Introduction to Other Form of Company Set-Up
Many business that foreigners want to run in Thailand are reserved to Thai nationals by the Foreign Business Act. To circumvent these regulations, there have been various attempts to set-up structures which de-jure fulfill the requirements with regards to Thai domestic ownership but de-facto give full control to the foreign shareholder.
Thai Nominee Shareholder
The by-far most common of these structures is to use a Thai Nominee Shareholder. In such a setting, a Thai national holds 51 percent of the registered capital, but de-facto has no control over the company, since he already signed a blanko share transfer form. Needless to say, that such a structure is considered illegal, since the entire purpose of the construct is to circumvent the Foreign Business Act and blanko contracts are prohibited.
Besides having Thai Nominee Shareholders, many foreigners try to set-up companies with basic cross-holding structures, where ownership structures among the involved entities are mirrored . Since the majority of all Thai companies involved in such a construct are owned by Thai Shareholders (Juristic Persons), all Thai companies involved are consider Thai controlled. Once again, this structure is considered illegal since Thai law explicitly prohibits cross-holdings.
There are more complicated structures, which in the end all aim to circumvent the regulations set by the Foreign Business Act. In a two-tier structure, a Nominee Shareholder is still needed, but he does not participate directly on the operating company. Such a structure is safer, but since the Nominee Shareholder would still need to sign a share transfer form beforehand, the construct is both neither save nor legal.
Another form to establish a business presence considered local without involving a Thai Nominee Shareholder is a three tier structure. Such a structure does not require any permanent involvement from any external party, implying it is self sustaining. Thai legislation prohibits Cross-Shareholding and Nominee Shareholders – both of which are not used in this structure. A foreign investor has full control over its investment in such a circular structure. It needs to become clear though, that the purpose of setting-up such a structure was not to circumvent the Foreign Business Act.
Preferred Shareholding Structure
What has become apparent to us in many discussion with our clients is that most investors are much more concerned about the control over the company and their investment than about the actual ownership structure. Having control over a company enables the shareholder to determine to a very large extend what the company is doing and what it is not doing. Therefore, the only construct we advise using for operating businesses in area the Foreign Business Act restricts to foreigners is a Preferred Shareholding Structure.
In a Preferred Shareholding Structure, there are different classes of shares. All of them must have voting rights, but some classes of shares can be supercharged with extra rights. Most of the time these rights are voting rights, but also other special rights can be determined (e.g. profit distributions, director ratios etc.). In such a setting a Thai national might own the majority of the share capital, but a foreign investor de-facto controls the company, since he owns the majority of voting rights. A Preferred Shareholding Structure is established through Company By-Laws (i.e. Articles of Association) which explicitly outline the different classes of shares and their respective rights.
Recently, however, there have been attempts to change the definition of foreign in the Foreign Business Act from majority in terms of foreign ownership to majority in terms of foreign control. Such attempts have been undertaken several times before already, without bringing any real change.