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Acquisition
of Thailand Companies
by Means of Purchase of Shares: Due Diligence and Checklists
by
H. Max Voigt
August 1999
I.
Introduction
This
article concerns various procedures and issues in connection with
a negotiated acquisition of a private Thailand company by means
of a purchase of shares by a foreign corporation and/or a private
Thailand company.
Private
Thailand companies (as opposed to publicly listed companies) are
not listed on the Stock Exchange of Thailand. They are called
“limited companies”. The suffix “Limited”
or “Ltd.” is required to appear at the end of the
name of a private Thailand limited company. Foreigners might
call them “corporations” as they have the same basic
structure and attributes which American corporations have.
This
article is not written from the point of view of a buyer who is
considering buying a small “Mom and Pop”-type company
or business such as a bar or a guest house or other small business.
This
article gives heavy emphasis to issues and considerations relevant
to a foreign company which would be involved in the acquisition
of a private Thailand limited company by means of a purchase of
shares.
II.
Categorizing the Foreign Buyer (company which is involved
in purchasing the shares)
In
order to analyze the issues of concern to the foreign buyer-company,
it is useful at the outset to determine in which of the below-listed
categories the foreign buyer-company fits. The foreign buyer-company
will necessarily fall into at least one of the categories listed
below.
III.
List of the Categories
- The
foreign buyer-company has no substantial ownership interest
in an existing Thailand limited company;
- The
foreign buyer-company owns a majority of the shares in, and
has control of, an existing Thailand limited company;
- The
foreign buyer-company owns less than a majority of the shares
in an existing Thailand limited company and has enough voting
power to elect at least a majority of the members of the Board
of Directors and to have effective control, if not absolute
control, in said existing Thailand limited company.
IV. Preliminary
Checklist for the Foreign Buyer-Company
Under
Thai law, there are prohibitions on what a foreign company can
legally do. We have discussed such prohibitions in other
articles and much material is available on these prohibitions.
We will not consider those prohibitions in this article, except
by way of the following preliminary checklist for determining
what sort of legal entity (or combinations thereof) and methods
the foreign buyer-company should or must use to acquire the shares:
- Determine
in which of the above-mentioned categories the foreign buyer-company
falls;
- Determine
whether it is legally permissible for the foreign buyer-company
to purchase the shares in its own name.
- Determine
whether it is legally permissible and most beneficial and/or
practical for the foreign buyer-company to have the existing
Thailand limited company (as described in Category 2 above)
purchase the shares;
- Determine
whether it is legally permissible and most beneficial and/or
practical for the foreign buyer-company to have the existing
Thailand limited company (as described in Category 3 above)
purchase the shares;
- Determine
whether the foreign buyer-company should form a new holding
company which fits the description in Category 3 above, and
use the holding company to purchase the shares;
- Where
it is not legally permissible for the foreign buyer-company
to own a majority of the shares in the target company, determine
whether the foreign buyer-company should form an alliance with
a Thai-majority owned limited company whereby the said Thai-majority
owned company would purchase 51% of the shares in the target
company, and the foreign company would purchase 49% of the shares
in the target company.
V. The Meaning of the Terms
“Buyer” and “Seller” as Used in the Remainder
of this Article
So
far, we have used the term “foreign buyer-company” because
most of our discussion has been from the foreigner’s point
of view. However, in the remainder of this article, we discuss
issues which would be of universal concern to any buyer, whether
foreigner or Thai. Therefore, hereinafter we will use the term
“buyer” to refer to any buyer company, i.e., any company
which is considering purchasing a major block of shares in a private
Thailand limited company (the “target company”).
Furthermore, “seller” will denote the selling shareholder
or shareholders, regardless of whether there is one selling shareholder
or several selling shareholders.
VI.
Due Diligence
The
buyers, as the first part of commencing a due diligence review,
should conduct the very basic, preliminary and elementary due
diligence review explained in the monograph that we wrote entitled
"A Starting Point for Due Diligence".
Although
the due diligence discussed in this article is premised on an
acquisition of a Thailand limited company by means of purchase
of shares, much of the remainder of this article is applicable
to an acquisition of a Thailand limited company by means of purchase
of assets. (See our monograph entitled "Mergers and
Acquisitions in Thailand: A Comparison of Amalgamation with
Purchase of Assets and Assumption of Liabilities".
There
are three sequential stages in a due diligence review; and a due
diligence review might stop before proceeding to the next stage.
The three stages are:
Stage One:
conduct the very basic,
preliminary and elementary due diligence review mentioned above.
If the buyer decides to proceed further, the parties will move
on to Stage Two.
Stage
Two:
we will refer to this stage
as “pre-signing due diligence” as it will precede
the event where a formal and definitive Acquisition Agreement
(hereafter the “Agreement”) is entered into between
the buyer and the seller.
