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1. Legislative and Regulatory Overview
Thailand has not enacted specific laws and regulations on mergers and acquisitions, thus parties are free to determine and agree upon the terms and conditions of such transactions. Nevertheless mergers and acquisitions must be structured to comply with the relevant laws and regulations applicable to private and public companies respectively.
Private companies are bound by the Civil and Commercial Code (“CCC”), and their internal regulations in the Articles of Association of each company. Transactions of public companies are more stringently governed and monitored under the Public Limited Company Act B.E. 2535 (1992) (“PLCA”), the Securities and Exchange Act B.E. 2535 (1992) (“SECA”) and the rules and regulations of the Stock Exchange of Thailand (“SET”).
Strictly speaking, the term ‘merger’ is not applicable under Thai law, instead, such transactions are referred to as an ‘amalgamation’ of companies. Apart from an amalgamation, the joining of two companies can also be effected by an acquisition of shares, or an acquisition of assets. The key aspects of these three transactions are considered below, while highlighting the differences between laws applicable to private and public companies. Related issues that have a direct bearing on mergers and acquisitions in Thailand, such as restrictions on foreign ownership, taxation, and competition laws will also be discussed.
1.1 Amalgamation of Companies
When two or more companies decide to amalgamate they no longer exist as juristic persons, and the merged entity shall be deemed to be a new company. The merged entity inherits the obligations, rights, assets and liabilities of each merging company.
Private Companies
Amalgamation requires shareholders of each merging company to pass a special resolution mandating the merger. Each company shall hold a shareholders meeting, at which 25% of all shareholders’ must be present. Unless otherwise prescribed by the company’s Articles of Association, at least 75% of shareholders in attendance must vote in favor of the special resolution. Creditors must be notified of the intended merger promptly, and a period of 60 days is afforded for creditors to raise objections to the merger. After the period for objections has lapsed the merger can be finalized which will normally take around 7 days.
Public Companies
An amalgamation must be approved by a resolution at a shareholders meeting, with at least 75% of all attending shareholders voting in favor of the resolution. Creditors have two months to raise objections to the merger, while dissenters shall be offered a buy-out of their shares at the last known traded price or an independently determined price. Failure or refusal of a dissenter to sell their shares within 14 days shall be deemed to be acceptance of the merger.
1.2 Acquisition of Assets
Private Company
The law does not require shareholder approval for sale or transfer of assets, however it is best practice to do so because such transactions directly affect the interests of shareholders.
Public Company
Section 107 of the PLCA requires that the sale or transfer of a substantial portion of a business be approved by at least 75 % of the votes of eligible shareholders in attendance at a shareholders meeting. Publically listed companies are also subject to the SET’s Notification Re: Rules, Procedures, and Disclosure of Information Concerning the Acquisition and Disposition of Assets of Listed Companies and must notify the public and its shareholders of any transactions that affect their rights or interests. The stringency of rules applicable to each transaction depends on the value and profitability of the assets, the total value of consideration involved, and the value of securities issued as consideration. A report disclosing the asset transfer transaction must also be submitted to the SET.
1.3 Acquisition of Shares
Private Company
Under the CCC, a transfer of a specified number of shares shall be made in writing and must be signed by the transferor and transferee. A witness is required to certify the signatures of both parties. Such transfer is effective against the company when the name and address of the transferee is recorded in the company’s Share Register Book.
If the acquisition is of newly issued shares, the CCC grants a pre-emptive right in newly issued shares to existing shareholders. Therefore, the common practice is for the acquiring company to receive by transfer, at least one share in the target company prior to the issuance of new shares. When the new shares are issued, existing shareholders will waive their pre-emptive rights and the acquiring company will then subscribe for the new shares.
Public Company
Pursuant to the PLCA, shares can be transferred by endorsement of a share certificate by the transferor. The share certificate must state the names of the transferor and transferee and is valid upon the affixing of both their respective signatures and delivery of the share certificate to the transferee. The transfer of shares is effective against the company at the time of executing the share transfer, and is effective against third parties upon registration of the share transfer in the Share Register Book.
The SECA imposes an obligation on shareholders of public listed companies who acquire or dispose of their shareholdings in increments of 5% of the company’s total shares, to report such transactions to the Securities and Exchange Commission within one business day. The SEC also stipulates that when any shareholder acquires 25% or more of the company’s total shares , or 50% of the company’s total voting rights, or 75% of the company’s total voting rights, that shareholder is required to make a tender offer to purchase all the company’s shares, unless that shareholder qualifies for a legislative exemption from this obligation. The tender offer requirement applies to a shareholder whether that shareholder holds the shares directly, or indirectly through a controlling shareholding in a third party company.
2. Foreign Investors
Foreign investors are subject to the Foreign Business Act B.E. 2542 (1999) (“FBA”), which restricts the types of business activities that foreigners can undertake in Thailand. Business activities are categorized into three lists under the Foreign Business Act;
List 1; Business activities that foreigners are not permitted to undertake for special reasons.
List 2; Business activities for which foreigners require permission from the Ministry of Commerce and a resolution of the Cabinet, due to the relation of those activities to national security, culture, natural resources and the environment.
List 3; Business activities in which Thais are not yet ready to compete with foreigners. Foreigners can undertake these activities with permission from the Department of Business Development, and the Foreign Business Board.
Foreign investors are also subject to laws which impose restrictions and conditions on majority ownership and management by foreigners in companies operating in specific business sectors, such as commercial banking and life insurance.
