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SRPP Publications l 15 June 2023
Structure
The types of deal structure that are common in Thailand are share deals, asset deals and amalgamation. Share deals are more typical than business or asset acquisitions as they are less tax or less fee intensive, less time-consuming and less complicated in terms of procedures and implications. Shares in a Thai company can be acquired through one or more private transactions to obtain control. By acquiring shares, the buyer acquires voting rights in the target company. The transfer of shares may be subject to restrictions contained in the company’s articles of association and specific laws and regulations. In addition, in a share deal, a buyer can opt for a share subscription scheme by subscribing for the company’s newly-issued shares. However, newly issued shares of a private limited company will always be subject to the pre-emption rights of the existing shareholders, although these may be waived.
Meanwhile, any of or all the assets of the target business may be acquired by a buyer and, unless there are express contractual provisions dealing with the transfer of liabilities, there are no provisions of Thai law that automatically transfer liabilities to the buyer even if all the assets of the target business are bought as a going concern. The transfer of employees requires the consent of each individual employee and does not operate by the automatic process of law. In a business or assets deal, the transaction normally involves complicated procedures at closing, particularly in terms of the transfer of business licences, most of which are non-transferable, and the transfer of assets, which sometimes requires an additional transition period. All such transfer process is time-consuming, requires the best effort from both parties to get the deal through and incurs additional transaction costs for the parties.
The transaction process for both share deal and businesses and assets deal generally begins with a non-disclosure agreement, letter of intent or memorandum of understanding execution, due diligence process (in terms of legal, financial and technical), price valuation, agreement negotiation, price adjustment, agreement execution, pre-closing obligations, closing obligations and post-closing obligations that can vary from two to eight weeks. However, the process may take longer subject to the relationship of the parties, complexity and asset size of each transaction.
Under Thai law, there are two types of business integration for a private company which are: (1) ‘amalgamation’ where legal entities will be dissolved after the process of amalgamation and a new legal entity will be created. The newly created entity inherits all assets, rights and liabilities of the merging entities; and (2) ‘merger’ in which there will be only one legal entity left while the other merging company or companies will be dissolved. Both amalgamation and merger require prior approval by a ‘special’ shareholders’ resolution passed at a shareholders’ meeting by 75 per cent of votes of shareholders who are present at the meeting and entitled to vote. The process for amalgamation usually takes up to 12 weeks to complete. The details of amalgamation and merger will be explored further below.
Legal regulation
Private acquisitions and disposals in Thailand are mainly governed by the Civil and Commercial Code of Thailand. Acts of general relevance to private acquisitions and disposals are:
a. Trade Competition Act B.E.2560 (2017) (updated English version) provides that a generic merger that meets the criteria under this Act requires the approval of the Trade Competition Commission;
b. Foreign Business Act B.E. 2542 (1999) (updated English version) establishes shareholding restriction over the foreign entities to carry on certain business in Thailand whereby the foreign entities cannot operate certain businesses until a foreign business licence is granted;
c. Labour Protection Act B.E. 2541 (Thai version) (outdated English version available);
d. Land Code B.E. 2497 (Thai version) (outdated English version available);
e. Exchange Control Act B.E. 2485 (Thai version) (outdated English version available);
f. Enhancement Conservation Environment Act B.E. 2535 (Thai version) (outdated English version available);
g. Consumer Protection Act B.E. 2542 (Thai version) (outdated English version available); and
h. Bankruptcy Act B.E. 2483 (but extensively amended in B.E.2541) (Thai version) (outdated English version available).
Furthermore, M&A transactions in certain business sectors may also be governed by specific laws (e.g., energy, finance, banking, insurance and telecommunication sectors), especially in regard to the shareholding ratio between the foreign shareholders and Thai national shareholders (whether individuals or entities).
Additionally, Thailand is a unitary state whereby all enacted laws and regulations govern every province in Thailand. However, there are some provincial regulations enacted to specifically address local procedures for provincial authority in relation to the registration, permission and transfer of licences that may affect the acquisition of business or assets occurring in such province.
Legal title
Under Thai law, shares of a private company are transferred by a written instrument of transfer, which must be signed by both parties and at least one witness (and stamped by the tax authorities with ad valorem stamp duty if executed in Thailand). The name of the buyer is also required to be registered in the target’s share register book to set his or her right to such share ownership against any third party. This legal title transfer procedure is specifically prescribed by the law and these actions are required to be completed at closing.
For asset deals, each asset has to be transferred separately either by delivery (in the case of movable assets) or by way of a documented transfer (in the case of real estate, ships and aircraft, and intangible assets in which proprietary rights have been recorded in a public register). Significant trading agreements (e.g., licensing or distribution agreements) are frequently subject to express contractual restrictions of transfer, requiring the consent of the counterparties. Commercial contracts and other arrangements in respect of which the company is a debtor are not transferable without the consent of the other parties (i.e., the creditors) under the relevant contract or arrangement. Thai law does not have any specific provision for the sale or transfer of a business as a going concern.
As Thai law does not distinguish between legal and beneficial ownership, it is only at the closing of an acquisition that a buyer acquires any legal interest in the target business.
