The Role of Company law and Good Governance in Thai’s Companies
At a time when Thailand is evidencing unprecedented economic and business growth, it is imperative to look at the different key players to the realization of such advancement. Thailand is increasingly becoming a world business attraction and different investors have found it paying to develop ties to enjoy the favorable business environment. The Kingdom of Thailand has ensured that there are strong business incentives, reliable infrastructure and a politically stable environment. The attractiveness of Thailand to the world has substantially been influenced by policies which encourage liberalized and free trade (Ladd, 2012).
Types of Business entities in Thailand
Thailand has various business entities. To start with, there are three types of partnerships. They include unregistered ordinary partnerships, registered ordinary partnerships and limited partnerships. Unregistered ordinary partnerships operate jointly and wholly to the effect that all partners are held liable jointly and wholly for all obligations arising out of the partnership dealings. On the other hand, the registered ordinary partnerships are a legal entity and their liability and obligation is distinct from the partners. In addition, limited partnerships operate like limited companies whereby liability is limited, and obligations are restricted to the capital contributed by the partners (Montreevat & Workshop on Corporate Governance Practices and Challenges in Post-Crisis Thailand, 2006).
The second businesses in Thailand are Limited companies, which are divided into two categories. These categories include Private companies and public companies. Private companies are regulated by the Civil and Commercial Code while public companies are regulated by the Public Company Act. Companies are distinct from partnership since they are limited to the unpaid capital, and their registration includes articles and Memorandum of Association (Leong & ASEAN Roundtable, 2005).
Lastly, under the Civil and Commercial Code, a joint venture is recognized as a business in Thailand. In Joint Venture, two juristic persons agree to do business together. A joint venture is supposed to remit corporate tax like a company (Ladd, 2012).
The reforms, which have drastically made Thailand appear attractive in the eyes of investors, have its origin in the 1997 Asian financial crisis. In ensuring that the country does not sink in recession, different measures were taken. The reforms majorly focused on establishing a reliable corporate governance so as to restore the investor’s confidence. A stable statutory framework to govern companies was passed, and two categories of companies were formed. There were those which were known as listed companies and the unlisted companies (Montreevat & Workshop on Corporate Governance Practices and Challenges in Post-Crisis Thailand, 2006).
This research will focus on the different measures under company law statutory provisions and the role they have played throughout the years in ensuring stable climate for business. The point of investigation will be whether the mentioned provisions have supported ethical governance in the company or they have formed hurdles that have hindered thriving of business in Thailand (Leong & ASEAN Roundtable, 2005).
Regulation of Companies in Thailand
Regulation of companies and their registration in Thailand is governed by two main legislations. In the first place, there is the Thai Limited Companies Act 1992 as amended by the Thai Public Limited Companies Act (No.2) 2001. The second Act is the Thai Civil and Commercial Code, Title XXII, partnership and Companies (also known as the “CCC”). The Public Limited Companies Act regulates the formation and functioning of public limited companies. Essentially, limited liability companies are set up with an aim of allowing the public to be part of the shareholding through selling of the shares to them. The salient element of limited liability companies is that any liability on the company is limited up to the amount shared or owned by the shareholders (Montreevat & Workshop on Corporate Governance Practices and Challenges in Post-Crisis Thailand, 2006).
On the other hand, the law governing private companies in Thailand has provisions on the limitations related to the shareholding. Unlike public limited liability companies, the private liability companies have stringent restrictions as per the provisions under Thai’s Civil Commercial Code. Partnerships are also considered to be part of the company law, and they are accorded similar protection under the Civil and commercial code (Ladd, 2012).
It is widely advisable that in doing business in Thailand and specifically when the company is a foreign entity, a private limited company is vital to form. Transaction made through a limited company is more advantageous compared to other forms of organizations. The structuring of a company is dictated by taxing and other legal requirements (Leong & ASEAN Roundtable, 2005).
There is a growing concern that Thailand has a complicated system of applying and registering for companies. This is mainly that the relevant documents need to be processed. The steps to be followed are not easy, and the process sometimes involves attorneys. In some instances, the foreign companies are given a condition to fulfill. The share capital is also given a priority when one is forming a company (Montreevat & Workshop on Corporate Governance Practices and Challenges in Post-Crisis Thailand, 2006).
