Merger & Acquisitions in Thailand – An Overview

In the current economic environment, many investors are looking at buying or selling a company or its assets in Thailand. In relation to such transactions, there are a number of key steps which the parties should ordinarily follow. This article provides a basic overview of the main steps and key matters which buyers and sellers should be aware of at each stage.

Step 1 – Parties to enter into a MOU or Letter of Intent

The Buyer and Target Company enter into a MOU or preliminary arrangement such as a Letter of Intent (LOI) to discuss the purchase of the company/ asset and initial issues such as:
     1. Due diligence by the buyer of the Target Company/ asset (through its lawyers, accountants and financiers) and the sharing of access with such parties and how such information shall be shared. Tip: online sharing is best using online applications such as drop box etc).
     2. Confidentiality obligations on the buyer and its lawyers/ advisors with respect to the information shared with it by seller as part of the due diligence process. If the buyer will share confidential information with the seller or its representatives then confidentiality obligations should be extended to cover this as well.
     3. Key legal clauses which shall be covered in the main agreement, provided that the due diligence is successful; and
     4. Timeframe for the whole process including due diligence, alternatives of M&A, contract preparation & signing and completion of the deal.

Step 2 – Due Diligence Investigation

The buyer (through its lawyers, accountants and financiers) then conducts the due diligence investigation on various material aspects of the target company such as:
     I. Key contracts to which the Target Company is a party to and shareholder agreements relevant to the company itself;
     II. Any litigation (including threatened litigation) involving the shareholders of the Target Company or the Target Company itself;
     III. Any licenses or permits held by the Target Company and whether it has the necessary licenses/ permits to operate its business in Thailand;
     IV. Foreign employees and whether such persons have the correct visa and work permits;
     V. Whether the Target Company is in good legal standing with its corporate law legal compliance requirements;
     VI. Key corporate documents such as its Articles of Association and Memorandum of Association etc;
     VII. Audited Financial Statements and whether the Target Company has paid corporate income tax, Value Added Tax (VAT), Specific Business Tax (SBT) (if any) correctly as well as other payments such as social security contributions for its employees; and
     VIII. Tax review of the Target Company to check important tax considerations such as whether it has any unpaid tax liability or is subject to an official audit etc.

Step 3 – Contract Preparation

If the buyers’ due diligence investigation is successful and is deemed acceptable then the parties shall need to move forward to preparing suitable contracts for the sale and purchase of either:
     a. The entire Target Company (or part thereof), this shall involve the sale and purchase of its shares; or the
     b. Sale of the particular assets held by the Target Company rather than its shares;
     c. Other Agreement (if any).
Each option has its pros and cons but if a buyer is going to purchase an existing company in Thailand through its shares then they must be careful of various issues, including:
     I. The Foreign Business Act (1999) (‘FBA’) limits the right of most foreigners to own more than 49% of the shares in a Thai registered company for those which operate businesses conducting certain types of activities (see List 3 of the FBA to see what types of business require a FBL in order to be able to be foreign majority owned).
     II. If the buyer purchases the Target Company then they should be careful of its existing liabilities such as civil or criminal cases involving it as well as liabilities under contracts to which the Target Company is a party.
     III. The share sale and purchase agreement should be carefully drafted. To this end, the contract should ensure that the shares sold are sold free and clear, are not subject to any lien or charge and are not subject to any litigation or claim. The buyer should also ensure that the share certificates are provided upon completion of the transaction too and that the share register book of the company is also duly updated along with form BorOrJor.5 at the Department of Business Development or DBD.
     IV. If the Target Company holds land then this can pose a major problem if the buyer wants the company to be majority foreign owned as there are very few exceptions where this is possible (such as BOI promotion privileges for certain approved BOI activities or Investment Promotional Privileges from the Industrial Estate Authority of Thailand (IEAT)).
     V. The Buyer should be wary of key contracts involving the Target Company which may automatically terminate if its ownership changes as this could create major problems for the Target Company as such contract may be important for its operations and negotiating a new contact may not be possible.
     VI. The share sale and purchase contract should be at a bare minimum be evidenced by a share transfer instrument between the buyer and the seller but often a more detailed contract is required to adequately safeguard a party.
The drafting of suitable and legally enforceable contracts should be undertaken by skilled and qualified lawyers to ensure that each parties’ legal interests are safeguarded. Each party and their respective lawyers should carefully consider the conditions precedent which should be mentioned in the agreement(s) to safeguard their party, such as the payment of money or the signing of a share transfer instrument etc.

Step 4. – Signing of the Contracts and Closing the Deal

After the drafting of the various agreements such as an asset purchase agreement or in the case of purchasing the company itself (share sale & purchase agreement) then the parties shall need to execute the various contracts. If a party is a juristic person such as a company then the other party should ensure that the sale & purchase agreement is properly signed by an authorized director. It may also be prudent to obtain a copy of a signed board resolution prepared by the company which authorizes the transaction and states that the signing director(s) have authority to execute the relevant contract(s) on its behalf.

In the case of purchasing an existing company through a share sale & purchase agreement, it should be noted that after contract signing, various filings shall need to be made with the DBD including an update of the share register (form BorOrJor.5) as well as an update of the Affidavit of Company Registration to reflect the appointment of new directors and the removal of the old directors (if such a change is made). The new directors (if any) shall each need to sign a form agreeing to their appointment, this is called Form Kor, such form shall need to be signed by an authorized director too, hence often it is sensible to add the new directors first before removing the old directors from the Target Company’s Affidavit of Company Registration.

Writer: Ryan Crowley – Foreign Services Manager

Dharmniti Law Office Co., Ltd.
2/2 Bhakdi Building 2nd Floor, Witthayu Road, Lumphini, Pathumwan, Bangkok 10330.
Tel: (66) 2680 9777
Fax: (66) 2680 9711
Email: info@dlo.co.th