Squeeze out
There are no provisions for the compulsory disposal of shares of minority shareholders under Thai law. Thus, minority sellers that refuse to sell cannot be squeezed out or dragged along by a buyer. So long as these persons remain shareholders, the basic rights of these shareholders (including to be notified of, and to attend, speak and vote at general shareholders’ meetings) must be respected.
Exclusion of assets or liabilities
An asset acquisition is an acquisition of all or some of the company’s individual assets and making provision for assigning or transferring relevant contracts and intangible rights. Thai law does not provide for the acquisition of an entire business (including liabilities, contractual rights and obligations) as a going concern, and contracts and liabilities are not automatically transferred with the assets of a business.
Consequently, specific contractual provisions must be made to transfer the benefit of a contract and when (as is common) a contract contains restrictions on assignment, the consent of the counterparty will be required; the transfer of liabilities will require the agreement of the creditors or counterparties or a novation (if it is intended that the seller should be released); employees do not automatically transfer with the assets of the business. While the buyer may be obliged to honour their employment contracts, no employees can be compelled to work for the buyer, so a new employment contract is effectively required for each transferring employee; numerous permits, licences and approvals may be required to carry on a business, (particularly if it involves manufacturing or processing (e.g., a factory licence, waste disposal, use of hazardous materials and labelling of consumer products)) and consents, and in some cases, new licences may have to be obtained; and the buyer will not inherit any tax liabilities of the seller but, as a practical consideration, it is advisable to conduct limited due diligence to ensure that the Thai tax authorities will not seek to enforce tax claims by seizing assets formerly owned by a tax defaulter.
The need for third-party consent and employee cooperation may frustrate the transfer of a business through a sale of assets, and these are the primary reasons why business sales usually take the form of a sale of shares. When an entire business is acquired through the purchase of assets, the choice is often tax driven.
Consents from regulators
According to the Foreign Business Act B.E. 2542 (1999) (“FBA”), a company registered in another country, or one registered in Thailand whose shares are at least 50 per cent foreign-owned, is subject to the limitations of carrying out certain business within Thailand. Under the FBA, there are three lists of restricted businesses:
a. the first list: businesses that foreign entities are absolutely prohibited from engaging in, such as rice farming, livestock farming and land trading;
b. the second list: businesses that foreign entities cannot engage in unless a foreign business licence is granted from the Cabinet, such as the production of wood carvings, Thai musical instruments, goldware and silverware; and
c. the third list: businesses that foreign entities cannot engage in unless a foreign business licence is granted by the Director-General of the Department of Business Development, such as advertising business, hotel business, wholesale and retail business, sale of food and beverages and other service businesses.
Apart from the FBA, businesses in certain sectors may also be subject to specific legislations governing foreign shareholding, such as a company engaging in the insurance business and financial institutions.
With respect to the transfer of assets, the Land Code Act B.E. 2497 (1954) prohibits a foreigner from having ownership over land in Thailand unless the foreign entity is granted a Board of Investment (BOI) certificate, or the foreign entity operates its business within an industrial estate of the Industrial Estate Authority of Thailand.
In respect of consent from a government body, transactions are not commonly subject to any public or national interest considerations unless the transaction is related to a business sector that may have an impact on the public, and a public hearing prior to proceeding with any construction or applying for approval from the government body.
The Trade Competition Act B.E. 2560 (2017) (“TCA”) is currently the main legislation governing the merger control regime in Thailand. With effect from 29 December 2018, any merger that meets the requirements under the TCA and the relevant subordinate regulations issued thereunder shall be subject to the merger clearance process as stipulated under the TCA.
Furthermore, there are ‘stakeholders’ other than the Trade Competition Commission that have concurrent powers, such as:
a. the National Broadcasting and Telecommunications Commission, which regulates and supervises mergers between companies with licences in the telecommunications and broadcasting, and television sector;
b. the Energy Regulatory Commission, which regulates and supervises mergers among companies holding licences in the energy sector;
c. the Bank of Thailand, which regulates and supervises mergers among financial institutions; and
d. the Office of Insurance Commission, which regulates and supervises mergers among insurance companies.
Third-party consents
In addition to potential consent requirements from a government body, the transfer of shares, business and assets may require third parties’ consent by contractual obligations, particularly when the target company or the seller is a party to a credit facility agreement with a financial institution which usually contains negative covenant provisions. Negative covenants prohibit the seller (as a shareholder of the target company) or the target company from disposing of its material assets, changing its shareholding structure and amending constitutional documents; accordingly, a consent or waiver from a financial institution is required. Furthermore, should there be a shareholders’ agreement between the shareholders of the target company, consent is typically required from other shareholders, given that there is a right of first refusal provision or other similar provision contained therein.
Regulatory filings
If closing occurs, the parties will arrange for the legal transfer of the shares or assets and any necessary registrations of the transfers with the relevant government authority.
For a transfer of shares, the law does not stipulate any regulatory filings requirement. Thai law only requires a company to submit a list of shareholders to government officials within 14 days of the company’s annual general meeting each year. However, in practice, the list of shareholders will be updated at the Ministry of Commerce at closing. Certain notifications may also be required (e.g., to the BOI Promotion if the promotion status of the company is conditional on certain levels of foreign ownership). In terms of fee payment, the share transfer instrument must be affixed with stamp duty in the amount of 0.1 per cent calculated from the transferred price or the paid-up value of the shares, whichever is higher.