One
of the principal purposes of pre-signing due diligence is
to assist the buyer in tailoring the provisions of the relevant
points to be covered in the Agreement, including those points
which are mentioned further on.
At
the end of this article, we have set forth a partial document
review checklist. Usually, a document review will be
part of pre-signing due diligence. The document review
which is commenced in Stage Two may continue into Stage Three,
or a new document review may be initiated in Stage Three.
There may be an overlap between the Stage Two document review
and the Stage Three document review.
Some
lawyers proceed on the basis that due diligence is limited
to examining documents as though the deal is embodied in a
pile of papers. That view is too narrow as it overlooks
that there are matters other than documents which embody the
deal--matters such as the harmonious relationship between
the parties (very important in Thailand as well as most other
parts of Asia), information not contained in the documents
which will provide the buyer with the information necessary
to allow an informed investment decision, and an overall understanding
of the business and functioning of the target company in concrete
terms and not merely in terms of legal abstractions (a lawyer
may understand a mouse trap manufacturing business from a
legal perspective; but chances are he doesn’t know how
to make a mouse trap).
A
pre-signing due diligence review may cover, but should not
necessarily cover, more than a thousand matters which should
be investigated. At this stage, in-depth investigation
of the target company and its business affairs is accepted
practice for North American, British, and European lawyers,
many of whom believe that the buyer can never do enough due
diligence review.
If
the buyer decides he is ready to sign the Agreement and the
Agreement is signed by all the necessary parties, then the
parties move on to Stage Three.
Stage Three:
we will refer to this stage as “post-signing
due diligence” as it will follow the event where the Agreement
has been entered into between the buyer and the seller.
In
this stage, any unfinished document review will be carried
out as well as any other investigations or activities required
by the terms of the Agreement. The next section of this
article includes, among other things, an elaboration on examples
of such investigations and activities.
VII. The
Agreement
The
Agreement will have many purposes, including most or all of the
following:
- To
set forth the seller’s representations and warranties and
other disclosures;
- To
set forth any indemnities to be obtained from the seller;
- To
identify legal and contractual impediments to completion of
the proposed acquisition, including required governmental and
other third party authorizations, consents, and approvals;
- To
allow the buyer to refuse to close the acquisition if the representations
are not true at closing or completion of the transaction;
- To
enable the buyer to recover damages if a representation turns
out to be false when made, whether or not the transaction closes
(this presupposes that the seller is creditworthy as “you
can’t get blood out of a turnip”).
- To
set forth an orderly and effective procedure for the handover
of control of the target company to the buyer, including but
not limited to, restructuring the Board of Directors (resignation
of existing directors and appointment of new directors), and
obtaining any signatures on documents required for the handover,
such as registrations of new directors and new shareholders
with the Ministry of Commerce.
- To
require the seller and/or the target company to produce certain
documents as a condition precedent or a condition subsequent
to the execution of the Agreement.
VIII. Some
Comments on the Partial Document Review Checklist Set Forth in
the Final Section of This Article
As
documents are important to due diligence, we have written a preliminary
list of documents needed for document review as part of due diligence.
The list is preliminary because certain additional documents might
need to be reviewed depending on the specific nature of the target
company’s business, and because it is impossible to create
in advance a final list of each and every document that one would
ultimately need to review; but as one must start some place, we
have started with the below preliminary list. The list has
been written with Thai law and practice in mind.
IX.
Preliminary List of Documents Needed for Document Review
- Copy
of Memorandum of Association of the Company, certified by MOC.
- Copy
of Articles of Association of the Company, certified by MOC.
- Copy
of Certificate showing names of directors and binding signatory
power of the Company, certified by MOC.
- Copy
of list of shareholders of the Company, certified by MOC.
- Copies
of all minutes of shareholders’ meetings and directors’
meetings, certified by binding signatory power of the Company.
- Copy
of all tax registration certificates, certified by binding signatory
power of the Company.
- Copies
of all share certificates of the Company, certified by binding
signatory power of the Company.
- Share
Certificate Book of the Company (can be examined on the Company’s
premises).
- Share
Registrar Book of the Company (can be examined on the Company’s
premises).
- Copies
of the following, if any: all agreements for purchase
and sale of shares, share option agreements, and pledges of
shares.
- Copies
of all contracts, including but not limited to, shareholders’
agreements, joint venture agreements, leases, employment agreements,
license agreements, distributorship agreements, non-competition
agreements, installment sale contracts, loan agreements, guarantees,
insurance policies, management agreements, technical assistance
agreements, franchise agreements, and overdraft agreements.
- Copies
of all relevant Bank of Thailand documents, including but not
limited to the following:
a.
Registrations of Foreign Investment in Shares,
if any;
b. Exchange Control forms evidencing inward
remittance of foreign loan(s), if any;
c. Exchange Control forms evidencing inward
remittance of foreign investment in shares of the Company,
if any;
d. Permission to send share certificate(s)
abroad, if any;
e. Permission to send dividends abroad, if
any;
f. Registration of Foreign Loan(s), if any.
