Q&A: setting up and operating a joint venture in Thailand

Setting up and operating a joint venture

Are there any particular drivers in your jurisdiction that will determine how a joint venture is structured?

The foreign investment and land ownership restrictions under Thai law are the primary drivers in determining how a joint venture is structured.

When establishing a joint venture, what tax considerations arise for the joint venture parties and the joint venture entity? How can tax charges be lawfully mitigated?

Joint venture parties will need to consider any tax triggered as a result of their respective contributions of any assets or businesses to the joint venture. This could be in the form of a capital gains tax with respect to contributed assets or businesses. In addition, value added tax may also be an issue when contributing non-fixed assets to a joint venture company. Prior consultation with a tax adviser on this is highly recommended.

Are there any restrictions on the contribution of assets to a joint venture entity?

Contributions in kind, such as assets and labour, are permitted under the Thai Civil and Commercial Code (CCC). However, the share price cannot be paid by offsetting debt that the company owes to the shareholder. In addition, if the joint venture parties contribute in the form of assets or labour, it may be difficult in practice to evaluate the value of such a contribution. An asset appraiser would be engaged to ascertain the valuation and avoid any challenge from the relevant authorities.

What is the interaction between the constitution of the joint venture entity and the agreement between the joint venture parties?

One of the constitutional documents of a private limited company is the articles of association (AOA), which prescribe the regulations concerning the company’s internal affairs, such as share transfer restrictions, the composition of the board of directors, the board of directors’ and shareholders’ meetings, and distribution of dividends. Under the CCC, the AOA is required to be filed with the Ministry of Commerce upon the company’s incorporation and within 14 days of the date on which a shareholders’ meeting, by a special resolution, approves an amendment to the AOA.

The CCC requires that the company shall be managed in accordance with the AOA. As such, in practice, the provisions of the agreement between the shareholders (eg, the joint venture agreement or the shareholders’ agreement) should be reflected in the joint venture company’s AOA. Where there is a discrepancy between the AOA and the agreement between the shareholders, the provisions of the AOA generally prevail in terms of the management of the company. However, between the shareholders, if such a discrepancy results in a breach of the shareholders’ agreement or the joint venture agreement, the defaulting party would need to be liable.

How may the joint venture parties interact with the joint venture entity? Are there any restrictions?

Interactions between the joint venture parties and the joint venture company are mainly governed by the terms of the joint venture agreement, the constitutional documents of the joint venture company and the applicable law (ie, the CCC if the joint venture company is a private limited company and the Public Limited Companies Act 1992 if the joint venture company is a public limited company).

Joint venture governance arrangements, which may restrict or provide mechanisms for related-party transactions, are typically prescribed in the joint venture agreement and the company’s AOA. A special resolution of the shareholders (which shall be passed by at least 75 per cent of the total votes of the shareholders attending the meeting and eligible to cast the votes) may be required for the joint venture company’s entry into a related-party transaction or a joint venture party may have a veto right against such entry. In addition, in Thai market practice, the joint venture agreement often includes a provision on a confidentiality obligation, which restricts the joint venture parties from exploiting confidential information shared by the other party in the course, or for the benefit, of the joint venture company’s business operations.

How may the joint venture parties exercise control over the joint venture entity’s decision-making?

Under the CCC, resolutions of the board of directors’ meeting in any matters require a majority vote of the attending directors and resolutions of the shareholders’ meeting in ordinary matters (eg, appointment of directors) require a simple majority vote (unless otherwise provided in the company’s AOA, in a vote by show of hands, the ‘one shareholder, one vote’ rule applies, whereas in a vote by secret poll, the ‘one share, one vote’ rule applies). Matters requiring special resolutions (eg, an amendment to the AOA, capital increase and decrease, and dissolution of the company) are required to be passed by at least 75 per cent of the total votes of the shareholders attending the meeting and eligible to cast the votes. As such, in the absence of any agreement between the joint venture parties to the contrary, a shareholder that holds more than 50 per cent of the company’s total issued shares would be able to effectively control the company. A shareholder would essentially have total control over the company if it holds 75 per cent or more of the company’s total issued shares.

