Part 1- Due Diligence for the Purchase of a Company Limited in Thailand
If an investor is considering purchasing an existing company limited which is registered in Thailand, then in order to safeguard their potential investment it is prudent to conduct a due diligence investigation into the target company before they move forward with purchasing shares in such company. In part 1 of this article we will cover some of the key areas which a due diligence (DD) investigation should ideally cover to ensure that the buyer is aware of potential risks posed by purchasing this existing legal entity. However, it is worth noting that before embarking on a due diligence study it is usually necessary (and best practice) for the buyer and seller to enter into a Memorandum of Understanding (MOU) allowing for the buyer or their appointed legal representative to conduct such investigation into the seller’s target company, such MOU will normally at a minimum contain confidentiality provisions which protect the confidentiality of the material which is shared and reviewed as part of the DD study.
Commercial Contracts/ Agreements
Arguably one of the most important things which the DD investigation should examine are the contracts which the target company is a party to so that the buyer can understand the rights and obligations which it shall be a party to if it proceeds to purchase the target company. The buyer should also check to ensure that such contracts are legally enforceable against the other parties to which the target company has contracted with. When reviewing such contracts it is also necessary to identify risks which may arise with the sale of the target company to the buyer such as provisions in such contracts which provide that such agreements shall terminate if the shares in the target company are sold to another party etc. Other risks such as indemnity clauses should also be considered carefully by the buyer given the liability that they may impose upon them.
The DD investigation should also checks to see if the target company is subject to any shareholder agreement because this could impose contractual obligations on the shareholders which the buyer should be mindful of particularly with respect to the sale of shares in the target company. If a shareholder agreement is in place then the buyer should consider whether they want to be a party to such contract upon buying shares or if they require such agreement to be amended or terminated as a condition precedent for their purchase of shares in the company. Buyers should be careful as many shareholder agreements provide that any transfer of shares to 3rd parties which fails to comply with the terms and conditions of such agreement shall be considered as void and unenforceable.
Employment Contracts, Work Rules & Company Policies
The DD study should also carefully review all employment contracts of staff so that the buyer is aware of the contractual terms binding the employees. The buyer’s lawyer should review these contracts too in order to check that they comply with Thai law, particularly the Labour Protection Act (1998) (LPA) and its amendments. If the target company has 10 or more staff then it should also have work rules and these should also be reviewed to ensure that they are compliant with Thai law, at a minimum these should cover the following topics:
- Working days, working hours and rest periods;
- Holidays and rules related to taking holidays;
- Rules related to overtime and work on holidays;
- Date and place of payment of wages, overtime, holiday pay and holiday overtime pay;
- Leave and rules for taking leave;
- Discipline and disciplinary actions
- How to submit a grievance - including scope & meaning of the term 'grievances', procedure for submission of grievance; investigation and consideration, procedures for settlement of grievance and protection of person submitting the grievance and other persons involved.
- Employee termination, severance pay and special severance pay.
Aside from work rules, it would also be prudent to ask the seller if there are any current employee disputes, and if so then the status of such disputes and their nature. If staff will need to be terminated (without cause) following the purchase of a target company then the buyer should be mindful of the liability posed by section 118 of the LPA as this section covers severance pay for staff terminated without cause, it can be quite expensive depending on the length of service of the staff to be terminated.
Foreign Employee Considerations Regarding Visas & Work Permits
If the target company has foreign (non-Thai) staff then the DD review should also examine the visas and work permits of such foreign staff to ensure that each of them has the legal right to work for the company. To have a work permit issued by the Department of Labour, the foreigner must hold a valid non-immigrant B visa. A private company limited without Board of Investment (BOI) approval must have 4 Thai staff per one foreigner. Furthermore, each foreign employee shall necessitate 2 million baht in fully paid up registered capital of the company. Sections 8 and 9 of the Foreigners Working Management Emergency Decree No. 2 (2561)(2018) sets out the key requirements for foreigners working requiring a work permit. If an employer fails to comply with section 9 then section 102 provides for fines of between 10,000-100,000 Baht for each foreigner employed without a work permit.
