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3 Legal Tips to Protect Your Investment in Thailand
04/04/2023
Are you a foreign investor looking to do business in Thailand? Collaborating with a local Thai partner can provide numerous benefits, including increased resources and market access. However, navigating the regulatory restrictions of foreign ownership can leave minority shareholders concerned about securing their investment gains.
Please note that it is not a mandatory requirement for foreign companies to have a Thai partner. For more information, please see our blog post here.
In this blog post, we will explore strategies for protecting your investments in Thailand.
Key points
- Foreign investors can prepare and execute a Shareholder Agreement with essential terms and conditions and structure their investments as preference shares to protect their investments.
- Shareholder agreements can govern the rights and obligations of shareholders in conducting business and management. Minority shareholders should have board representation and participation, key management personnel nomination rights, and affirmative rights to approve decisions on reserved matters.
- Articles of Association must be enacted with share transfer restrictions to be used against third parties. It establishes the regulations for a company’s operations, purpose, and procedure for completing organisational tasks.
- Preference share structures allow granting more or less voting rights and dividend rights to certain shareholders.
What are the best ways for a foreigner to protect their investment?
Protecting foreign investment in Thailand is crucial for investors. Preparing and executing a Joint Venture Agreement, including essential terms and conditions, and structuring investments as preference shares are two legal options that can help protect their investment.
Below is a list of common examples of how foreigners can protect their investments.
Shareholder agreements
For foreign investors in Thailand, protecting their investments is of utmost importance. One legal option to ensure this is by preparing and executing a Shareholder Agreement, which governs the rights and obligations of the shareholders in terms of conducting business and management. The agreement should include essential terms and conditions, such as:
Board Representation and Participation
Minority shareholders should have the right to nominate directors to represent them on the board of directors to balance management control and stay informed about the company’s operations.
Key Management Personnel
Minority shareholders should also be able to nominate key management personnel, such as the CEO, CFO, and COO, to balance the company’s internal control.
Affirmative Rights
Minority shareholders can agree to an “Affirmative Right,” requiring majority shareholders to seek minority shareholder approval before making decisions on “Reserved Matters” that affect shareholders’ interests in the company.
Restrictions on Share Transfers
Minority shareholders may want to demand a “Lock-Up Period” during which no shares can be transferred to prevent the premature departure of a majority shareholder, which could burden minority shareholders with responsibilities for which they may not have the competence or operational experience to continue the project.
Board Reserved Matters
Board reserved matters are a set of key decisions and actions that are reserved for the board of directors of a company or organization. These matters are typically defined in the company’s articles of association or other governing documents. They are intended to ensure that the board retains ultimate control over important aspects of the business.
Examples of board reserved matters may include:
- Approving the company’s overall strategy and business plan.
- Appointing and removing the CEO and other senior executives.
- Approving major capital expenditures or investments.
- Approving significant contracts or transactions.
- Setting the company’s overall budget and financial goals.
- Approving changes to the company’s ownership or corporate structure.
- Making decisions on matters related to mergers, acquisitions, or divestitures.
- Approving changes to the company’s articles of association or other governing documents.
- Overseeing the company’s risk management strategy.
- Deciding on the distribution of dividends to shareholders.
Shareholders Reserved Matters
Shareholder-reserved matters are certain decisions that the shareholders can only make of a company rather than the board of directors or management. These matters are typically specified in the company’s articles of association or other governing documents. They are intended to give shareholders control over key aspects of the company’s operations.
Examples of shareholder-reserved matters may include:
- Appointing or removing directors.
- Amending the company’s articles of association.
- Approving major mergers or acquisitions.
- Authorizing the issuance of new shares or other securities.
- Deciding on changes to the company’s capital structure or dividend policy.
- Approving major changes to the company’s business or operations.
- Winding up or dissolving the company.
Shareholder-reserved matters give shareholders a say in important decisions that can affect the value and direction of the company. By reserving these matters for shareholder approval, companies can ensure that they are making decisions aligned with their investors’ interests and that are consistent with their long-term goals.
