Farang Control A Thai Company

[sibeymai]

It has been suggested to me that this method is an effective way for a farang to maintain control of a Thai company. Do you agree ? Or are there other methods to maintain effective control while complying with Thai laws ?

Company shareholding constituted as Thai shareholder #1 (41%) as sole director, Thai shareholder #2 (20%), farang shareholder #3 (39%). Farang shareholder holds a signed undated unconditional letter of resignation from the director (Thai shareholder #1) and a signed undated voting rights proxy transfer from Thai shareholder #2 allocating voting rights to the farang.

The theory is that should the director perform any action which the farang disagrees with the farang can pre-date the director's resignation letter to invalidate the director's action. The director's resignation will prompt a shareholder vote for the appointment of a new director and with the proxy allocation from Thai shareholder #2 the farang controls 59% of the votes and may therefore appoint a director of their choice.

Is the above method legal under Thai law ?

Another method I have heard of is where the farang shareholder is allocated preferential voting rights on their shares when the company is formed. For example, Thai shareholding 80%, farang shareholding 20%. However, the farang shares are preferential and allocated 5:1 voting right. Therefore the Thai shareholders can exercise 80 votes and the farang 100 votes. In this method the farang needs to ensure the directors can not issue additional shares to offset the farang's shares so undated signed resignation letters for all the directors is also required.

Is this method also legal under Thai law ?

Any other legal methods for a farang to maintain control of a Thai company ?

[AnnyLing]

Why would a Farang who intends to control a Thai company use a Thai Director ?

[sibeymai]

Why would a Farang who intends to control a Thai company use a Thai Director ?

Because companies formed with a farang director attract more scrutiny from the relevant Thai authorities than when forming a company without a farang director (eg. source of capital).

Besides, any director can be replaced at any time by a vote of the majority Thai shareholders so being a director, even a sole director, doesn't provide an effective means of control.

Edited August 5, 2010 by sibeymai

[wolf5370]

Yes I have heard of both of these methods too. I have a book (albeit a good few years old now) that suggests both ways, but states that the first is not really kosher legally speaking, but is very common.

The book says that there have been various 'discussions' in parliament about closing the share type loopholes (unequal voting rights), but at the time of printing never came to much more than talk. Although I remember a thread here a while ago (long while ago) where someone said something along the lines that a new rule (law?) could be used to kill the benefit of unequal voting rights, by making the voting rights used in place of share volume ownership where it gave greater control to a foreigner (i.e. that if you did own only 25% but have 75% voting rights, then the authorities would consider you 75% owner and thus a foreign owned company) - I have heard this several times since in chats - don't know how true this is.

The first method also needs a clause that prohibits sale of shares without board agreement - otherwise he could sell them to his wife and then quit and your letter would be useless. Also both require limitiation clauses to stop then being used as leins or loans being taken out in the company's name etc. and to limit purchases by volume, cost etc. Of course also dividend entitlement.

One thing I have always considered, but never bother finding out about is as follows: I presume Thailand has favourable rules concerning neighbours and ASEAN countries' companies operating here. It is very easy to open a foreign company in say Indonesia - this could then be used to either operate here (under these favourable conditions) or as a share holder in a Thai company. Anyone?

I guess SunBelt may be your best bet at checking all the above. Let me know if you ever get a real confirmation - post or PM. Good luck

Cheers.

[richardt1808]

Hi,

Some great responses above. I think that the basic letter of the law which restricts foreign ownership to 49% of a Thai company says it all. Anything that you attempt to do to lock in control of a Thai company would not survive the ultimate test of legality if it were challenged in court. 'Proxy' became a very dirty word here following the debacle concerning a certain telecom company here, so while it may be possible to get away with something like this, no plan is going to be watertight and I wouldn't bet your life savings on it if I were you.

Cheers

Edited August 5, 2010 by richardt1808

[AnnyLing]

Why would a Farang who intends to control a Thai company use a Thai Director ?

Because companies formed with a farang director attract more scrutiny from the relevant Thai authorities than when forming a company without a farang director (eg. source of capital).

Besides, any director can be replaced at any time by a vote of the majority Thai shareholders so being a director, even a sole director, doesn't provide an effective means of control.

Voting does not help much if a director has cleaned out the bank accounts and is on the run. Only a few days ago somebody complained in this forum that a co-director disappeared with the company seal and the checkbook.

[Motoon]

Hi,

Some great responses above. I think that the basic letter of the law which restricts foreign ownership to 49% of a Thai company says it all. Anything that you attempt to do to lock in control of a Thai company would not survive the ultimate test of legality if it were challenged in court. 'Proxy' became a very dirty word here following the debacle concerning a certain telecom company here, so while it may be possible to get away with something like this, no plan is going to be watertight and I wouldn't bet your life savings on it if I were you.

Cheers

Fully agree with this assessment. Although proposed solutions are common practice they're not completely safe. If a court decides that the "Farang" does exercise control over the company, the status of the company could be rendered to an illegal status. I know of two actual cases where the court decided that foreign "control" is 100%, control was considered equal to ownership and the company was declared illegal since formation. Therefore there is always a potential risk. This is also the reason why the FBA is still hotely discussed in Parliament.