There is a strong criticism leveled against the registration of companies in Thailand. The laws have been said to be nationalistic hence a foreigner is highly pressed to meet those standards. For a registration of a company to be complete and the company to be allowed to transact business in Thailand, 49% of the shareholding by Thai citizens is a mandatory requirement. It has been stated that foreign companies have been unnecessarily restricted so as to benefit Thailand nationalists. The said issue has materially affected foreigners, and the registration of a company has become a hard task to complete (Ladd, 2012).
Large forms of investments have occurred amidst the said controversies. The essential question looming large in both foreign and domestic companies within Thailand is whether the available company laws have assisted in ensuring sound corporate governance. Good corporate governance is defined as a set structure whereby the relationship between the company, its management and the shareholders is enhanced to foster competition and put into consideration the interests of all shareholders. In enhancing that principle, corporate governance is considered a necessary principle in ascertaining the success of a given company. The operation of companies in Thailand is modeled in the walls of corporate governance (Leong & ASEAN Roundtable, 2005).
The 2008 Civil and Commercial Code Amendments
In recent years, a joint committee in Thailand has been made which consists of the Ministry of Commerce and the Ministry of Finance which has renewed its commitment towards amending the Provisions of section 100 of the Public Companies Act. The joint committee argued that; the required shareholding to call for an extra ordinary meeting is unnecessarily high. The committee further claimed that the provisions of section 100 of the Public Companies Act favor the majority shareholders at the expense of the minority shareholders. The proposal in the amended is to the effect that the percentage of shareholding should be reduced to 5%. On the other hand, there was a need to dispense the requirements of a certain number of shareholding (Sakulrat, 2006).
Similar suggestions of the amendment have also been proposed by the joint Committee on the civil, commercial code. In this case, the 20 per cent total number of shares should be lowered to 5% per cent so as to put the Civil Commercial Code and Public Companies Act on the same footing.
In 2008, the above mentioned proposals by the joint Committee were amended and various changes witnessed in the business sector. First, requirement of seven persons in the formation of a private company was amended to allow three people to form a private limited liability company. The minimum shareholding was reduced from seven shareholders to three shareholders. The most encouraging amendment was the reduction of the duration required for registration to one from the previous nine days.
Under the amendments, the corporation status could only be evidenced by an Affidavit of Registration and the certificate of the corporation is no longer necessary. Further the extra copies of the Articles and Memorandum of Associations required before are not needed during the time of registration. A Partnership need not be dissolved for it to be transformed into a limited liability company.
The amendments further reduced the meetings required in passing particular resolutions. One general meeting with 75% of the number of shareholders present and eligible to vote is sufficient to pass an outstanding resolution. A notice of 14 days is required before a meeting is held. These days were formerly seven hence the increase in days allows adequate service of the notice in the shareholders AR mail.
It is worth stating that after registration the company has powers to own property and exist in perpetuity. Essentially, that means that the company cannot use the names of directors and shareholders acquire property. It becomes a separated legal entity with powers to sue and be sued. However, such duties are mainly executed by the directors who are supposed to act in due diligence. The company’s directors are expected to be in a fiduciary relationship with the company and their duties are not only limited on the shareholders but also the company’s creditors (Leong & ASEAN Roundtable, 2005).
The powers given to the directors to act with utmost duty of care are sometimes subject to abuse. Therefore, section 87 of the Thai’s Public Companies Act protects the shareholders from any unfair dealings by the directors. The said provision ensures that the directors of the company are prohibited from buying the property of the company or selling it to the company without a full disclosure to the company (Montreevat & Workshop on Corporate Governance Practices and Challenges in Post-Crisis Thailand, 2006).
The provision on the election of members of the board is envisaged under section 70 of the Public Companies Act whereby the shareholding of directors is prescribed by the Act. The elections of directors are by the shareholders who choose either to cast their vote to one director or many directors. One director is supposed to be appointed through a general meeting (Jeffreys & Oxford Business Group, 2009).
