Preferred shares

[Anthony5]

I sold a house that was registered on a company, by selling the company, as is usually done.

Since this was still a company with 7 shareholders, the new owner decided to switch to the new structure of 3 shareholders only.

Told to accountant that the foreign director should hold 39% of shares but in preferred stock, and accountant agreed to arrange all the changes for a total of 6000 Baht which I think is fair.

Today he called me and informed that preferred stock is only possible if the company has a registered capital of 2 million Baht, where the company has only 1 million Baht registered currently.

Of course to add the paperwork for increasing the registered capital would bring the cost to 25.000 Baht total.

The reason for my thread is not to discuss the cost, but if it indeed is Thai law that only companies with a registered capital of at least 2 million can issue preferred stock.

[Naam]

i can't answer your question but my advice for the new owner is "stay away from preferred shares!"

[OneZero]

i can't answer your question but my advice for the new owner is "stay away from preferred shares!"

Can you elaborate / educate me as to why to stay away from preferred shares. My interest would be in SET shares.

[Naam]

i can't answer your question but my advice for the new owner is "stay away from preferred shares!"

Can you elaborate / educate me as to why to stay away from preferred shares. My interest would be in SET shares.

relax Zero!

we are not talking here about those preferred shares you mentioned but about a totally different animal, namely a Thai company which owns real estate controlled by a foreigner.

[Anthony5]

i can't answer your question but my advice for the new owner is "stay away from preferred shares!"

Can you elaborate / educate me as to why to stay away from preferred shares. My interest would be in SET shares.

relax Zero!

we are not talking here about those preferred shares you mentioned but about a totally different animal, namely a Thai company which owns real estate controlled by a foreigner.

Then the question remains. What is the disadvantage of having preferred shares?

[fletchsmile]

Key in this situation is understanding what rights the preferred stock have as to: voting rights, dividend rights, and rights/hierarchy in the event of the company being wound up/liquidation.

Where I've seen this used for companies is companies issuing preference shares with limited or no voting rights to Thais to make up the majority of shares by registered capital value. The pref shares usually then pay a fixed dividend which should be at a commercial rate.

The foreigner then holds the ordinary shares which have most of the voting rights. This then allows then to maintain control of the company, while not owning the majority of shares.

It is possible to structure pref shares with preferential/ higher than normal voting rights but less common.

Hence I hope (for their sake) that whoever is doing this has had a good look at the rights attached to each class of shares: both ordinary and preference. In particular I hope they are holding the voting shares which control the company.

Cheers

Fletch

Edited July 16, 2015 by fletchsmile

[Naam]

in particular i hope for the new owner's sake that changing the company structure does not open a can of worms or wake up sleeping dogs. that's all i have to say.

[Anthony5]

Key in this situation is understanding what rights the preferred stock have as to: voting rights, dividend rights, and rights/hierarchy in the event of the company being wound up/liquidation.

Where I've seen this used for companies is companies issuing preference shares with limited or no voting rights to Thais to make up the majority of shares by registered capital value. The pref shares usually then pay a fixed dividend which should be at a commercial rate.

The foreigner then holds the ordinary shares which have most of the voting rights. This then allows then to maintain control of the company, while not owning the majority of shares.

It is possible to structure pref shares with preferential/ higher than normal voting rights but less common.

Hence I hope (for their sake) that whoever is doing this has had a good look at the rights attached to each class of shares: both ordinary and preference. In particular I hope they are holding the voting shares which control the company.

Cheers

Fletch

The only purpose for the preferred shares is that the foreigner holds the majority of voting rights, since the company same as all the other thousands of similar companies, doesn't do any real business.

The company will probably closed end of 2016 anyway, but for the time being the foreigner want to protect his rights.

The question still remains if you really need minimum 2 million registered capital to be allowed to create preferred shares.

[Time Traveller]

i can't answer your question but my advice for the new owner is "stay away from preferred shares!"

Can you elaborate / educate me as to why to stay away from preferred shares. My interest would be in SET shares.

relax Zero!

we are not talking here about those preferred shares you mentioned but about a totally different animal, namely a Thai company which owns real estate controlled by a foreigner.

Then the question remains. What is the disadvantage of having preferred shares?

If you have preferred shares and ordinary shares , there are going to be differences in the rights that these two classes of shares have. So you need to compare them. We can't answer the quesiton without seeing the 2 share classes.

Some have no voting rights, some have enhanced voting rights, some have 1st priority for dividends, some convert into ordinary shares after a period of time.......

there is no single answer

[Anthony5]

Then the question remains. What is the disadvantage of having preferred shares?

