Thai Law Insights

Thai Nominee Shareholders: Aftermath Problem

Chatchawarl Sornsurarsdr/Chansilp Laosiriwut

E-mail:	chatchawarls@csbc-law.com
	chansilpl@csbc-law.com

A. Thai Nominee: Aftermath Problem

A foreign investor in Thailand, when associating with a Thai nominee shareholder or Thai partner, may experience difficulties in controlling management of his/her company established as Thai national company if a legal device for minority shareholder protection is not carefully planned and prepared before forming the joint venture.

On paper, the Thai partner may have the usual 51% compulsory shareholding ratio as required by Thai law.

A problem may occur when the foreigner, as the minority shareholder, holding no more than 49% of total equity, loses actual management control over the company due to an act by the Thai majority shareholders, who can actually control voting rights in any shareholder meeting or, even in any board of directors meeting, despite of the fact that all funds may have been provided by the foreign investor from the outset.

If a clandestine shareholding structure was created by the foreign and Thai partner, the foreign investor may be prevented from exercising his or her rights in Court. A derivative suit or derivative action is only the viable legal solution to protect a minority shareholder from fraud by a Thai partner. However, if the minority shareholder prevails in Court, the benefit would be awarded to the company and not the minority shareholder.

B. Check any Irregularity Committed

Thai directors who are members of the Board of Directors of a company should be monitored for any corporate irregularities or other wrongful acts detrimental to the company and control of the company must be wrested from any wrongdoer so that legal action may not be commenced by the company.

In this respect, pursuant to the Thai Civil and Commercial Code, the minority shareholder can bring a case in Court if the director commits a wrongful act and that the company per se under that director's control refuses to institute an action in Court, provided that (i) the director's act is detrimental to the company; (ii) the minority shareholder exercises his/her right of action in Court for benefit of the company; (iii) the director committed an irregular or wrongful act; and (iv) the company (not the shareholders) suffered as a result. This kind of action in Court is known as a derivative suit or derivative action under English and US legal systems.

C. Possibility of a Claim in Court for Invested Fund from Thai Nominee Shareholder

Under Thai law, shares are regarded as property. Thus, shares can be held in trust by another. When the beneficial owner of the shares calls back the shares from the Thai nominee shareholder, the beneficial owner can call and collect the shares by virtue of the law because the shares were held in trust. In this respect, the list of shareholders is treated as evidence under Thai law but, the list is not conclusive proof that the shareholders are the actual owners. Proof of the source of the funds which purchased the shares is admissible in Court to prove the identity of the beneficial owners (Thai Supreme Court Judgments No. 10274/2551 and No. 6735/2548).

The negative consequence of the nominee shareholding structure is that under the Foreign Business Operations Act of 1999 or Alien Business Law or ABL, if a Thai national holds shares for a foreigner so as to help the foreigner to carry on business prohibited or restricted by the ABL, shall result in punishment with imprisonment or a fine or, both. The foreigner behind the scene shall be jointly liable as well. In this instance, there may be a presumption that the nominee shareholding structure was created to circumvent the ABL unless the Thai shareholder can prove beyond a doubt that he or she had enough funds to purchase the shares and did not, in fact, hold the shares for the foreigner.

D. Conclusion

To avoid any legal problem as pointed out above, a foreign investor should find a responsible local partner with whom to associate and, prior to concluding any joint venture or shareholders' agreement with Thai partners, the foreign investor should seek for advice from legal counsel to minimize or avoid legal risk.