In the past, we have discussed that nominee shareholdership had become a widespread practice among foreign investors in Thailand. However, we also know that this practice is downright illegal and that the Board of Investments and other relevant authorities in the Kingdom are cracking down on those foreign-companies that employ nominal shareholders.
Let us understand why nominal shareholders are illegal for foreigners, but first let us take a look at what foreign-owned companies are required in terms of share ownership in order to operate legally within the Kingdom.
Under Thai law, foreign-owned companies are still required to have Thai shareholders holding at least 40% of the business’ capital. This leaves only 60% to foreign ownership. There are exceptions to this when the company decides to invest in a market that the BOI is actively promoting for foreign investors. In this case, the company may be 100% foreign owned instead of going through the 60-40 ratio in shareholdership.
In other cases, some foreign entrepreneurs, instead of registering a foreign-owned company, decide to go through the local route. This means that they incorporate a locally-owned company, meaning that majority of the investors are Thais.
For various reasons, foreign nationals decide to take advantage of nominal shareholders when incorporating their business. One reason is to incorporate a locally owned company so that they can enjoy several perks not afforded to a foreign-owned company, like working in a market that is, by law, restricted to foreigners as theoretically their more robust financial capabilities can put local businessmen at a disadvantage.
Now, Thai law implicitly requires that a local company’s BoD should have local Thais owning more than 50% of the company’s shares and paid-up capital.
With the entrepreneurs seeking to keep ownership to themselves in both situations, that is where the use of nominal shareholders comes in.
How Does It Work?
To summarize, nomimal shareholders are simply shareholders by name. They affix their signatures in the company’s incorporating documents as shareholders, but they are not true shareholders.
For instance, they actually hold no real shares nor do they exercise voting rights within the company. The real ownership of the shares rest with the foreign nationals, who alone exercise ownership and voting rights in the decisions regarding the company.
In some cases, nominal shareholders are also made to sign a document stating that they are selling their shares and that the foreign nationals are buying back those shares.
The sole reason that nominal shareholders exist is to complete the legal requirements of incorporating the business. This allows the entity to operate legally, although the circumstances surroundings its registration in the Kingdom are questionable.
Why Is It Illegal?
Nominal shareholders are not downright illegal in Thailand. In fact, the law allows locally owned companies to employ nominal shareholders to meet the minimum of 3 stockholders in incorporating the local business.
However, the Foreign Business Act implicitly disallows the practice in incorporating foreign-owned businesses or locally-owned companies that are really owned by foreign nationals. There are hefty fines imposed by the law on locals who assist in incorporating a company that is meant to go around the restrictions imposed by Thai law on foreign-owned companies.
If you’re looking to invest in a company in Thailand, you might want to start thinking about your Board of Directors as well as the options available to you when incorporating your enterprise in the Kingdom. You might want to think about obtaining the help of a lawyer as well.
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