The blank share transfer agreement
Blank share transfer agreements don’t do the job
Blank share transfer agreements are widely used in Thailand’s legal industry. This seems to be convenient but disrespects Thailand’s laws. They are, therefore, void when they are blank and even void after they are completed.
Thailand has the concept of a registration of an accomplished share transfer, not of a share transfer through registration. Shares are transferred by agreement, not by the registration at the company or the company register. In the grand scheme of things, it is as simple as that.
Formal and procedural requirements of the law
The transfer is accomplished through a share transfer instrument. This has formal as well as procedural requirements:
- The transfer of shares entered in a name certificate is void unless made in writing and signed by the transferor and the transferee whose signatures shall be certified by at least one witness (Section 1129 para 2 CCC).
- To enable the witness to carry out such certification of both signatures, the transferor and transferee have to sign the document in his or her presence.
- The task of the witness is no identity check, but the testimony of both parties being in agreement.
Formal and procedural requirements have the same importance for a legally binding agreement. If one of both elements is not fulfilled, the whole share transfer is void.
The fact that the laws of Thailand have not only formal but also procedural requirements is nothing unique and follows civil law standards: Under German laws, there are specific formal requirements and, as a procedural requirement, the document has to be read out loud by the notary public in the presence of transferor and transferee. If this procedural requirement is not fulfilled, the share transfer is void under German laws.
Share transfer agreements can’t be agreed retroactively. If they are backdated, this has no legal effect other than an attempt to delude the public or a possible buyer of the shares, probably by a criminal act. If a share transfer had been void in the past, or if in a chain of share transfers one or more elements turn out to be void, the old shareholder has to sign new transfer agreements, without the need to backdate any document. Although this does not affect the situation in the past, it enables the seller to obtain ownership of the shares. As a result, the intended share sale and purchase can be legally accomplished.
The negative protection by the company register
Any proper share transfer is invalid as against the company and third persons until the fact of the transfer, and the name and address of the transferee are entered in the register of shareholders (Section 1129 para 3 CCC). While a registered share transfer gives no protection against its voidness (no positive publicity of the register), the non-registration gives legal confidence, that a share transfer is not valid. The public is protected by the silence of the record, but not by its registrations (negative publicity of the register).
It is the responsibility of the director(s) of the company to register each and any valid share transfer at the company register, even if the transfer has been made in breach of a contractual obligation of the shareholder. The director is entitled to reject only when the bylaws of the company require his consent or give him a veto right. The director is liable for any misconduct in this director’s obligations.
The registration of a void share transfer does not replace the transfer. It is incorrect and has to be corrected by the directors as soon as the incorrectness is known. The board of directors is personally liable for any misconduct. There is no healing period and no period of limitations for an invalid share transfer by registration. If the record based on a blank share transfer instrument, the transferor can claim of a breach of the legislation and restitution by a registration of his name in the shareholders’ list again.
Share ownership through blank share transfer instrument?
A blank share transfer instrument is a written agreement to transfer the shares, signed by the current (typically Thai) shareholder, but without mentioning the name of the acquirer (assignee) and the date of the share transfer. Such document is usually deemed to grant the foreign investor protection against a no longer cooperative Thai majority shareholder. By the way, the existence of such blank share transfer agreements is the most visible indication of an illegal nominee structure under the Foreign Business Act.
The blank share transfer instrument is a poisoned temptation. Hands off!
Any blank document is obviously void because it does not meet the minimum formal requirements for a share transfer instrument. Unfortunately, it is even void under the laws of Thailand, after it has been completed and the missing information is added to apparently meet all formal requirements. The reason for this is that
- the procedural requirement as described above is not met because an unfinished document is completed unilateral, which makes it void,
- the certification of the witness that both parties signed together in his or her presence is incorrect – and potentially a criminal act.
The equivalent under German laws would be that the notary public certifies a notarization of the share transfer instrument without having read it out loud. He would be personally liable and commit a crime.
Even a two-witnesses-scheme would not make it legal and valid. One witness to confirm the signature of the buyer and a second witness for the seller’s signature does not help. The witness does not have to verify the authenticity of the parties signatures – which could be separated into two task for two persons. Instead, the witness has to confirm that the parties confirmed their agreement at the same time. This is a responsibility which can’t be divided into two parts.
Formal requirements result in difficulties and obstacles for the execution of documents to which parties have different locations, especially in cross-border transactions. However, this does not allow the parties to neglect current laws. Thailand’s laws restrict remote transactions in many aspects, but this is in-line with civil law principles of many jurisdictions. If the parties are not able to meet in person, they can assign a local proxy to act for them, which is able to fulfill existing legal requirements.
The Supreme Court Decision Case No. 52/2540 (1997) might hold another viewpoint. It is focussed on the convenience of the share transfer, but convenience is from our viewpoint, not a valid argument. Anyway, that decision had been made in a very particular case and it is doubtful whether such views would be held up in future court rulings. It is obviously not best practice to accept the invalidity risk although the most secure way is easily available.
The voidness under Thai laws might be tolerable if all involved parties act cooperative and close-lipped together. However, under the scenario of an unfriendly litigation, when the judge asks the Thai and foreign buyer, seller and witness whether the signatures have actually been made at the same time, it would require a high criminal energy to dispute on this point. Therefore, a blank share transfer instrument is a horrible idea and does not provide reasonable protection for a foreign shareholder.
To sign a blank share transfer instrument is neither equivalent with a valid share option right “to whom it may concern,” nor is it a binding obligation not to transfer the shares other than by the pre-signed instrument. Therefore, an astute shareholder has always the opportunity to outsmart a signed blank share transfer instrument. Whenever the holder of such document completes it and puts on a date, the transferor has the simple possibility to prepare a second share transfer instrument which is dated to a previous day and, therefore, makes the first share transfer document useless and ineffective.
As a practical advice it can be highly recommended
- not to use any blank share transfer agreement in a corporate investment structure, but instead to implement a strong protection mechanisms, and
- not to trust in any previous share transfer which based on the completion of blank share transfer agreements, but instead to require new, legally valid share transfer instruments. Such additional costs and legal fees are well invested.
Worthless blank share transfer agreements turn more foreign investments into a financial nightmare than all the bars of Pattaya