Article 36 of the Federal Foreign Investment Law of Thailand prohibits using nominee Thai shareholders. It may lead to imprisonment of up to three years and/or a fine of one hundred thousand to one million baht for both the Thai nominee and the foreign shareholder.
Each of the following methods has its disadvantages and vulnerabilities. Foreign investors must carefully assess all risks and structure their relationship with Thai shareholders.
Formal Transfer Order
A blank transfer order for shares, also known as a 'quitclaim deed,' is a document that a nominee Thai shareholder signs without specifying the date of transfer of the shares and limiting the new shareholder. This gives the beneficiary the flexibility to manage his shares, as he can put the desired date at any time and designate another person to whom the shares will be transferred. Usually, it is another Thai nominee shareholder who ensures the shares' safety and control over them.
However, using a blank stock transfer order may also have risks. Some unscrupulous individuals may use this document to transfer shares without the beneficiary's permission. In addition, there is a risk of extortion or misappropriation of company property. Therefore, it is recommended that blank stock transfer orders be carefully kept and secured.
Blank stock transfer orders are one way foreign investors can secure their investments in Thailand. However, before using this method, it is necessary to carefully assess all risks and ensure the chosen Thai shareholder is reliable.
Preferred shares
The following method of protection is the use of preferred shares. This allows various rights to the owners of the shares, such as the right to vote or receive dividends. Holders of common stock receive one vote each, while preferred stock can provide multiple voices or be grouped into various pieces corresponding to one vote.
Two methods can be used to provide a majority of votes.
The first method proposes that 49% of the shares be composed of preferred shares providing multiple votes, while Thai shareholders hold only common shares.
The second method involves Thai shareholders owning preferred shares issued on a two-share-one-vote basis.
To ensure control, foreign investors should carefully consider the ratio of share types because the type of shares cannot be changed in the future. If the voting ratio needs to be changed later, it will be necessary to increase the share capital by issuing new shares of the desired type.
Holding structure
Schemes involve using a minimum of two companies to build a holding structure.
Cross-holding (cross-ownership)
Cross-shareholding is an investment strategy that allows two or more companies to control most of each other. In the case of a cross-holding structure, both companies have the same beneficiaries and own 51% of each other's stock, giving them complete control over their decisions.
An essential aspect of cross-shareholding is the security and protection of ownership rights. Such an approach requires careful legal and financial analysis, as it can affect company management, taxation, and ownership rights. In doing so, ensuring compliance with all legal and regulatory requirements is essential.
In Thailand, cross-holding restrictions apply to media and public companies.
Two-tier holding structure
In some situations, foreign investors may be advised a "two-tiered ownership structure" for tighter control over a Thai company. This structure involves creating two Thai companies: operating and holding companies. One or both companies could use a preferred stock scheme.
It should be noted that creating a two-tier structure can be, to some extent, a more complicated and costly process, which may include additional registration and administrative costs. At the same time, this scheme is one of the most efficient in terms of protection.
Collateral Control Scheme
An investor loans a Thai shareholder who pledges share certificates as collateral. Two agreements are concluded - a loan agreement and a share pledge agreement. The share certificates are transferred to the pledgee (i.e., the foreign investor), who will hold them until the pledgor pays off the entire loan.
The share pledge agreement may also set out additional conditions. For example, the pledgee's authority to vote at shareholder meetings, the assignment of rights to dividends, the obligation to vote in a particular manner, and the right to transfer shares to the pledgee or a third party in the event the pledgee defaults.
The above examples of control schemes have their peculiarities and can be combined depending on the investor's goals and objectives.