If you have preferred shares and ordinary shares , there are going to be differences in the rights that these two classes of shares have. So you need to compare them. We can't answer the quesiton without seeing the 2 share classes.

Some have no voting rights, some have enhanced voting rights, some have 1st priority for dividends, some convert into ordinary shares after a period of time.......

there is no single answer

I thought by now it was clear, since I have explained it twice already, that this is a company that does no real business but only holds a property, like there are thousands similar.

So there are no dividends or whatever involved, the only purpose is that the foreigner who holds only 39% of the shares will have the majority of the voting rights.

Isn't that exactly what I said in post #8 anyway?

But hey, why give a simple answer to a simple question, if we can make it complicated.

[fletchsmile]

Key in this situation is understanding what rights the preferred stock have as to: voting rights, dividend rights, and rights/hierarchy in the event of the company being wound up/liquidation.

Where I've seen this used for companies is companies issuing preference shares with limited or no voting rights to Thais to make up the majority of shares by registered capital value. The pref shares usually then pay a fixed dividend which should be at a commercial rate.

The foreigner then holds the ordinary shares which have most of the voting rights. This then allows then to maintain control of the company, while not owning the majority of shares.

It is possible to structure pref shares with preferential/ higher than normal voting rights but less common.

Hence I hope (for their sake) that whoever is doing this has had a good look at the rights attached to each class of shares: both ordinary and preference. In particular I hope they are holding the voting shares which control the company.

Cheers

Fletch

The only purpose for the preferred shares is that the foreigner holds the majority of voting rights, since the company same as all the other thousands of similar companies, doesn't do any real business.

The company will probably closed end of 2016 anyway, but for the time being the foreigner want to protect his rights.

The question still remains if you really need minimum 2 million registered capital to be allowed to create preferred shares.

No I don't believe there is a direct requirement to have 2million if you want pref shares in a company. I believe it's just an indirect consequence of the way the whole thing is being structured:

The 2 mn is more likely because foreigners are involved in the ownership structure.

The prefs are to create a different class of shares with different voting/control rights between Thai and foreigner.

Put another way, if it was for a Thai-Thai shareholding without foreigners involved I believe the company could have pref shares with less than 2mn capital.

Put another way still, if it was foreigner-Thai shareholding with only ordinary shares (and no prefs) the company would still need 2million registered capital. So don't think the prefs are the reason. It's the foreigner that is the reason.

Personally I wouldn't go this route at all when it comes to property as it can be perceived as artificial to avoid foreign land ownership rules. many people get away with it, and while to an extent complies with the form of the law, it doesn't comply with the spirit.

When you say thousands of companies set up like this. There are probably ten times as many companies that are set up where the foreigner owns the ordinary shares, the company does do real business, and ordinary shares have more votes and rights to variable dividends. On the other hand the Thai holds the prefs with limited (or no) voting rights and fixed div. This is because in a real business company the foreigner wants control (votes) and rights to profit (dividends that vary as profits rise) and is less concerned about rights in liquidation as the business - main assets - has gone bust in liquidation. The Thai effectively has minimal input in return for a fixed dividend payment.

For property: there will likely be no divs, so of more concern is the foreigner having higher rights (preferential) in the event of liquidation, as in liquidation the main asset will be the property. He also wants control hence the votes again.

So as said:

If you understand:

- Class of shares each holds -

- Dividend/profit rights

- Voting rights

- Liquidation rights

You will then understand why the company is set up the way it is. Without understanding the whole structure - which is why I asked - it's difficult to fully answer.

Sum up: The 2mn is likely registered cap requirement for having a foreigner involved, not necessarily because there are prefs. The prefs are just the share class the foreigner owns and he wants 1) preferential voting rights 2) preferential treatment on liquidation - rights to the property. This would align with other rules of needing 2mn registered capital per foreigner for a (real business) company when work permits are required. The laws all tend to link in. This structure just tries to bypass the intention of ownership laws, so throws up indirect issues like this.

Edited July 16, 2015 by fletchsmile

[Anthony5]

Key in this situation is understanding what rights the preferred stock have as to: voting rights, dividend rights, and rights/hierarchy in the event of the company being wound up/liquidation.

Where I've seen this used for companies is companies issuing preference shares with limited or no voting rights to Thais to make up the majority of shares by registered capital value. The pref shares usually then pay a fixed dividend which should be at a commercial rate.

The foreigner then holds the ordinary shares which have most of the voting rights. This then allows then to maintain control of the company, while not owning the majority of shares.

It is possible to structure pref shares with preferential/ higher than normal voting rights but less common.