As for the acquisitions of business or assets of a company, movable assets are transferrable upon the acquisition by delivery, but immovable assets, such as land, will not be legally transferred unless the buyer has registered such assets under its name with the relevant authority. For example, if a buyer acquires a seller’s land, for the buyer to receive legitimate ownership over the land, the buyer must register the land purchase agreement with the Department of Lands and pay the transfer fee. In addition, intellectual property is another example of an asset acquisition that requires registration and payment of the transfer fee to the Department of Intellectual Property of Thailand to gain lawful ownership. In addition, if machinery has been mortgaged or released from mortgage, the parties need to effect the change at the Machinery Registry of the Ministry of Industry.
No requirements exist concerning prior approval of foreign investments in Thailand or the inward remittance of investment funds (whether as equity or debt).
Appointed advisers
In addition to external lawyers, financial advisers, tax advisers and accountants are commonly appointed in M&A transactions to assist in conducting valuation, tax structuring and negotiating with the principal to drive the transaction forward. However, transactions concerning a particular business may involve an additional technical adviser; for example, an IT specialist is usually appointed to transactions relating to an e-commerce platform, and an antitrust expert is typically appointed to transactions that are likely to meet criteria under the TCA. Advisers are typically engaged on an hourly rate fee, capped-fee or fixed-fee basis. As for financial advisers, their fee is sometimes based on a ‘success basis’.
Duty of good faith
Thai law neither recognises any obligation to negotiate in good faith nor any obligation not to discontinue negotiations without good cause. To mitigate the risks of the counterparty discontinuing negotiations without good cause or concurrently negotiating with another prospective buyer, the parties will often enter into heads of agreement or an equivalent document outlining the agreement reached in principle and incorporating a lock-out clause.
Under the Civil and Commercial Code of Thailand, it is required that every person must, in the exercise of his or her rights and in the performance of his or her obligations, act in good faith. Therefore, it is interpreted that parties to a contract shall act and exercise their rights in good faith.
Furthermore, the parties may sometimes be subject to other duties both by legal and contractual obligations. The common example is the fiduciary duty of the directors of the company, which provides that the directors must act in good faith and in the best interest of the company that they are representing when negotiating a transaction.
Documentation
Normally, when the buyers acquire shares in a company, the buyers and sellers will enter into a share purchase agreement in case of acquiring shares from existing shareholders, and a share subscription agreement in case of subscription of the newly-issued shares by the company. Both agreements will determine the conditions of share transfer, including the share price and the numbers of shares to be transferred. Moreover, if the buyer does not acquire 100 per cent of the total shares in a company, the buyer may also enter into a shareholders’ agreement with the other shareholders of the company.
For the acquisition of business and assets of the company, the parties will enter into an asset purchase agreement or business asset purchase agreement. For these agreements, the parties shall specify the assets to be transferred, including transferring any liability attached to such assets. In the case of an acquisition of business, the business to be transferred may require the consent of a third party, such as when the buyer acquires a seller’s business that includes its employees. Both agreements will determine the conditions of transferring of the assets, including the asset price and the numbers of employees to be transferred or terminated.
Formalities for executing documents
Except for the share purchase agreement whereby the number of shares to be transferred and the amount of shares to be transferred including the price of the transferred shares shall be specified, the seller (as a transferor) and the buyer (as a transferee) must execute a share transfer instrument together with at least one witness for the document to be valid. In the case of an asset transfer agreement, the transfer of immovable properties or special types of movable properties must be executed in a certain form required by law. For instance, a transfer of land must be made in writing and registered with the official of the Department of Lands. Should the parties not follow the form as prescribed by the law, the transfer shall be void.
Thailand has legally recognised electronic signatures since the enactment of the Electronic Transactions Act B.E. 2544 (2001) (“ETA”) in 2001. The ETA clearly stipulates that information made in the form of a data message shall not be denied its legal effect and enforceability merely because it is in an electronic form. Additionally, the creation of an electronic signature shall have legal effect provided that the digital signature satisfies the following conditions:
a. reasonable care is exercised to avoid unauthorised use of its signature creation data;
b. without undue delay, any person must be notified if they may reasonably be expected by the signatory to rely on or to provide services in support of the electronic signature if:
(i) the signatory knows or should have known that the signature creation data have been lost, damaged, compromised, unduly disclosed or known in a manner inconsistent with their purpose; or
(ii) the signatory knows from the circumstances occurred that there is a substantial risk that the signature creation data may have been lost, damaged, compromised, unduly disclosed or known in a manner inconsistent with their purpose; and
(iii) where a certificate is issued to support the electronic signature, reasonable care must be exercised to ensure the accuracy and completeness of all material representations made by the signatory that are relevant to the certificate throughout its life cycle or as specified in the certificate.
Despite the above, electronic signatures are not popular in M&A transactions in Thailand.
