Foreign investors frequently do business in Thailand through a joint venture with a local Thai partner. The main reason behind this association is not only to increase capacity, resources, technical expertise, and access to established markets and distribution channels but also to hold strong potential for growth and innovative ideas.
Nonetheless, due to regulatory restrictions, foreign investors that enter into a joint venture in Thailand often own minority interests, with their local Thai partners holding the remaining majority shares. As a result, one of the most common concerns among minority shareholders is how to secure their investment gains.
Joint Venture Agreement
Preparing and executing a Joint Venture Agreement (or Shareholder Agreement), which governs the rights and obligations of the shareholders in terms of conducting business and management, would be prudent among other legal options. The following should be included in the sample of essential terms and conditions of the Joint Venture Agreement:
Board Representation and Participation
Minority shareholders should be able to agree on the number and nomination of directors who will serve as their representatives on the board of directors in order to balance management control and stay informed about the company’s operations. Those directors selected by minority shareholders should, in theory, be obligated to be included in the quorum.
Key Management Personnel
In addition to the Board of Directors, the minority shareholder should have broad power to nominate key management employees. These management employees can be the CEO, CFO, and COO. Please note that this is essential to balance the company’s internal control.
Affirmative Right
Shareholders in a joint venture could agree to an “Affirmative Right” in favor of minority shareholders. This right requires majority shareholders to seek minority shareholder approval before making decisions on “Reserved Matters,” which are not in the ordinary course of business but affect shareholders’ interests in the company, such as
(i) any changes in the company’s share capital structure;
(ii) any matters relating to capital issuance or dilution of shares; and
(iii) any key person appointments or removals.
Restrictions on Share Transfers
Minority owners may decide to form a joint venture based on the long-term involvement of majority shareholders with capacity, resources, and experience. If share transfers to third parties are allowed, the premature departure of a majority shareholder could burden minority shareholders with responsibilities for which they may not have the competence or operational experience to continue the project. As a result, minority shareholders should consider demanding a “Lock-Up Period” during which no shares can be transferred.
Articles of Association
Furthermore, only if certain terms and conditions of the Joint Venture Agreement, such as share transfer restrictions, are enacted in the company’s Articles of Associate (so-called “AOA”) and officially registered with the Department of Business Development (“DBD”), can they be used against the third party.
Let us help you know about the Article of Association in detail. The Thailand Articles of Association are the company’s rules and regulations. These regulations govern the company’s internal activities, such as voting rights. The creation of a corporate document is mandatory, and the Statutory Meeting must finalize the content of it with the involvement of the Private Limited Company. They might establish their own Articles of Association or use the Thai Commercial Code as a guideline.
Here’s an example of an Articles of Association to give you a better sense of what’s in them.
Content of Articles of Association in Thailand
Chapter 1: General Provisions
- In all respects, the provisions of the Thai Civil and Commercial Code relating to Private Limited Companies will apply.
- Any amendments or revisions to the document must fetch the attention of the shareholders’ meeting. This must be in accordance with the law.
Chapter 2: Shares and Shareholders
- Registration of the company’s shares must hold authentic certificates and be completely paid-up. A minimum of one director must sign each certificate. It must also have a company seal attached to it.
- If you’re transferring shares, you’ll need to write it down. Both the transferor and the transferee must sign the agreement, with at least two witnesses.
- When the corporation registers the transfer, the transfer becomes effective.
Chapter 3: Directors
- Selection of the number of directors is mandatory during a general meeting of shareholders.
- Half of the total number of directors must be present to form a quorum.
- The Board of Directors will be in charge of the company’s management.
- If a position on the Board of Directors becomes vacant, the Board of Directors will appoint a replacement. Until the director returns, this individual will hold the position.
Chapter 4: Shareholders’ Meeting
- The Board must convene a general meeting within six months of the company’s registration date.
- An ordinary meeting is mandatory once a year.
- If a shareholder is unable to attend the meeting in person, he or she may vote by proxy.
Chapter 5: Balance Sheet
- The balance sheet is a document that lists the company’s assets and liabilities. It also contains the profit and loss statement. Every financial year, from January 1 to December 31, the director must create a balance sheet.
- A single auditor must audit the balance sheet before it gets approval in a general meeting.
Chapter 6: Dividend and Reserve Fund
- When distributing dividends, the company must put at least one-twentieth of the profit into the reserve fund. This is mandatory until the capital volume reaches one-tenth of its original size.
We at Konrad Legal are here to help and guide all Foreign Investors in Thailand. All our experts have years of experience and skills in dealing with company registration and joint venture association matters. Book your free session of consultation with us or email us your query at [email protected].