Hence I hope (for their sake) that whoever is doing this has had a good look at the rights attached to each class of shares: both ordinary and preference. In particular I hope they are holding the voting shares which control the company.

Cheers

Fletch

The only purpose for the preferred shares is that the foreigner holds the majority of voting rights, since the company same as all the other thousands of similar companies, doesn't do any real business.

The company will probably closed end of 2016 anyway, but for the time being the foreigner want to protect his rights.

The question still remains if you really need minimum 2 million registered capital to be allowed to create preferred shares.

No I don't believe there is a direct requirement to have 2million if you want pref shares in a company. I believe it's just an indirect consequence of the way the whole thing is being structured:

The 2 mn is more likely because foreigners are involved in the ownership structure.

The prefs are to create a different class of shares with different voting/control rights between Thai and foreigner.

Put another way, if it was for a Thai-Thai shareholding without foreigners involved I believe the company could have pref shares with less than 2mn capital.

Personally I wouldn't go this route at all when it comes to property as it can be perceived as artificial to avoid foreign land ownership rules. many people get away with it, and while to an extent complies with the form of the law, it doesn't comply with the spirit.

When you say thousands of companies set up like this. There are probably ten times as many companies that are set up where the foreigner owns the ordinary shares, the company does do real business, and ordinary shares have more votes and rights to variable dividends. On the other hand the Thai holds the prefs with limited (or no) voting rights and fixed div. This is because in a real business company the foreigner wants control (votes) and rights to profit (dividends that vary as profits rise) and is less concerned about rights in liquidation as the business - main assets - has gone bust in liquidation. The Thai effectively has minimal input in return for a fixed dividend payment.

For property: there will likely be no divs, so of more concern is the foreigner having higher rights (preferential) in the event of liquidation, as in liquidation the main asset will be the property. He also wants control hence the votes again.

So as said:

If you understand:

- Class of shares each holds -

- Dividend/profit rights

- Voting rights

- Liquidation rights

You will then understand why the company is set up the way it is. Without understanding the whole structure - which is why I asked - it's difficult to fully answer.

Sum up: The 2mn is likely registered cap requirement for having a foreigner involved, not necessarily because there are prefs. This would align with other rules of needing 2mn registered capital per foreigner for a (real business) company when work permits are required. The laws all tend to link in. This structure just tries to bypass the intention of ownership laws, so throws up indirect issues like this.

What you say now is that once again there is a law for some and another law for others, which I don't think is written anywhere.

Because you say the 2mn is required because there is a foreigner involved, but at the end of the day the same company law should apply for foreigner and Thai.

Further reading through your post, it seem that I was wrong informed by someone who calls himself an accountant, since you explain that for higher voting rights there is no need for preferred shares. As you say that even ordinary shares can have higher voting rights.

I think it's time to look for a change in accountant.

[fletchsmile]

The "preference" element of the shares usually refers to in liquidation. i.e it is higher up the hierarchy/ gets preferential treatment in liquidation. So for a property company you may want these, as in liquidation the property is where the money is.

It's possible for ordinary shares to have voting rights or no voting rights. It's possible for pref shares to have voting rights or no voting rights or even limited voting rights. So in theory you could have the foreigner having ordinary shares with voting rights and the Thai having another class of ordinary shares with no voting rights. So in terms of voting/control alone there is no need for pref shares. But it's the liquidation hierarchy that likely needs the prefs. Otherwise if there were two ordinary class shares they'd likely rank equal in liquidation and both would have equal rights over the property.

There are many combinations of ordinary-ordinary, ordinary-pref, pref-ordinary.

What you tend to find is trading companies (real businesses) are ORD for foreigner (with better voting rights + variable div/profits right) + PREF for Thai (limited voting rights + fixed div payment )

For property company what you are describing: PREF for foreigners (with better voting rights + priority in liquidation) + ORD Thai (less voting rights + lower priority in liquidation so they don't get the property)

Your accountant is probably trying to pick the best combination for the activity concerned. So is doing his job, just trips over in the explanations because of the way it's structured. If voting alone he doesn't need prefs. But because of the property, then ownership of the asset in liquidation is important so prefs are used.

BTW The same company laws generally do apply. It's just there are extra laws to add if you have a foreigner. It basically ends up as for every foreigner you have you need to add another 2mn baht capital

I've worked for real business companies where they had 2mn baht capital and were allowed one foreigner in the company. When they wanted to add another foreigner they need to add another 2mn, 3 foreigners add another 2mn etc. If they don't add the foreigners they don't need to keep adding 2mn each time one joins.

Edited July 16, 2015 by fletchsmile