Due diligence
A seller would normally expect a buyer to undertake due diligence on a target, but may neither collate material documents nor organise a data room. Generally, a due diligence report is prepared by advisors of the buyer to identify potential legal, technical and accounting risks and for the buyer to be aware of and try to eliminate or mitigate such risks prior to the acquisition of the target company’s shares, business or assets. A legal due diligence report is typically prepared on a red-flag basis and will only address material issues that are crucial for the buyer to consider and take into account when determining the purchase price. As part of the bidding process, the seller may also prepare the seller’s due diligence report that normally address only certain issues with the aim of providing an overview of the target company for the prospective buyer to submit its bids. As regards to the reliability of the legal due diligence provided by the seller, a seller does not generally allow a buyer to rely on its due diligence report. Eventually, the buyer will engage legal advisers to prepare its own independent due diligence reports.
Liability for pre-contractual or misleading statements
In general, the seller can be liable for the pre-contractual or its misleading statements. However, the parties usually agree to limit the scope and extent of their liabilities as specified in the share purchase agreement or the asset purchase agreement. Nevertheless, parties cannot exclude liabilities arising from their gross negligence or fraudulent act, any agreement to the contrary shall be void under Thai law.
An “entire agreement” provision plays a role as an exclusion clause for the parties’ liability emerging from their pre-contractual statements. It is typically included in the share purchase agreement or the asset purchase agreement. By entering into such an agreement, all prior agreements and understandings, whether such prior agreements are made verbally or in writing are superseded by the newly entered agreement.
A representation and warranty provision, where the seller typically warrants that the statements and information given by the seller and the target company are true, accurate and not misleading in all aspects. If there is a breach of representations and warranties, the buyer may use such contractual ground to set a claim against the seller. The seller can stipulate a non-reliance provision – a provision that the parties have not relied on any representations – to prevent the buyer from alleging that it was induced to enter into the agreement by a pre-contractual representation, to avoid claims for misrepresentation.
Publicly available information
In Thailand, one may acquire the basic information of a company, such as the company’s affidavit, the list of shareholders, financial statements, the articles of association and the memorandum of association from the Department of Business Development, Ministry of Commerce.
Generally, there is no public source where the assets of a company are publicly available. The buyer would rely on the seller to disclose its assets to the buyer’s adviser to conduct due diligence on the assets, especially material assets required for a target business operation and assets with high value, such as land. Once it is aware of the seller’s assets, the buyer may also request its adviser to conduct:
a. a land search at the Department of Lands against the information of land given by the seller to ensure that the information on such land is registered with the government accurately and properly;
b. an online business collateral search through the website of the Department of Business Development, Ministry of Commerce, to verify whether there exists any encumbrance over certain assets of the target company (e.g., projects, businesses, accounts receivable, inventory, immovable assets and intellectual property); and
c. an IP search at the Department of Intellectual Property or Ministry of Commerce, or an online IP search through the website of the Department of Intellectual Property.
It is highly recommended that the buyer conduct these searches prior to entering into a share purchase agreement or an asset purchase agreement.
In practice, prior to the execution of any agreement, the parties shall customarily conduct a corporate search and litigation search of the target company to identify the authorised directors of the company and to ensure that the target company is still in good standing, not bankrupt, insolvent or under any debt restructuring process, respectively. In terms of share acquisition deals, the buyer must also review the target company’s articles of association to verify whether there is any share transfer restriction.
Impact of deemed or actual knowledge
Under Thai law, the buyer can bring a claim against the seller if there are defects in the transferred assets. However, exceptions apply if the buyer has known or should have known of the defects – and it exercised the care as might be expected from a person of ordinary prudence – prior to entering into an asset or share purchase agreement. In such a case, the buyer cannot raise the defect as a claim against the seller. Furthermore, the aforementioned liability typically is excluded from the agreement as it is customarily agreed that the seller shall not be liable for any damages arising from facts that the buyer knew or should have known from the documents or statements that the seller has disclosed to the buyer during the course of the buyer’s due diligence.
Determining pricing
Under Thai law, there is no specific regulation regarding the determination of pricing. Therefore, the price determination varies in different agreements and is based on mutual agreement between the parties. The pricing may be determined from the market value, the par value (in terms of shares) or the book value. In practice, pricing is usually determined based on the market value as it reflects the true value of the assets in the company. The market value will be appraised by the financial advisers.
For a closing accounts structure, the purchase price is established upon closing, and the parties will consider the financial position of the company as of the closing date for a post-closing adjustment. As for locked-box structures, parties will determine the fixed consideration prior to the execution of the share purchase agreement. The locked-box pricing structure is more common in transactions because it provides parties with a certain level of certainty on the price and a simpler process. However, in recent transactions, the closing accounts structure has become more common.
Form of consideration
Under Thai law, there is no restriction or requirement that the consideration payment has to be made in a certain form. The parties can freely agree on the form of consideration payment. However, the most common consideration payment usually takes the form of cash or a combination of cash and shares. Payment by way of a vendor note (e.g., promissory notes) normally occurs when the buyer and the seller are in the same group company. Although there is no overriding obligation to pay multiple sellers the same consideration (except for tax implication), the payment of the same consideration (price per share) to multiple sellers in an M&A transaction is customary in Thailand.
Earn-outs, deposits and escrows
Earn-outs, deposits and escrows are commonly used in Thailand.
