Corporate Due Diligence in Thailand
Thailand’s legal framework and business environment poses particular challenges and sets special requirements to analyze and assess Thai companies as potential acquisition targets. A professional corporate due diligence creates for the foreign investor a quantifiable basis for the decision-making process that takes into account all aspects of Thai laws, regulations and industry practices.
Foreign direct investments in Thailand are often associated with the set-up of a limited company and the legal requirements under Thailand’s corporate and foreigner laws (“greenfield investment”). However, apart from entering into a joint venture, the acquisition of an existing company with all its assets and market share is often a more attractive alternative (“brownfield investment”).
When talking about M&A transactions, M(erger) is typical of minor importance and A(cquisition) the rule. Thailand’s legislation does not allow a merger where one company survives and the other company is incorporated in the other. Instead, there exists the legal alternative of an amalgamation, where both companies cease to exist and a new legal entity is formed. For various reasons, the amalgamation is even less attractive than a merger. Therefore, in the grand scheme of things it has a shadowy existence and Thailand’s M&A industry is highly dominated by acquisition processes.
It is the well-known classification to distinguish between a share deal and an asset deal. However, it is not uncommon to have a hybrid transaction, when the foreign buyer buys the foreign company from a foreign seller – but the target has a production site in Thailand. In this case, there will be no Thai share transfer, no ownership transfer in the Thai assets. However, a due diligence is required to understand the Thai legal, tax and business implications of the deal outside of Thailand.
The acquisition process follows typically a common scheme and it is advisable to subdivide the overall process into four phases. It starts with phase 1 to structure the whole transaction and to enter into preliminary agreements – and to get a common understanding regarding the commercial points of the deal. Phase 2 covers mainly the several due diligence processes. In phase 3 the purchase agreement and supporting documents are drafted and negotiated. Finally, in phase 4 the deal is signed, closed, paid and the transfer is accomplished.
Applicable laws for acquisitions in Thailand
The applicable Thai legislation on the acquisition in Thailand depends widely on the target, the company to be acquired or merged. The acquisition of shares in a Thai Company Limited is governed by Sections 1238-1243 CCC (Civil and Commercial Code of Thailand). In the case of a Thai Public Company (PLC), the required procedure is described in the Public Limited Company Act 1992 (PLCA) and, supplementary, the Securities and Exchange Act 1992 (SEC Act). For the acquisition of Thai PLC listed at SET Stock Exchange of Thailand, additional rules and regulations of the Stock Exchange of Thailand (SET) and rules and regulations of the Securities Exchange Commission (SEC) are applicable. In the case of the acquisition of assets in a Thai company (“asset deal”), the general rules in the CCC have to be applied, and, as the case may be, Section 107 PLC-Act.
In addition, a broad scope of laws, regulations and legal aspects have to be taken into consideration, which includes the following list:
- Permission and reporting requirements for companies promoted by the Thailand BOI Board of Investment
- Permissions by the IEAT Industrial Estates Authority of Thailand
- Foreign Business Act (Alien Business Act) for foreign investments
- Land Code restrictions for acquisitions of land owning companies
- Survival of concessions and permissions in the acquisition process
- Compliance with environmental impact assessment (“EIA”) and health impact assessment (“HIA”).
- Employment issues and local labor laws
- Intellectual property management
- Borrowings and liabilities
- Disputes and litigations
The legal structuring would be incomplete without a proper tax planning. A subdividing into pre-deal phase, closing and post-acquisition is advisable and typical aspects are shown in the following overview:
What happens in the data room, stays in the data room
Until the ink has dried on the purchase contract, it is unclear, whether the potential buyer will be the new owner or remain a competitor. To resolve the conflict between buyer’s information interest and seller’s interest in confidentiality the documents required by the buyer are put together and made available in a data room for due diligence. While such data room had formerly been a physical room with a guard, it is now a virtual room on the Internet. The buyer will expect the following ten-point-systematics:
- Company formation and previous share transfer instruments
- Commercial contracts (distribution agreements, etc.) and major assets
- Company documents (Shareholders meeting, directors resolution, etc.)
- Other contracts (leases, etc.)
- Investment promotion by the BOI Board of Investment
- Human Resources / Employment matters
- Financial statements
- IP and licenses
However, the data room is just one of several data sources. Inventory of available data and documents. Others are (i) the company register at the DBD (Governmental company register), (ii) a property search, (iii) the litigation search, (iv) the insolvency search and(v) other sources, depending on the specific business of the target.
Anyway, the buyer should keep in mind that the requested information might be incomplete, not detailed enough and not reliable because of low integrity. Typically even the data of the governmental register are neither guaranteed by the government nor by anyone else as complete and correct. Therefore, it is good industry practice to always look for the possibility for cross-checks of information by third party data, individual discussions with the seller and the target and by other ways and means to review, endorse and reassure the initially received data and information.
The corporate due diligence report
The term “due diligence” has been introduced into legal practice already 80 years ago. The so-called “due diligence defense” is used by lawyers when accused of inadequate disclosure of material information with respect to the property. As long as lawyers exercised “due diligence” in their investigation into the property and disclosed to the investor what they found, they can’t be held liable for non-disclosure of information that was not discovered in the process of that investigation. This means, it is of eminent importance that the due diligence report indicates, which legal aspect has not been investigated.
Underestimated legal hotspots of a Thai legal due diligence
Experience in accomplishing due diligence investigations in Thailand show typical critical areas which should be carefully analyzed and examined. These potential deal point cover, above other:
- Theft or loss of valuable intellectual property eased by careless handling of regulatory and compliance guidelines, including customer data, trademarks, and patent infringements
- Fraudulent payments to senior staff in untraceable cash, inflated payrolls and ghost employees, among others
- Inadequate measures to prevent regulatory noncompliance, financial irregularities, computer crime and employee misconduct
- Undisclosed commercial interests, whether directly owned or through family members or other nominees, which pose conflicts of interest
- Bribery of public officials through fictitious subcontractors
- Unpreparedness to plan and implement an asset recovery or loss mitigation strategy, including preparing reports for regulatory authorities, law enforcement, and civil litigation
- Vulnerability to regulatory and compliance breach, bribery, kickbacks, anti-competitive behavior and “pay-to-play” schemes involving governments.
Another aspects to be considered are the competition laws and anti-monopoly regulations in Thailand: Under the Trade Competition Act 1999, an acquisition requires the permission from the Trade Competition Board of Thailand, if it (i) creates a monopoly or (ii) leads to unfair competition. The term acquisition in the meaning of the law includes share deal, asset deal, and amalgamation (merger). Under the general policy of the Trade Competition Board, this is given with (i) a market share of 50+% or a collective share of 75+% by the top three and (ii) a turnover of more than THB 1 billion (individually respectively collectively). A permission is typically granted if the acquisition (i) promotes business, (ii) is reasonably commercially necessary, and, (iii) has no significant negative effect on the economy or the consumer. The decision is typically made within 90 days after a valid application has been made.
The interdependencies between company legislations, contract laws, and Thailand’s complex foreigner’s legislation are often underestimated. This shows an easy example, the typical acquisition of a Thai limited company by a foreigner from another foreigner in Thailand.
However, legal and tax aspects are just part of the game. The integration of purchased companies in a multi-national corporation fails not infrequently by unrealistic expectations of both parties. It is foolish when a foreign investor makes an acquisition in Thailand and leaves incumbents in place to run the business as if it was still their own. Instead, the target company must be fully adopted into the procedures and culture of the acquiring organization, to protect the key assets for which it was purchased.