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LATEST NEWS: THAILAND FOREIGN BUSINESS ACT ‘FBA’

CAN SINGAPORE KEEP SHIN CORP?

CAN FOREIGNERS OWN THAI LAND WITHOUT THAI NOMINEES?
by Mysai Kung

All revisions to Thailand’s Foreign Business Act (FBA), which would have brought tighter rules for outside investors, have been scrapped, Commerce Minister Mingkwan Sangsuwan said on Friday, 13 June 2008. “Why close the door to foreign investment? That’s why I don’t bring it back,” he said, referring to the controversial revisions which have been in legislative limbo since last year. “Don’t worry. No more. Finished.”

The revisions to the FBA, introduced after Prime Minister Thaksin Shinawatra was ousted in a 2006 bloodless coup, proposed to limit foreign shareholding voting rights, as well as share value, to 49 percent, in a bid to plug a 30-year-old loophole.

The new coalition government elected in December 2007 has made economic growth a top priority and promised market-friendly policies. In March 2008, it removed capital controls imposed in late 2006 by the military-appointed interim government to stem the rising baht which threatened the export economy.

Thailand´s Foreign Business Act is expected to remain unchanged for 2008, say government officials. Domestic politics have already had an impact on foreign investment. Therefore, instead of amending the Act and creating more uncertainty, Chulalongkorn University and the Ministry of Commerce (MOC) will study the legislation and analyze the effects that certain changes could have on foreign investment.

CAN SINGAPORE KEEP SHIN CORP?

One of the biggest motivations for revising the Thai Foreign Business Act has been the purchase of shares in Shin Corp. by the Singapore government’s investment arm Temasek, through a structure of intermediary Thai and non-Thai corporations. Much controversy ensued, because apparently this purchase in effect enabled “Singapore Inc.” to exert effective control of a strategic Thai organization without breaking any existing Thai laws. They exploited large loopholes in the Thai legal system governing public limited companies and private limited companies. The FBA was supposed to be revised to close some of these loopholes, even though not retroactively.

Now, with revisions to the FBA scrapped for the forseeable future, Singapore’s Temasek seems safe in their ownership of Shin Corp. The next big question is: If a foreign entity like them can legally control Shin Corp. shareholdings, then can they legally control the assets of Shin Corp? The answer would seem self-evident, positively yes. One obvious type of of such asset is: LAND.

CAN FOREIGNERS OWN THAI LAND WITHOUT THAI NOMINEES?

So, if other foreigners were to follow the methods so carefully researched and legally implemented by the Singapore government experts, could they legally own land in Thailand, without using Thai nominees? Why not? Readers’ comments are invited and welcome.

To minimize rehashing recent history, I would like to claim that the alleged use of nominees in Temasek / Shin Corp. is irrelevant and unnecessary. Mainly, the use of nominees in such cases under Thai law is a crime. Whatever the Singaporean civil servants may be, they are not stupid – they can achieve their aims wholly within the pertinent Thai laws.

The following provisions of the Thai Foreign Business Act (FBA) make it illegal for Thai citizens to hold shares as nominees of foreign investors, as a device to avoid the target Thai company being subject to applicable restrictions on foreign share ownership:

(a) Section 36 of the FBA provides that a Thai national who “holds shares on behalf of” a foreign national for purposes of “evading or violating” the provisions of the FBA, as well as a foreign national who “allows” a Thai national to commit such an offense, may be subject to a fine from Baht 100,000 to Baht 1,000,000 and/or imprisonment for up to three years.

(b) Section 37 of the FBA provides that a foreign national that engages in a restricted business in violation of the FBA may be subject to a fine from Baht 100,000 to Baht 1,000,000 and/or imprisonment for up to three years.

Therefore, now, how could law-abiding foreigners own land without the use of Thai nominees, which is explicitly illegal? The key, as in the Temasek / Shin Corp. case, may be in the judicious preparation and distribution of PREFERRED SHARES.

It should be noted at this point that the treatment of preferred shares in a Thai public limited company is different from the treatment of preferred shares in a Thai private limited company – these differences may in fact provide more flexibility in controlling a Thai public limited company through one or more Thai private limited companies, if so desired.

According to the Public Limited Company Act (PLCA) of 1992 as amended in 2001, public limited companies can issue preference shares with voting rights less than that of ordinary shares (for example, one vote for one ordinary share; or one vote for ten preference shares). However, public limited companies are prohibited from issuing preference shares designated with no voting rights or with voting rights greater than that of ordinary shares. Since Section 65 of the PLCA 1992 prohibits change in any rights accruing to preference shares already issued, this new provision will be applicable only to preference shares issued after the effective date of PLCA 2001.

There is no separate Thai private limited company act, but such companies are governed generally by the Civil and Commercial Code of Thailand, except when mentioned in other specific law codes.

So long as Thai citizens hold shares representing more than 50% of the paid-in share capital, a limited company will be considered to have Thai nationality, and thus not be subject to any restrictions on the types of businesses it is entitled to conduct in Thailand. There is yet no requirement that Thai citizens must control more than 50% of the voting rights attached to the shares, or that the shares held by Thai citizens must have equivalent or superior participation in the dividends of the company.

A Thai limited company may be structured such that:

- a foreign national will have voting control of the company and a priority economic interest in the dividends and/or distribution of assets on dissolution, while

- the company will still be considered to have Thai nationality because Thai citizens hold a majority of the total number of shares, in all classes, issued by the company.

This is done through a simple mechanism of having at least one class of ordinary shares and one class of preference shares, whose rights are respectively defined in the company’s Articles of Association.

One Alternative: Thai citizens hold the preference shares.

Their preference shares represent a numerical majority, say 70%, of the total number of shares issued but are assigned say 1 vote per 10 shares and a preferential but nominal dividend. Foreigners hold the ordinary shares, which carry 1 vote per 1 share and are entitled to participate in dividends pro rata (after payment of the smaller preferential dividends). Although the number of ordinary shares is less than the number of preference shares, the foreign investors are entitled to the much greater number of share votes and thus have full control of the company.

Another Alternative: Foreigners hold the preference shares.

Their preference shares represent a numerical minority, say 30%, of the total number of shares issued, but are assigned say 10 votes per 1 share and a substantial preferential dividend. Thai citizens hold ordinary shares, which carry 1 vote per 1 share and are entitled to participate in dividends pro rata (after payment of the larger preferential dividends). Although the number of ordinary shares is more than the number of preference shares, the foreign investors are entitled to the much greater number of share votes and thus have full control of the company.

Will preference share arrangements still be legal? Up to now, I have not heard or read of any criminal charges against Temasek in its effective control of Shin Corp. And, for the near future, the Thai Foreign Business Act will not be amended otherwise. What do you think? Would anybody be interested in trying out a new arrangement with a Thai private limited company? It seems possible under the law.

THAILAND FOREIGN BUSINESS ACT ‘FBA’

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