller, date of share transfer, price, number and class of shares, name of company in which the shares are being transferred etc.

[5] In order to update form BorOrJor.5.

[6] If the shares are not fully paid up then the new shareholder should be aware that if they purchase such shares then they will be liable for the unpaid up amount and may be required to pay such monies if the board of directors issues a call to pay up the unpaid up amount owing on such shares.

[7] See section 4 (3) of the FBA.

[8] For example, the Thai shareholders must have purchased the shares with their own funds and they must have the financial capacity to own the shares they hold in the company.

[9] Provided that they did not take up new shares under a capital increase.

[10] A person is considered a Thai tax resident if they stay in Thailand 180 days or more in a calendar year.