Share ownership through adverse possession (AP)
Under Thailands civil law principles the shareholder continues to hold legal title in his rights, even if he does not make use of them for a very long time. He is not obligated to complain about a wrongful modification of the shareholders’ list and even if another person is publicly registered as apparently new shareholder, there is no legal obligation for an objection to maintain the legal owner of the shares.
An exception from these principles is the concept of “adverse possession” (AP) under the squatter’s rights provision of Section 1382 CCC. Although such concept is primarily existing for real estate transactions, the Supreme Court of Thailand (e.g. decision no. 2970/2522) ruled that it is possible to acquire shares in a limited company by adverse possession.
However, Section 1382 CCC does not at all state that a registration of a void share transfer makes it effective five years after the registration date. Instead it requires a “peacefully and openly possession of the shares for an uninterrupted period of five years with the intention to be the owner”. This corresponds with Latin legal terms which require “Nec vi, nec clam, nec precario” (without force, without secrecy, without permission).
The registration as shareholder alone is no form of possession of the shares. Therefore, there is no legal principle that a wrong share registration will be healed after five years. The rather complex legal concept of adverse share possession under Thai laws is summarized in the following high-density chart:
To base ownership of the registered shareholder not on a share transfer but on an adverse possession should be seen as the last resort and it requires a comprehensive examination and corporate due diligence. The adverse possession requirements have to be examined for each and any share separately. The requirements might be fulfilled for a shareholder with tiny shares, but not for the majority shareholder – or vice versa. The three requirements are
- Possession in the shares as an intangible asset,
- A specific qualification of that possession, and,
- An undisturbed lock-up period of five or more years.
Even short voluntary interruptions of one of the four elements of possession or the three elements of a qualified possession in the shares will start a new five years lock-up period. Only an involuntary interruption of the four possession elements can be healed, if the twelve months deadline is observed. An involuntary interruption in one of the three elements of the qualified possession can’t be healed. If the person, e.g., hides his possession, he starts a new lock-up period.
Under the legislation of the Supreme Court of Thailand (Opinion No. 677/2007), adverse possession in real estate requires that the land title has been issued before the lock-up period can start. As a consequence, adverse possession in shares would not be possible if the shares have been registered under a void capital increase. Doubts regarding the valid emission of new shares could not be solved by adverse possession principles.
There are cases where a Thai national holds the majority shares in a Thai company together with a foreign minority shareholder. Between the shareholders exists a not registered (sometimes oral or only implicit) agreement that the Thai shareholder will carry out his voting rights parallel to the voting by the foreign shareholder and will always act cooperatively as directed by the foreigner. Such nominee agreement might – or might not – be in compliance with the Foreign Business Act. Typically the governmental agencies will not intervene in such business structure. However, such unobstructed nominee structure might be deemed under Thai civil laws as an obstacle to meet the requirements of the adverse possession doctrine. Thai courts may argue that the Thai acts similar to a possessor under a lease or license, which would not qualify as adverse possession.
AP – not at all an easy shortcut.
The adverse possession doctrine should be understood as an exception with very strict legal requirements. It does not require that most, but that all of the conditions prescribed by law have to be fulfilled. Thai court decisions are in this area highly unpredictable and in the case of remaining doubts a share transfer restructuring is highly preferable.
Experience shows that invalid share transfers typically occur in companies with such a lousy corporate governance, that the AP rules are not fulfilled either, especially because possession has not been maintained. As a result, AP rarely serves as backup solution for a corporate due diligence.