The provision of earn-outs, deposits and escrows are commonly used as a part of the consideration payment. The most common term in Thailand is deposits. The Civil and Commercial Code of Thailand stipulates that, upon the entry into an agreement, if a deposit was made by either party, the deposit is deemed and considered as evidence that the agreement has been agreed and the deposit will be considered as a guarantee that the parties shall perform according to the agreement. The deposits can be: (1) treated as part of the payment upon performance, (2) forfeited, if the party providing the deposit fails to perform or if the performance becomes impossible because of his or her fault or if the rescission of the contract is due to his or her fault, or (3) returned, if the party receiving the deposit fails to perform or, if the performance becomes impossible owing to his or her fault.
Under the Escrow Account Act B.E. 2551 (2008) (“EAA”), an escrow account mainly allows the parties to agree on a middleman as an escrow agent to take charge in the performance of the obligation of the parties. In many merger and acquisition transactions, the parties are not in the same jurisdiction and want to mitigate the risks of delays in the transfer of property or payment, so the parties may agree to appoint an escrow agent. Under the EAA, the escrow agent is required to have an escrow licence that is normally granted to financial institutions. If the parties wish to appoint an escrow agent, they shall enter into an escrow agreement, whereby the escrow agent will prepare an escrow agreement and open an escrow account for money transfer. With regard to the fees, in practice, it is usually the buyer’s responsibility to pay the fees to the bank where it opened the bank account. However, the law does not restrict parties from agreeing otherwise.
Thai law does not stipulate the definition or legal concept of the earn-out term. The provision of earn-outs, therefore, can be agreed between the parties on a contractual basis. In many merger and acquisition transactions, the seller usually wishes to incorporate such provision in the agreement. By doing so, it indirectly preserves the seller’s right to receive additional considerations upon the occurrence of certain events as agreed by the parties. This concept is, however, not very common in the merger and acquisition scenario in Thailand.
Financing
In Thailand, acquisitions finance may be done by way of equity financing and debt financing. The methods in which funds can be financed are, for example, obtaining loan from the financial institutions or from its shareholders, using the proceeds from its operation or increasing the capital of the buyer (provided that the buyer is a company) by offering the newly-issued shares to the company’s existing shareholders. If the buyer opts for the debt financing route, it will be subject to the company’s creditworthiness whether the requested amount will be granted in full. If the buyer’s creditworthiness is low, the financial institutions may request for the buyer to provide collateral or guarantees to its satisfaction to ensure the buyer’s ability to repay such loan. For certain types of acquisition, such as a power plant business, the buyer may seek project financing with financial institutions.
In this regard, to offset the risk of not being granted the financing in full, the buyer may also explore potential alternatives, such as equity financing, as a source of funds for the acquisition. Under Thai law, the company is required to reserve 5 per cent of its profit in the reserve fund until such reserve fund has reached 10 per cent of the company’s registered capital. For an amount that exceeds 10 per cent of the reserve fund, the buyer may also use these proceeds to finance its acquisitions.
Limitations on financing structure
If a buyer finances its acquisition through equity funding by increasing capital, there is normally no limitation, except if the company has not passed the special resolution regarding capital increase (which must be passed by a majority of not less than 75 per cent of the votes of the shareholders who are present at the meeting and entitled to vote), otherwise the buyer cannot proceed with the capital increase process.
There may be several limitations if the buyer acquires its finance through debt financing, for instance:
a. the existing loan agreement of the buyer usually prohibits the buyer from creating additional indebtedness unless such indebtedness is subordinated to the existing loan agreement or it is proven that such indebtedness is the ordinary course of business of the buyer; and
b. the buyer has obtained the Board of Investment (BOI) certificate that grants the buyer with BOI benefits and privileges such as tax exemption or land ownership for foreign entity. However, one of the conditions under the BOI certificate is that the buyer would have to maintain its debt to equity ratio not exceeding 3:1 at all times as long as the buyer still enjoys its privileges under such certificate.
Under Thai law, there is no restriction imposed on a seller providing financial assistance to the buyer for acquisition financings given that the financial assistance is given based on good faith. Normally, such assistance would occur when the buyer and the seller are in the same group company and the monetary aids from the seller to the buyer would be for the purpose of group company restructuring. Nonetheless, if the seller assists the buyer financially with an underlying intention of money laundering, in such a case, the seller is prohibited from providing financial assistance to the buyer and a criminal penalty will be imposed.
Closing conditions
Most transactions are subject to closing conditions that are required to be completed on or before the closing date. The closing conditions, such as representations and warranties of each party, are valid as of the execution date and the closing date, regulatory approvals, delivery of certain ancillary documents, third-party consents, securing financing arrangement by the buyer to pay for the purchase price and deal-specific conditions and deliverables, such as pending liabilities of the target company (which the buyer requests to be included in the acquisition agreements). Such deal-specific conditions are varied in each transaction as they are subject to the findings from the due diligence conducted by the buyer’s adviser.
The following obligations are typically placed on a buyer or a seller to satisfy closing conditions whereby the strength of these obligations customarily varies depending on the subject matter of the condition:
a. actions legally required to affect the transfer in terms of regulatory approval, for example, obtaining permission from a trade competition committee and approval of a competent authority;
b. actions required in relation to the parties’ internal approvals, for example, approval from the board of directors or the shareholders of the parties to execute the transaction documents;
c. actions required to affect the transfer in terms of a creditor’s approval, for example, obtaining approval or waiver from the seller or the target company’s financier in relation to the change in shareholding structure, the change of management of the target company or the sale of material assets of the target company; and
d. actions the buyer required to ease any outstanding issues or defects of a target company, business, or assets that have been raised in the due diligence report, for example, renewing an expired licence or correcting any outstanding issues in relation to the operation of the target company to the satisfaction of the buyer.