2.1 Exceptions to Restrictions on Foreign Investors
There are exceptions to the restrictions on foreign investors under legislation, treaties and free trade agreements. For example, American persons and juristic persons receive exemptions pursuant to the US – Thai Treaty of Amity and Economic Relations. The other main category of exceptions is offered by Thailand’s Board of Investment (“BOI”), which has the authority under the Investment Promotions Act B.E. 2520 (1977) to grant special privileges to companies seeking to make industrial scale investments in Thailand. Foreigners that obtain BOI privileges can bypass the approval process under the FBA and obtain a business license for activities in the restricted lists. BOI privileges include, exemptions to land holding restrictions, exemptions from Lists 2 and 3 of the FBA, tax exemptions and other financial incentives. The criteria of eligibility for receiving BOI privileges is based on the intended level, and nature of investment. BOI privileges are available in the following industries:
Priority business activities in fields such as agriculture, technology and human resources development, public utilities and infrastructure, environmental protection and conservation, and other industries targeted by the government for development, are eligible for tax exemptions.
Businesses involved in car, electronics and electrical appliance manufacturing, and business that promote skill and technology innovation are offered tax incentives.
Businesses that operate in industrial estates or export processing zones are granted tax and other privileges by the Industrial Estate Authority of Thai land under the Industrial Estate Authority of Thailand Act B.E. 2522 (1979).
Goods produced for export are also offered incentives in the form of taxation exemptions, duty draw back schemes, and packing credits.
3. Taxation
Thailand does not have specific legislation dealing with the tax treatment of merger and acquisition transactions. Therefore, general laws of taxation under the Revenue Code are applicable. Amalgamation of companies is generally not subject to pay tax, while asset acquisition and share acquisition may give raise to tax liabilities. Such taxes include corporate income tax (“CIT”), value added tax (“VAT”), specific business tax (“SBT”), stamp duties and withholding tax (“WHT”) for foreign investors. However, exemptions from these taxes are available subject to pre-determined conditions, as notified by the Director-General of the Revenue Department.
CIT – A general rate of 30% is imposed on the net income of companies incorporated in Thailand, though the rate is subject to variation under the Revenue Code. For example, public listed companies are subject to the rate of 25%, and small enterprises are taxed at progressive rates ranging from 15-30%.
WHT – A foreign company that does not carry on business in Thailand is subject to withholding taxes at the rate of 15% on income derived from Thailand such as fees for services performed, royalties, interest, rent, capital gains, and dividends, which are taxed at 10%.
VAT – The applicable rate is 7%, except for exports which are subject to 0% tax.
Stamp Duty – The applicable rate is variable depending on the transaction.
SBT– Gross revenue is taxed at fixed rates. Interest and proceeds on transfers of immovable property are taxed at 3.3%, although a relaxation of the applicable rate operative until 28 March 2010 means the applicable tax is 0.1%. After that the SBT shall be resumed at the rate of 3.3% pursuant to the cabinets resolution.
3.1 Amalgamation of Companies
The companies being amalgamated are not subject to CIT, but must comply with the principles related to liquidation in the Revenue Code. The newly formed company thus assumes the tax liabilities of the original companies.
The related transfer of assets is not considered a sale, therefore VAT is not applicable. Nevertheless, amalgamation is not preferred from a taxation perspective for two reasons, firstly, the two merging companies may be audited by the Revenue Department due to the liquidation, and secondly, the losses of each merging company cannot be transferred to the new company, instead the merging company must be liquidated. Finally, capital gains of individual shareholders are also not taxed for increases in share value or receipt of new shares resulting from the amalgamation subject to the Revenue Department’s regulations.
3.2 Acquisition of Assets
An acquisition of assets can be exempt from applicable CIT for net profit of sale, SBT and stamp dutyon immovable property, and VAT on movable property, if the transfer is of the whole business enterprise. However, other taxes applicable to asset acquisition include, transfer fee, WHT for foreigners, SBT, and possible stamp duty depending on the transaction.
3.3 Acquisition of Shares
The taxes applicable to an acquisition of shares differ for a juristic person and individuals. Their similarities however are exemption from VAT and SBT for the sale of shares, and the imposition of stamp duty at the rate of 0.1%, and WHT for foreigners. A company will be subject to CIT on its net profit from the sale of shares, and foreigners are subject to the additional WHT. Whereas an individual is not liable for capital gains tax for shares listed on the SET, other capital gains are taxed at a progressive rate ranging from 5 – 37%.
4. Competition Law Issues
If a potential merger or acquisition threatens to result in a monopoly or cause conditions of unfair competition, the transaction shall be subject to vetting by the Trade Competition Board pursuant to the Trade Competition Act B.E. 2542 (1999). The Trade Competition Board will consider an application for the proposed merger or acquisition, and has the discretion to permit such a transaction, subject to conditions relating to market share, sales turnover, or the value of capital, shares or assets. The Trade Competition Board is allowed to self-initiate a review of any permission granted, and thereby amend or revoke the permission or any conditions.
An application for a merger to the Trade Competition Board may be granted if the Board determines that the new company:
The Trade Competition Board will make its decision within 90 days of submission of the application. A final appeal to the Appellate Board may be submitted within 30 days of receipt of the decision.
Violations of the Trade Competition Act are subject to imprisonment and, or significant fines. Individuals in senior management or executive positions are personally liable for penalties imposed on the company, unless such person can prove that the violation was committed without their consent and, or, knowledge, and that such person took reasonable precautions to prevent commission of the violation.
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