It is easy for foreigners to set up a wholly foreign owned enterprise (WFOE) in Thailand. However, such firms are subject to limitations, for example in trading and providing services. A Joint Venture with a Thai majority, on the other hand, is free to do anything that is possible for Thai companies. Even in such a Joint Venture, foreigners may legally have a majority of voting rights and preferential dividend rights.
Yet this must be properly planned from the very outset and cleverly set up from a legal point of view. Once the company has been established, there is very little that one can do about it.
Sanet Legal, the German lawyers in Thailand for corporate law, explain how to make a Joint Venture in Thailand a successful concept. They also point out legal options that many investors have probably not considered yet.
Joint Venture Precepts – “Trust who you trust!”
Many companies dread a Joint Venture because a partner might get too much insight into their own customer base or technology. In principle, this is a valid thought. As in every cooperation, however, the old lawyer’s principle “Trust who you trust!” applies. When entering a Joint Venture in Thailand, it is essential to find a reliable partner as well. Long-standing business relationships with proven track records are usually a good indicator.
Most important, however, are synergistic interests. In contrast to China, where we usually strongly advise against a Joint Venture, Thai businesspeople do not spend every morning thinking about how they can deprive their partner of money or know-how. Instead, they see mutual advantages in the fact that the European partner will consistently supply them with top products, while they themselves know the market and bring the customers.
One important aspect of joint ventures in Thailand is that hardly any Thai will take a joint risk with a foreigner. Therefore, the Business Plan must promise a safe profit, and this must be tangible and not based on “hopes”.
The allocation of functions on site – efficiency and control
It makes little sense to put a foreign manager in front of the Majority Partner. Administration and Sales Management should be in the hands of the Thai partner. Anything else is counterproductive and demotivating. However, control is also a must.
In experience, Sanet ASEAN ADVISORS repeatedly encounter cases of fraud where the foreign partner restricts his activities over years to visits at annual closing or – if at all – to the yearly planning.
Whoever “holds back” in this way cannot be surprised if the partner wonders whether it would not be fair for him to fork out a little more of the earnings than agreed. Then once in a while a family member is switched on as an intermediary customer, who picks up an “extra margin” in sales and thus pushes up the real market price out of competitiveness.
With pleasure also coworkers and equipment are used, in order to burden the cost load for lucrative second business of the Thai partner to the joint venture enterprise.
The only thing that helps there is control. In any case, the right to appoint a co-manager, for instance the CFO or the Technical Director, should be stipulated in the Joint Venture Agreement.
The Joint Venture Agreement – the heart of the cooperation
In principle, it is generally possible to stipulate either essential part such as the composition of the Board of Directors, lock-up minorities, rights to sell shares, the revocation of shares in the event of infringements, and much more topics purely by contract.
In the event of a dispute, a binding arbitration agreement should be concluded. That is always preferable to years of civil litigation with an ever-open outcome. In this case, reasonable business deals can hardly be done with each other.
If you are looking for a qualified international lawyer in Thailand with many years of experience in corporate law, you should contact Sanet Legal Ltd. in Bangkok.
However, certain regulations can even be incorporated into the Articles of Association, which are similar to the “GmbH Satzung” in Europe. Your European lawyer will also advise you on this in detail.
Extra profits and voting rights even as a minority shareholder
Extra profits and voting rights even as a minority shareholder Sanet Legal Ltd., with its German-speaking lawyers in Bangkok, offers particularly attractive options for new companies.
First of all, at the time of incorporation, and only then, it is possible to allocate shares of the company, which, in terms of voting rights and/or profit distribution, are preferred to ordinary shares of the company.
Nothing thereby will change in the status of a Thai company with no restriction under the Foreign Business Act. The Thai law evaluates the question whether a company limited is classified as a “Thai” or “Foreign” company exclusively on the basis of the number/value of the subscribed shares. If a foreigner has 50% or more, the Thai company becomes a WHOFE, i.e. a Wholly Foreign Owned Enterprise with all restrictions on its activities.
However, even 49% of the shares can be partially “Preferred Shares”, which entitle the holder to greater voting rights and/or profit participation.
This is particularly interesting when the foreign minority investor contributes high values, for example also as non-cash assets such as licenses or if he grants supplier loans, and therefore wants to be entitled to higher dividends in return. Similarly, he can then be assigned higher voting rights via preferred shares if he bears higher risks in the JV or would like to enforce certain decisions to a large extent by himself.
A Thai law firm with a German attorney should be consulted about such a structure, which is then considered to be fair for all parties involved. It requires a high level of legal and entrepreneurial knowledge, such as Sanet Legal in Bangkok possesses.
Another way of balancing interests is a three-party structure. For example, if you want to enter into a joint venture with your most important distributor on an equal footing, you can agree on 45 % of the shares for each partner. The remaining 10 % is given to an investor who is either a pure financial investor or who takes on an advisory and mediating role in the event of disputed decisions.
The SANET Group in Thailand can also provide advice on a suitable and trustworthy partner.
Beware of “stooges” or “nominees”
Criminal and tax consequences can be severe, however, for those who formally pretend to have a Thai majority by “faking” a Thai without an active business interest to be the majority shareholder.
This straw man then in addition often signs that he will transfer his shares at any time to another person at the request of the foreign shareholder.
In the past, and especially in the case of rather “windy” foreign investors, even cab drivers, girlfriends or other “Buddies” served as such straw men, giving their names for a few Thai Baht on the palm of their hand or as regular dividends.
These times are over. Such structures will be effectively uncovered and prosecuted in Thailand. One can only warn against this.
A competent lawyer will wort during the contract negotiations towards the fact that a Thai shareholder is indeed actively involved in the business of the Joint Venture in some way or the other.
Overall, a Joint Venture in Thailand can be a viable alternative to a wholly owned subsidiary.