Pre-closing covenants
The parties generally agree on the pre-closing covenants, which typically cover the undertakings of the seller not to act or omit certain actions to maintain the business and assets of the target company as is from the agreement execution date until the closing date. For example, unless it is in the ordinary course of business of the target company, the seller typically agrees not to take any actions, make any new investment or incur any additional indebtedness in excess of the amount as agreed between the parties.
Termination rights
The parties may terminate the agreement on a contractual and legal basis. Termination by contract provision varies depending on what was agreed by the parties, for example, it may be an event of default (including a breach of obligation by one of the defaulting party): if the situation is unremedied by the defaulting party. In addition, a termination event in a sale agreement potentially includes:
a. legal or regulatory changes that prevent any party from fulfilling its obligation under the agreement;
b. failure of any party to satisfy the closing conditions;
c. the occurrence of material changes in the target company or extraordinary events (force majeure or acts of God); and
d. the parties’ failure to obtain the consents or approvals required for closing in accordance with the agreement.
Apart from termination by contractual rights, the agreement can be terminated by law as well. Under the Thai Civil and Commercial Code, a party may terminate the agreement if the counterparty does not perform its obligations and fails to remedy the same within a reasonable period of time as determined by the non-defaulting party, or if the objective of the agreement becomes impossible owing to a cause not attributable to the terminating party, the non-defaulting party may terminate immediately.
Break-up fees
Break-up fees and reverse break-up fees are not often seen in Thailand in an acquisition transaction. Break-up fees are usually associated with the termination of a transaction without cause by any party, typically at an early stage.
Nonetheless, the parties can agree on terms of break-up fees and reverse break-up fees as there is no restriction to do so under Thai law; therefore, if commercially acceptable, both parties can include such a term in the transaction agreements.
Scope of representations, warranties and indemnities
The seller typically gives representations, warranties and indemnities to the buyer to give assurance to the buyer that the target company, its operation and any information related thereto are true and accurate and shall remain the same as is from the execution date of the agreement until closing date.
The scope of representations, warranties and indemnities of the seller usually concerns the ownership of the seller over the disposed shares or assets of the target company, the status and conditions of the disposed shares or assets of the target company and the authority and competency of the seller to enter into the transaction.
Under Thai law, there is no legal distinction to the meaning of representations and warranties. However, in practice, representations are provided to assure the details of the target company as of the present date, but for a warranty, the seller will warrant the conditions of the target company from the execution date of the agreement until the closing date. The indemnity clause is prescribed in the agreement to include liability incurred by other related parties as well. The seller will indemnify or compensate the buyer for any loss or damage the buyer suffers provided that the cause of such loss or damage arises from a breach of representation and warranty that the seller has given. In addition, under Thai law, only the actual loss or damages can be indemnified. Foreseeable damages such as opportunity loss are unlikely to be set up against the seller to claim indemnity because it is difficult to prove to the court and no actual damage has been determined.
Limitations on liability
Under the sale and purchase agreement, the seller’s liability is normally limited by amount and time. The costs, expenses, liabilities, losses or damages (including interest and reasonable fees or legal counsel and other experts) arising out of any inaccuracy in, or breach of the representations, warranties, indemnity and covenants made by the seller may be limited to a certain amount as agreed between the parties. There may be a minimum or capped maximum claim amount, which can be negotiated and mutually agreed between the parties. However, the maximum claim usually does not exceed the purchase price. In regard to the time limit, a claim regarding tax liabilities shall not be permitted on or after the date falling five years after the closing date and a claim regarding other aspects shall not be permitted on or after the date falling two years after the closing date.
Transaction insurance
Although this type of insurance exists in Thailand, all are offered by foreign insurance companies from offshore, and in recent years, its popularity has been growing rapidly.
Post-closing covenants
Post-closing covenants are common in Thai M&A transactions. They generally consist of the acts required to be carried out by the relevant party to legally enforce the performance from such party. For example, affixing stamp duty to the share transfer instrument, the correction of certain provisions in the agreements of the target company. In addition, post-closing covenants generally include obligations that are not critical to the closing of the transaction, whether originally agreed as the post-closing covenants or altered from the unsatisfied closing conditions.
Tax
Transfer taxes
Under Thai law, there is no transfer tax on share transfer. For the transfer of assets, in respect of the land or building of the target company to be transferred, transfer tax shall be imposed on such transfer of immovable property. The transfer tax is 2 per cent of the appraised value or the purchase price, whichever is higher. Transfer taxes will be collected upon the registration of the transfer of immovable property. Normally, the parties are equally responsible for the transfer tax payment; however, the parties can negotiate and mutually agree that either party can take on such payment burden individually.
Corporate and other taxes
In addition, the parties may enjoy the tax benefits under a double taxation agreement (DTA) if either the seller or the buyer is an entity incorporated in Thailand and the other party is an entity incorporated in the jurisdiction that has entered into a DTA with Thailand. Such tax benefits vary in accordance with the terms and conditions agreed between the two countries.