In light of the above, it is customary for minority investors to seek protection and contractual rights in proportion to their size of investment through the provisions of the joint venture agreement and the joint venture company’s AOA. In this regard, minority investors typically request for the constitution of the quorum of the joint venture company’s shareholders’ or board of directors’ meeting to require the attendance of such minority investors or the director nominated by them, as the case may be. In addition, they typically seek veto rights over certain important matters and try to negotiate for as many board seats as possible. Further, they may seek to designate other management positions in the company (eg, chief operating officer or chief financial officer).

What are the most common governance issues that arise in connection with joint ventures? How are these dealt with?

In Thai market practice, the most common governance issues are:

• the level of control that joint venture parties have over the joint venture company: the joint venture party holding majority shares in the joint venture company would be able to effectively control the company. Therefore, it is significant for the minority shareholders to seek protection in the joint venture agreement, which should also be reflected in the company’s AOA to ensure stronger protection;
• management of the conflict of interests: governance issues often arise when it comes to the balancing of interests of the joint venture company and the interests of the joint venture parties. In terms of a private limited company, the CCC prescribes the mechanism to deal with the conflict of interest issue; and
• deadlock mechanism: a deadlock event arises when the joint venture parties cannot compromise on a certain key issue. To keep the business of the joint venture company going, a deadlock mechanism is often included in the joint venture agreement as well as in the AOA in relation to the joint venture company.

With an incorporated joint venture, what controls exist in your jurisdiction in relation to nominee directors? How should a nominee director balance the potentially conflicting interests of the joint venture company and the appointing shareholder?

The directors of a private limited company owe a fiduciary duty to the company as prescribed in the CCC and shall be jointly liable for certain matters, such as capital payments being paid and resolutions of the shareholders’ meeting being properly enforced.

In addition, the directors of a private limited company are also subject to the statutory non-compete obligations under the CCC, which explicitly prohibit the directors from undertaking any commercial transaction of the same nature as and competing with that of the company, either for the benefit of the directors or other persons, and from being a partner with unlimited liability in another commercial entity carrying on business of the same nature as and competing with that of the company. However, if the directors are granted the approval of the shareholders’ meeting to undertake the foregoing, they may not be liable to the company and the shareholders giving the approval.

To deal with the potentially conflicting interests of the joint venture company and the appointing shareholder, the joint venture agreement may include the provision regarding related transactions and apply the arm’s-length principle, or designate a matter regarding related transactions as a shareholders’ reserved matter that requires a supermajority vote or entitles the minority shareholder to a veto right. Nonetheless, in common market practice, strong protection is not typically available where the shareholders, nominee shareholders or nominee directors are not direct parties to the transaction at issue.

What competition law considerations are engaged by the formation and operation of the joint venture? Is approval needed?

If the joint venture company is a result of a merger between two entities, merger control regulations may apply.

What are the key considerations in your jurisdiction in structuring the provision of services to the joint venture entity by joint venture parties?

Typically, the roles of the joint venture parties depend on their areas of expertise. Common services provided by the foreign joint venture parties are technical assistance and IT solutions. When the joint venture company is located and operated in Thailand, back-office services – such as bookkeeping, marketing and revenue management – are typically provided by the Thai joint venture party.

What impact do statutory employment rights have in joint ventures?

In general, the seconded employee shall be:

• entitled to rights, benefits and welfare without discrimination and that are comparable to those granted to other employees of the joint venture company whose work is of a similar nature; and
• required to observe the joint venture company’s work rules and the statutory requirements under Thai labour laws. For example, the seconded employee may terminate the employment agreement with the joint venture company by giving written notice of at least one payment cycle in advance.

How are intellectual property rights generally dealt with on the creation, operation and termination of a joint venture in your jurisdiction?

Ownership over intellectual property rights depends largely on the negotiation between the joint venture parties. Nonetheless, the parties usually agree to have joint ownership over the intellectual property arising in the course of the joint venture company’s business operations.