- All
Company-sponsored employee benefit plans, if any.
- Copies
of all financial statements of the Company filed with MOC, certified
by MOC.
- Copies
of all tax receipts.
- Copies
of all tax reports of the Company which have been lodged with
the relevant authorities, certified by the binding signatory
power of the Company.
- Copies
of all title deeds (front and back) to land leased by the Company.
- List
of names and addresses of all suppliers to the Company in and
outside Thailand, with list of items supplied by each respective
supplier and Baht amount paid annually to each respective supplier.
- List
of credit customers of the Company with outstanding amount owed
to the Company by each customer.
- List
of all governmental licenses and permits of the Company, including
but not limited to, if applicable, logging permits, factory
licenses, transport licenses, vehicle licenses, alien permits,
warehouse licenses, customs broker licenses, and any permits
obtained under environmental laws.
- List
of names of legal consultants, accountants, insurance companies,
medical and health services, security services, and advertising
agencies which have ever done business with the Company, or
have been employed by the Company, or have performed services
for the Company.
- List
of all banks and financial institutions in which the Company
has an account, credit facilities, or safe deposit box, together
with a list of all bank account signatories.
- Copies
of all Powers of Attorney issued by the Company which are currently
in effect.
- List
of all shares of stock owned by the Company, if any.
- A
list of all partnerships or joint ventures in which the Company
is a partner, if any.
- A
list of all business entities directly or indirectly controlled
or managed by the Company, if any.
- Copies
of all mortgages, pledges, claims, encumbrances, or charges
to which any land or buildings owned or leased by the Company
is subject.
- A
list of all claims, actions, suits, investigations, or other
proceedings against the Company or against any property or assets
of the Company, which are pending or threatened before any court,
administrative or regulatory body, or other governmental agency.
- The
address of the premises where the corporate records of the Company
are maintained.
- A
copy of the currently effective work rules of the Company.
- Copies
of all agreements between the Company and labor union(s), if
any.
- A
list of any price controls to which the products of the Company
are subject.
- If
applicable, copies of all documents of the Company submitted
to the Board of Investment (BOI), the Company’s BOI Promotional
Certificate, all BOI conditions, rights, privileges, and requirements
to which the Company is subject, and all correspondence between
the Company and BOI; and a list of all machinery covered by
or affected by the rights and benefits granted by the BOI, including,
but not limited to, machinery for which a duty concession will
be applied.
- A
list of any sums due from the Company to any shareholder, director,
or officer as and for wages, reimbursement of expenses, compensation
for services rendered, pensions, severance pay, or employment
benefits or remuneration of any nature whatsoever.
- A
list of any material financial interest in any competitor, supplier,
or customer of the Company which any officer, director, shareholder,
or member of the management of the Company has.
- A
list of all trademarks, service marks, copyrights owned or licenses
to or by the Company; and copies of all contracts, agreements,
licenses, and registrations relating to the foregoing.
- A
list of all patents owned by the Company and patent applications
filed by the Company.
- A
list of all applications, if any, to governmental authorities
for all licenses and other authorizations necessary to the conduct
of the business now conducted by the Company.
- A
list of any applications submitted
by the Company to any governmental authority including any such
applications which were denied by the relevant governmental
authority.
- Copies
of any share transfer instruments held by the Company or any
of its directors which have been signed by the transferor or
seller, but not the transferee or buyer.
- A
list of all offices and factories of the Company, including
all branch offices and copies of any registrations of such branch
offices with any Thai governmental authority or agency.
- A
list of all assets, properties, and liabilities of the Company.
- Copies
of all documents of title or evidence of the Company’s
ownership in the above-mentioned assets and properties.
- With
respect to land possessed or occupied by the Company, or which
the Company has a right to possess or occupy, but which is not
subject to a title deed or lease, copies of the certificate
of occupancy or other document evidencing the Company’s
right to possess or occupy said land.
- A
copy of any agreements restricting or otherwise affecting transfer
or other rights pertaining to the Company shares.
- Copies
of all pledges, hire-purchase contracts, conditional sales contracts,
mortgages, assignments, and other security agreements that the
Company has entered into with respect to assets it has purchased,
owns, or possesses, and assets it has sold or otherwise disposed
of.
- A
description of the Company’s bad debts and agreements that
are expected to result in a loss.
- If
applicable, copies of all governmental and other consents required
for the construction and erection of the Company’s factories.
- Copies
of all work permits of any aliens who are or were employed by
the Company and/or worked for the Company.
- A
list of all businesses in which the Company is engaged.
For
further information, please contact Ms.
Piyanuj (Lui) Ratprasatporn, Partner and
Director, Commercial Department, Tilleke & Gibbins (e-mail
piyanuj.r@tillekeandgibbins.com).
©1999
Tilleke & Gibbins, Bangkok, Thailand
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