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Thai Preference Share Structure

Thai company shares

The structure of preference shares opposite ordinary shares in a Thai company is typically used to give control to a group of shareholders (foreigners) above another group of shareholders (Thai) in the company.

For now, Thailand has not changed the preference structure allowing foreigners as a minority shareholder to control a Thai limited company, however there is a discussion if preference shares and foreign voting rights in a Thai company should be used as a criterion in defining a Thai company foreign. In new regulations the government is currently discouraging foreigners to invest in Thai businesses by using Thai nominee shareholding structures, however has not issued restrictions on the use of preference shares and majority voting rights by foreign shareholders in a Thai company.

A Thai company must have 3 promoters when applying for company registration and no less than 3 shareholders during its existence. The liability of shareholders extends only so far as the amount not yet paid up on their shares.  Therefore, a shareholder who has paid up 100% of their shares has no further liability or responsibility for any debts of the company.

Share Types

  1. Ordinary shareholders have rights against and owe duties to the company under the Civil and Commercial Code.  For example, they will get a share of any profits in respect of those shares which are 100% paid up, in the form of dividends, and their initial investment in the company will be returned if they sell their shares or if the company falls in to liquidation and the assets outweigh the debts and liabilities. Further, ordinary shares carry voting rights at shareholder meetings and one share gives one vote.
  2. Preference Shares also have rights against and owe a duty to the company under the Civil and Commercial Code. However, these shareholders have some special rights.  The preference shareholder’s position is like a half shareholder, half debtor.  If the company falls into liquidation, the company must first settle any debts and if there is any money left over to reimburse shareholders for their investment, the preference shareholders will be repaid before the ordinary shareholders. Therefore, if after the company has repaid the preference shareholders, there are insufficient funds to reimburse the ordinary shareholders then the ordinary shareholders may only be partly reimbursed or may receive no refund at all.

Preference shareholders can receive an equal share of the profits whether their shares are paid up or not. Preference shareholders can have voting rights in shareholder meetings however their voting power depends on the content of the company documents. The company can choose whether the voting rights of preference shareholders are equal to one vote for one share or they can increase voting power and may choose to give ten votes for one share.

Public Limited Companies has to comply with the Public Company Limited Act B.E.2535. The Act permits companies to change the share types in a company whereas Limited Companies have to follow the Civil and Commercial Code which does not permit this.

If a Limited Company needs to change its ordinary shares to preference shares so that the holders benefit from the favorable voting rights, it is possible. Although the foreign shareholders in Thailand will hold fewer shares, they are still able to control the company by passing resolutions in their favor by using their preferred voting rights.

How to change a Share Structure

There are two ways to change the share structure:

  1. Increase Registered Share Capital. This is the most common way of solving the problem of giving foreigners control of a Thai company.  In order to increase the registered capital, the company must follow the Ministry of Commerce’s regulations.  The change can be registered within a day.
  2. Reduction of Company Capital. A company can reduce its capital by a quarter.  This method is more difficult, takes longer and is more expensive.  A company may be unable to do this if its creditors object.  A reduction in capital will take about three to four months and the company must follow Ministry of Commerce regulations. First, the company reduces capital and reduces the number of ordinary shares proportionately.  Then the company will increase its capital so that it is equal to the previous registered capital but it will issue preference shares in place of some of the ordinary shares.

Example: company capital is 2,000,000 THB with 20,000 ordinary shares at a share value of 100 THB, one share equals one vote.  Mr. A has 5,000 ordinary shares and Mr. B has 12,000 ordinary shares.  Therefore, Mr. B has more authority than Mr A. If the company wanted Mr. A to have more authority than Mr. B, the company can’t change Mr. A’s ordinary shares to preference shares instantly.  However, the company can increase capital and issue preference shares.  If the company increases its capital and issues 2,000 preference shares, Mr. A can have 5,000 votes via his ordinary shareholding and a further 20,000 votes through his preference shareholding (carrying 10 votes per share).

However, the increase in capital may affect the company balance sheet or tax liability. So, if the company does not want to increase its registered share capital, an alternative is available.

Before a company increases or reduces its capital, it must check the company articles of association.  The company articles of association must permit such increase or reduction. If they do not, the company must amend the articles of association first by submitting certain documents to the Ministry of Commerce.

By law, a Thai Limited Company can not change ordinary shares to be preference shares.  Therefore, the company must solve this problem by following one of the above methods. If the Thai company has only ordinary shares, it can increase or decrease capital in order to issue preference shares.

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