Transfer of employees
There is no transfer of employment upon the acquisition of shares in the target company as such target company continues being an employer to its employees. The change merely occurs to the shareholding structure of the target company. However, upon the acquisition of business and assets of the target company, the buyer will have to determine whether they have an intention to transfer the employees from the seller and become the new employer of those employees. If so, the employees’ consents are legally required to be obtained prior to the acquisition of business and assets of the target company. The need for employees’ cooperation may frustrate the business or assets acquisition transactions, and these are the primary reasons why business sales usually take the form of a sale of shares. When an entire business is acquired through the purchase of assets, the choice is often tax-driven.
Notification and consultation of employees
There are no statutory requirements for consultation with unions or work councils concerning acquisitions, disposals or mergers. However, employees of an entity whose business is discontinued on its sale have certain statutory rights as regards to the buyer. Prior consultation concerning acquisitions, disposals or mergers is a common contractual requirement in collective agreements with recognised trade unions.
Transfer of pensions and benefits
As there is no transfer of employment in a share acquisition scheme, every right and obligation – such as wages, pensions, benefits – between the target company and the employees will continue as is.
In respect of a business or assets acquisition, the buyer may choose:
a. to have the seller terminate the existing employment agreements entered between the seller and its employees and to rehire the employees itself and become the new employer of such employees. This option allows the buyer to renegotiate the employment terms with such employees whose employment agreement has been terminated and all the existing rights of the employees such as wage, benefits and employment terms have been discontinued. However, severance shall be fully paid to those employees upon that termination; or
b. to novate the employment agreements by executing the novation agreements among the seller as a former employer, the buyer as a new employer and the employees. For novation schemes, the severance pay has yet to be required to be paid, but the buyer shall offer (although not necessary) the transferred employees the same rights, such as wage, benefits and employment terms to which the transferred employees were entitled under their previous employment agreements with the seller.
Key developments in Private M&A
In Thailand, the key legal developments are the Trade Competition Act B.E. 2560 (2017) (TCA) (Thai version, English version not available) and the Thai Personal Data Protection Act (“PDPA”) B.E. 2562 (2019) (updated English version). The TCA is currently the main legislation governing the merger control regime in Thailand. With effect from 29 December 2018, any merger that meets the requirements under the TCA and the relevant subordinate regulations issued thereunder shall be subject to the merger clearance process as stipulated under the TCA, except for any merger between the businesses of the subsidiary and its parent company. Nevertheless, there are also specific laws and regulations governing share acquisitions for certain business sectors, such as the energy sector whereby the Energy Regulatory Commission has issued a regulation to regulate the licensee from merging with other licensees to prevent monopolisation and reduction of competition in the energy sector. In such a case, the TCA will no longer be applicable as the parties must comply with such specific regulations.
The PDPA is enacted with a purpose to protect the rights of the individual (data subject) over his/her personal data from being exploited by an unauthorized data controllers. The PDPA sets out the methods and requirements which the data controller needs to comply with before processing personal data, which includes obtaining a consent, a notification of the processing of personal data before obtaining the personal data as well as certain exemptions for the processing of personal data without consent from the data subject. The PDPA may affect an M&A transaction in particular on the process of due diligence on the target company which requires a disclosure of relevant information between relevant parties (i.e., the purchaser, the advisors of the purchaser and the buyers as well as the personnel of those entities). Therefore, it is important that the related parties must understand and follow the requirements of the PDPA to ensure that all relevant M&A processes are properly undertaken without breaching the PDPA. The PDPA originally would have been effective on 27 May 2020, one year after it was enacted in 2019; however, owing to the covid-19 pandemic, enforcement of the PDPA was postponed to 1 June 2022.
Additionally, before the outbreak of covid-19, one major merger and acquisition transaction caught the attention of the public. CP All Public Company Limited (CP) wished to invest in Tesco Malaysia and Tesco Thailand by way of acquiring shares in both companies through its holding company. On 9 March 2020, CP’s subsidiary entered into the share purchase agreement with Tesco Holdings Limited and Tesco Holdings BV, the sellers. CP is considered the largest retailer in Thailand with its main business of operating the convenience stores (i.e., the 7-Eleven stores). Hence, once CP entered the acquisition of shares is Tesco Asia Group, the concern was whether the acquisition elevates CP to a monopoly or not. As one of the conditions precedents, Tesco Holdings Limited shall obtain approval from the Trade Competition Commission to dispose of its shares in Tesco Thailand to CP. In November 2020, the Trade Competition Commission approved the acquisition of Tesco by CP but imposed certain conditions, including a three-year restriction for the company to merge with another business with the same category such as retail and wholesale businesses for the next three years to cushion any impacts that the transaction may cause.
Coronavirus
Generally, Thai law provides that a party to a contract that requires return performance or a reciprocal contract may refuse to perform his or her obligations until the other party performs or tenders to perform. Thai law does not, however, support anticipatory breaches if the other party’s obligations are not due.
With regard to covid-19, the Thai government issued a ministerial regulation to include the pandemic under force majeure. Therefore, by virtue of the regulated law to include this meaning, any contracting party that suffered harm owing to the pandemic may be exempted from liability by invoking force majeure. Moreover, the law covers not only the businesses whose closure the government announced but also businesses that the owner chooses to close as a measure to protect employees.
