Shareholders' Agreements in Thailand: The Basics

Shareholders’ Agreement in Thailand: Overview

A Shareholders’ Agreement is a private arrangement that defines governance, ownership, and management rules between shareholders. It regulates key areas such as voting rights, share ownership, profit distribution, financing, share transfers, conflict resolution, and non-compete obligations to ensure smooth operations and prevent disputes.

Although not legally required in Thailand, a Shareholders' Agreement offers critical protection by clarifying roles, decision-making authority, and dispute resolution. Thai law does not regulate these agreements directly but recognizes them under the freedom of contract principle, allowing shareholders to structure terms according to their needs.

The agreement should align with the company’s Articles of Association (AoA). While the AoA governs the company’s compliance with Thai law, the Shareholders' Agreement handles confidential matters, such as management roles and voting rights, that remain outside public documents.

Why You Need a Shareholders’ Agreement in Thailand

For companies with multiple shareholders, setting clear rules prevents misunderstandings and conflicts. This is especially relevant in Thailand’s business environment, where many ventures involve foreign investors.

Thailand’s business environment often involves joint ventures with foreign investors. In many cases, compliance with the Foreign Business Act (FBA) requires Thai majority ownership. In other cases, multiple foreign partners join forces, adding complexity to governance and management. A Shareholders' Agreement helps address these challenges, ensuring smoother operations.

When Should You Draft a Shareholders’ Agreement?

The optimal time to draft a Shareholders’ Agreement is at the early stages—during the preparation of term sheets, LOIs, incorporation documents, or share purchase agreements. Defining key terms upfront ensures all parties align their expectations, reducing the risk of future disputes.

Consistency with the company’s official records is essential. For instance, provisions like the directors' signing authority must match the affidavit registered with the Department of Business Development (DBD). Ensuring alignment across documents minimizes governance issues and supports smooth business operations.

Key Elements of a Shareholders’ Agreement

A well-structured Shareholders’ Agreement (SA) reflects the specific needs of the business, tailored to the project, shareholders, and circumstances. It defines roles, responsibilities, decision-making processes, and mechanisms for handling disputes. Below are the essential provisions to consider:

1. Roles, Responsibilities, and Contributions

This section outlines the obligations and involvement of shareholders:

• Capital Contributions: Specifies the initial and ongoing investments required from shareholders.
• Management Involvement: Clarifies whether shareholders will take on managerial or director roles.
• Operational Responsibilities: Assigns specific tasks to shareholders to avoid overlap and misunderstandings.

2. Share Ownership, Transfer, and Exit Strategies

To maintain control and avoid conflicts, the SA should define ownership rights and transfer procedures:

• Right of First Refusal (ROFR): Requires shareholders to offer their shares to existing shareholders before selling to external buyers.
• Preemptive Rights: Gives shareholders priority to buy newly issued shares, protecting them from dilution.
• Tag-Along Rights: Allows minority shareholders to sell their shares on the same terms as a majority shareholder who exits.
• Drag-Along Rights: Empowers majority shareholders to compel minority shareholders to sell their shares, ensuring a smooth business sale.

3. Resolving Deadlocks and Disputes

Deadlocks occur when shareholders or directors cannot agree on key decisions, potentially stalling operations. A Shareholders' Agreement can incorporate the following mechanisms to resolve such situations:

Forced Sale Provisions:

• Russian Roulette: One shareholder offers to buy the other's shares at a set price. The recipient must either sell their shares or buy the initiator's shares at the same price.
• Texas Shootout: Both parties submit sealed offers to buy the other's shares. The higher offer wins, requiring the winner to purchase the other’s shares.
• Dutch Auction: Shareholders propose the lowest price at which they are willing to sell. The lowest bidder must sell at that price.

Note: These provisions are effective only if shareholders have comparable financial resources. Otherwise, wealthier shareholders may use them to impose unfair terms.

Arbitration and Mediation:

• Arbitration: Offers a confidential, binding resolution but can be expensive.
• Mediation: Encourages compromise but does not guarantee a solution.

Appointment of an Independent Director: An independent director with a casting vote can help resolve deadlocks.

Company Sale or Liquidation: As a final option, the company can be sold or liquidated, though this may result in financial losses if market conditions are unfavorable.

4. Reserved Matters: Critical Decisions Requiring Approval

Reserved matters are strategic decisions requiring special approval from shareholders or directors, ensuring balanced governance.

Examples include:

• Corporate Changes: Amending the Articles of Association or issuing new share classes.
• Financial Decisions: Taking on loans above specified limits or granting guarantees.
• Major Transactions: Entering joint ventures or selling key assets.
• Employment Matters: Hiring or terminating key employees, changing their contracts.
• Dividend Policies: Decisions about profit distribution or restructuring.

Key considerations: Reserved matters must strike a balance—they should not obstruct daily operations but must ensure control over significant decisions.

5. Profit Distribution

This section specifies how the company’s profits will be managed:

• Dividend Policy: Defines the frequency and conditions for dividend payments.
• Reinvestment: Clarifies whether a portion of profits will be reinvested in the business.
• Class-based Distribution: Determines whether different share classes receive different dividends.

6. Confidentiality and Non-Compete Clauses

These clauses protect the company’s sensitive information and prevent shareholders from engaging in competing activities:

• Non-Disclosure Agreement (NDA): Prohibits the sharing of confidential information such as business plans or client data.
• Non-Compete Clause: Prevents shareholders from engaging in similar businesses or poaching employees for a set period after exiting the company.

Example: A departing shareholder agrees not to open a competing business in Thailand for two years.

7. Financing and Share Issuance

This section defines how the company will raise capital and whether existing shareholders have the right to participate:

• Preemptive Rights: Shareholders have the first right to purchase new shares.
• Anti-Dilution Protection: Prevents disproportionate reduction in ownership percentages.
• Loan Guarantees: Specifies if shareholders must provide personal guarantees for loans.

8. Exit Strategies and Succession Planning

This section addresses scenarios like shareholder departure or death:

• Buy-Sell Agreements: Establish procedures for valuing and purchasing shares from exiting shareholders.

Example: Upon a shareholder’s death, their shares are sold at fair market value to the remaining shareholders or the company.

9. Amendments and Termination

This section sets rules for changing or ending the agreement:

• Amendment Procedures: Requires unanimous or supermajority approval for changes.
• Termination Clause: Specifies when the agreement ends, such as after a sale or liquidation.

10. Governing Law and Dispute Resolution

• Governing Law: The agreement is governed by Thai law.
• Arbitration: Disputes are resolved through arbitration or mediation to avoid ordinary courts.

Example: Shareholders may select the Thailand Arbitration Center (THAC) for dispute resolution.

Conclusion

A shareholders’ agreement is essential for smooth business operations in Thailand, especially when:

• Uneven Ownership Shares: Defines control, voting rights, and profit distribution among shareholders with differing ownership levels—especially important for Thai majority companies.
• Complex Projects or Multiple Partners and Investors: Facilitates effective governance across joint ventures and mixed ownership structures.

Read the full article on my blog for more insights and practical tips on managing businesses in Thailand effectively, minimizing risks, and preventing disputes.

Need help with Shareholders' Agreements or corporate law? Contact me to keep your business compliant and running smoothly.