Drag Along/Tag Along
Drag along and tag along share rights are provisions in a shareholder agreement or other governing documents that define the rights and obligations of shareholders in the event that a company is sold or undergoes a change in ownership.
A drag along provision allows a majority shareholder or group of shareholders to compel the minority shareholders to sell their shares in the company if a buyer is willing to purchase the entire company. In other words, if the majority shareholders want to sell the company and a buyer is willing to purchase the entire company, the minority shareholders are required to sell their shares as well. This provision is designed to prevent a minority shareholder from blocking a sale of the company.
A tag-along provision, on the other hand, gives minority shareholders the right to participate in a sale of the company if a majority shareholder or group of shareholders is selling their shares. In other words, if the majority shareholders are selling their shares, the minority shareholders have the right to sell their shares on the same terms and conditions as the majority shareholders. This provision is designed to protect minority shareholders by ensuring that they are not left behind in a sale of the company.
Both drag along and tag along provisions are important mechanisms for protecting the rights of shareholders in the event of a sale or change in ownership of a company. By establishing clear rules for these situations, shareholders can have greater confidence in their ability to realize the value of their investment in the company.
Articles of Association
In addition to the Joint Venture/shareholder Agreement, certain terms and conditions, such as share transfer restrictions, must be enacted in the company’s Articles of Association (AOA) and officially registered with the Department of Business Development (DBD) to be used against third parties.
Articles of Association are a document that specifies the regulations for a company’s operations and company’s purpose. Articles of Association also establish the procedure for completing organizational tasks, such as appointing directors and handling financial records.
Articles of Association must be recorded at the Ministry of Commerce. It is also important to note that the Ministry of Commerce will review all submitted Articles of Association provisions. This ensures all the provisions are compatible with the Thai Civil and Commercial Code. Should any provisions be found to go against the Civil and Commercial Code, they will be rejected.
For more information about Articles of Association in Thailand, please take a look at our blog post here.
Preference Share Structures
Another option for foreign investors in Thailand is to structure their investment as preference shares. This structure not only allows investors to receive a fixed dividend before any common shareholders receive any dividends but also grants them the ability to use their shares for voting rights.
Preference shares can be structured to grant voting rights on certain matters, such as the appointment or removal of directors, changes in the company’s share capital structure, and other significant decisions. This gives preference shareholders greater control over the company’s direction, which can be particularly important for foreign investors who may have a different level of influence than local shareholders.
In addition to the voting rights, preference shareholders have priority over common shareholders in receiving their investment back in the event of liquidation. This structure can protect foreign investors by ensuring they receive a return on their investment before common shareholders and have a higher priority in the event of liquidation.
How can Belaws help?
For more information about protecting your investment in Thailand, why not talk to one of our experts now?
This article is for information purposes only and does not constitute legal advice.
Our consultations last for a period of up to 1 hour and are conducted by expert Lawyers who are fluent in English, French and Thai.
Consultations can be hosted via WhatsApp or Video Conferencing software for your convenience. A consultation with one of our legal experts is undoubtedly the best way to get all the information you need and answer any questions you may have about your new business or project.
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Frequently asked questions
How can a foreigner invest in Thailand?
Foreigners can invest in Thailand by collaborating with a local Thai partner or by structuring their investments as preference shares.
Why is it good to invest in Thailand?
Investing in Thailand provides numerous benefits, including increased resources, market access, and potential returns on investment.
What are the key components of a shareholder agreement to protect investments in Thailand?
Board representation and participation, key management personnel nomination rights, affirmative rights, and share transfer restrictions are key components of a shareholder agreement for protecting investments in Thailand.
Why are preference shares significant for foreign investors in Thailand?
Preference shares provide foreign investors in Thailand with greater control over the company’s direction, a fixed dividend, and priority in receiving their investment back in the event of liquidation.
Why is enacting share transfer restrictions in the Articles of Association important for foreign investors in Thailand?
Share transfer restrictions in the Articles of Association ensure that the company’s ownership structure remains stable and must be recorded and reviewed by the Ministry of Commerce.
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