In addition, there are many regulations that exempt the liability of a party that has suffered from a force majeure event and is unable to perform its contractual obligation, such as the Civil and Commercial Code of Thailand, the Carriage of Goods by Sea Act B.E. 2534 (1991) (updated English version) and the Multimodal Transport Act B.E. 2548 (2005) (updated English version). These regulations exempt the carrier from any loss, damage or delay in the delivery of goods as a result of force majeure. The Bank of Thailand also issued measures to mitigate the burden of such debtors in debt repayment. The main measures are to provide the debtor with a payment break as well as a reduction of interest rates for their outstanding loans whereby the rates are varied for each financial institution.
Even though, under Thai law, some protection has been provided to parties that have suffered from the events of force majeure, parties are encouraged to include a force majeure clause in transaction agreements. By doing so, there will be a clearer picture of the liability of each party and the consequences that may arise if performance under the contract cannot be performed, as well as the costs and compensation that each party shall bear.
The Thai Ministry of Public Health's announcement delisted COVID-19 from the dangerous communicable diseases under the Communicable Disease Act B.E. 2558 (2015), effective from 1 October 2022.
The Amendment to the Civil and Commercial Code Act B.E.2565 (2022)
Prior the amendment to the Civil and Commercial Code of Thailand B.E. 2565 (2022), the only business integration process for a private company in the Civil and Commercial Code of Thailand was an “amalgamation”. The amendment to the Civil and Commercial Code of Thailand B.E. 2565 (2022), became effective on 7 February 2023, includes improvements on the integration of private companies, among other key changes. It introduces the “merger’ process to Thai law. Under the amendment, there are two types of business integration processes:
Amalgamation: an integration of two or more private companies in which a new private entity is formed and the previously existing private companies will cease their existence as juristic persons; and
Merger: an integration of two or more private companies in which one of the integrated companies will continue its existence while the other integrated company will cease its existence as a juristic person.
In this amendment, private companies cannot integrate together unless a special resolution (a resolution passed at a shareholders’ meeting by 75 per cent of the votes of shareholders who are present at the meeting and entitled to vote) from a shareholders’ meeting has been passed.
Companies may only initiate the amalgamation or merger procedure after passing a shareholders’ special resolution. However, a shareholder attending the meeting may raise an objection to the amalgamation or merger. If an objection has been raised, the company shall arrange for the shares of the objecting shareholder to be bought at an agreed price. If an agreement cannot be reached, the price shall be fixed by an appraiser. If the objecting shareholder refuses to sell shares within 14 days from the date of receiving such the offer, the company may proceed with the amalgamation or merger.
Additionally, upon passing a special resolution for amalgamation or merger, the company must notify known creditors of the resolution in writing within 14 days from the date of resolution. The notification must also specify that an objection must be made within 1 month from the date of receiving such notice. Moreover, the company shall publish the resolution in a daily newspaper within the period of 14 days as well. In order to notify other creditors that might not appear on the list of creditors in the company’s account. If an objection is raised, the amalgamation or merger process cannot proceed unless it has repaid the debt or given security for it as part of the creditor protection.
Moreover, after the procedure above has been carried out, the director of the integrating companies shall call for a joint meeting of shareholders of their companies to decide on important matters that are required by Thai law, e.g., the name of the integrated company, the integrated company’s objective, share capital, and other matters that are necessary (if any).
The joint meeting shall be held at the location of the principal office of any integrating company or in the province where one of the integrating companies is situated. The quorum of the joint meeting requires shareholders holding shares not less than half of the total number of shares of each integrating company, and shareholders attending the meeting shall elect a shareholder among them to chair the meeting. A decision of the meeting shall be decided by a majority of the votes of the shareholders attending the meeting, except if shareholders agree otherwise.
After the aforementioned joint shareholders’ meeting, the board of directors (BOD) must register the amalgamation or merger and file the memorandum of association and articles of association duly approved by the shareholders’ meeting with the registrar within 14 days from the date of the completion of the meeting. The BOD of the former companies must also hand over the business, property, accounts, documents, and evidence of the companies to the board of directors of the amalgamated or merged company within 7 days from the date of the completion of the meeting.
After the completion of all procedures of the amalgamation or merger, the merged or amalgamated company shall be entitled to all properties, liabilities, rights, obligations, and responsibilities previously entitled by the former companies before the amalgamation or merger.
Most of the amendment to the Civil and Commercial Code in Part 9—"Integration of Companies"—stipulates the procedure of the amalgamation and merger process and the result after the amalgamation and merger. Since previously, under the Civil and Commercial Code, the procedures for the amalgamation of companies were complicated and lengthy, and legal issues were fragmented into many different laws and regulations, the amendment to the Civil and Commercial Code was introduced to improve the integration of companies through the amalgamation and merger process, which would increase flexibility in business operations and facilitate mergers and acquisitions transactions.
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Author: Panuwat Chalongkuamdee (Senior Partner), Natira Siripun (Partner), and Krisakorn Thongprasert (Associate)
You may view Panuwat's profile here.
You may view Natira's profile here.
You may view Krisakorn's profile here.
Stamp duty
0.1 per cent calculated from the transferred price or the paid-up value of the shares, whichever is higher
Seller
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