Litigation Involving the Company
The DD study should also entail a search of the various courts of Thailand to see if the target company is a party to any litigation in the Kingdom. The courts which should be checked are the Civil Court, Criminal Court, the Bankruptcy Court, Intellectual Property & International Trade Court and the Labour Court. When searching for cases involving the company, it is a good idea to check using the current name of the company as well as former names of the company too as sometimes companies change their name for various reasons. If any cases are identified in the court system then the buyer should consider various issues such as whether the target company is plaintiff or defendant, what the nature of claims are, the amounts being claimed, the status of such case and whether the courts have issued judgment and if so for what amount and whether such claim is now in the hands of the Legal Execution Dept. When reviewing cases it is also prudent to check if the target company is subject to any settlement agreements which have been lodged with the relevant Court as this could pose significant liability if the terms of such agreement are not complied with.
Powers of Attorney
A careful review of all power of attorney documents issued by the target company is also advisable to see which persons have been authorized by the Company to perform certain acts on its behalf. Furthermore, one should also check to ensure that such power of attorney documents were validly executed by the target company in accordance with its then valid affidavit of company registration (issued by the Dept of Business Development). If a PoA would pose risk to the buyer then it should consider having such PoA terminated/revoked or amended before or upon purchasing the target company.
Foreign Business Act, BOI Promotion or US Thai-Treaty Protection
As part of a detailed DD investigation it would also be sensible to check if the target company has any Foreign Business License (FBL) issued under the Foreign Business Act B.E. 2542 (1999) (FBA) or if it has BOI promotion privileges or protection under the US-Thai Treaty of Amity.
If the target company does not have a FBL, BOI promotion certificate or protection under the US-Thai Treaty of Amity then it is likely that such company must be Thai majority owned. This is an important factor which foreign buyers should carefully weigh up as it may require the target company to have majority Thai shareholders which could be Thai citizens or majority owned Thai juristic persons. If Thai shareholders shall purchase a majority of shares in the target company then the foreign party should be mindful that such Thai shareholders must be genuine shareholders who have evidence of having the financial capacity to purchase such shares (such as bank statements etc) as otherwise they may be considered as ‘nominee shareholders’ which could result in them breaching the FBA. The penalty for Thai persons or juristic persons which act as a nominee enabling a foreigner to circumvent the provisions of the FBA regarding List 3 (i.e. business activities requiring a FBL) are set out in section 36 of the FBA which provides for serious penalties including imprisonment for a term not exceeding three years or to a fine of one hundred thousand Baht to one million Baht or to both, and the Court shall order the cessation of the assistance or the aiding and abetting or order the cessation of the joint operation of the business or order the cessation of shareholding or partnership, as the case may be.
It is also worth noting that the penalties for a foreigner who operates a business under List 3 of the FBA but which fails to obtain a FBL are serious given that section 37 of the FBA provides that they shall be liable to imprisonment for a term not exceeding three years or to a fine of one hundred thousand Baht to one million Baht or to both, and the Court shall order the cessation of the business operation or the cessation of the undertaking or order the cessation of shareholding or partnership, as the case may be. Moreover, in the case of violation of the order of the Court, the violator shall be liable to a fine at the daily rate of ten thousand Baht to fifty thousand Baht throughout the period of the violation.
Part 2 of this article shall continue examining other matters which should be considered by a buyer when it is considering purchasing a target company limited in Thailand.
Should you require any legal support relating to conducting a due diligence investigation on a company in Thailand then please contact us at Dharmniti Law Office Co., Ltd. 2/2 Bhakdi Building 2nd Floor, Witthayu Road, Lumphini, Pathumwan, Bangkok 10330.
Tel: (66) 2680 9777
Fax: (66) 2680 9711
Email: ryan [at] dlo.co.th or chalapunj [at] dlo.co.th