It follows that, the power to remove a director rests in the hands of the shareholders. According to section 76 of the Public Companies Act, it is provided that the shareholders’ meetings have the powers to pass a resolution to remove a director from office. The shareholders should not be less than 75%, and the number of the shares held should not be less than 50%. The section presents a tight clause which favors the directors stay in office while making it hard for shareholders to remove a director (Ladd, 2012).
The requirement of not less than 75% of the shareholding and 50% of the total number of shares owned has become a hurdle which is too restrictive. In practice, it has proved almost impossible to remove a director from office. The joint committee has also advocated for the restrictive provision to be relaxed so as to allow the shareholders to exercise their will on who to run the affairs of the company (Leong & ASEAN Roundtable, 2005).
There are legal duties entrusted with the directors in the running of the company’s affairs. The code of conduct dictates that directors should perform their duties while observing fairness and integrity. The Public Companies Act provides that, in the exercise of their duties, directors should be loyal and adhere to duty of care. The term fiduciary duty is borrowed from the trust law. Though Trust Law happens to be not part of Thai law, it is clear that its understanding is crucial in understanding the meaning of fiduciary duty (Jeffreys & Oxford Business Group, 2009).
Trust law present a relationship whereby the trustee holds property from a settler that does not belong to him or her, but it is held for the beneficiaries. The applicability of the said principle in the company law is extremely vital. Its applicability is to the effect that the directors of a company cannot be regarded as the owners of the property. This is because a company is a corporate entity, but manages the said assets for the benefit of the company. The fiduciary duty was in the past owed to the shareholders and employees of the company. Growth in corporate law indicates that the duty has been extended to include creditors of the company (Sakulrat, 2006).
Breach of the said duties call for the lifting of the veil of limited liability, and the directors are held personally liable. The law takes cognizance of the fact that directors of the company need to have discretionary powers to decide on behalf of the company. The law also draws a thin line between the personal liabilities upon a breach of the fiduciary duty. The law seeks to protect directors who are diligent in performing their duties. To be held personally liable and not facing the consequences due to other directors mistakes is something the law seeks to safeguard (Sakulrat, 2006).
Thai Company law does not provide for a clear guideline on how to limit the director’s powers. However, the corporate practices in Thai are not different from others found elsewhere. The different ways in which the director is protected from being sued for breach of fiduciary duty takes many forms. To start with, there must be a sufficient proof that the director acted in good faith and at the best interest of the company while executing the duties. Secondly, the decision making must have been reached in observance of necessary care. Thirdly, there is no scintilla of evidence indicating that there was a conflict of interest when the decision was reached (Ladd, 2012).
There are benchmarks to determine whether a director was in breach of a duty of care or not. First, test of reasonability is very important. The director must have acted, not like an excellent director, but he or she should act the way a reasonable director would have acted under those circumstances. Secondly, the director ought to have acted on an informed point basis. The acting ought not to be triggered by speculation but should be through information. Thirdly, the acting was without reasonable doubt since the information relied on was persuading (Montreevat & Workshop on Corporate Governance Practices and Challenges in Post-Crisis Thailand, 2006).
The Role played by company law in good governance
The role played by the company law in making sure that corporate governance is facilitated, and companies achieve their goals is worth examination. There are strong elements that make the principle of sound corporate governance. The rights of the shareholders in the company are one element of corporate governance. The Principles of Corporate Governance for Economic Cooperation has given the main elements which make up the principle of corporate governance. Thailand has incorporated some of the said principles in her corporate law (Ladd, 2012).
The first element of corporate governance is to enhance participation of shareholders. This can be achieved through voting and releasing the company’s information on a regular basis to the shareholders. The Public Companies Act has guaranteed shareholders the right to vote and attend meetings. The shareholders are further authorized to invite proxies and vote on their behalf. Further, the right to call for an extraordinary meeting is entrenched in section 100 of the Public Companies Act whereby 25 shareholders holding not less 10% of the total number of shares are given powers to submit a request to the directors who subsequently call for an extraordinary meeting. The written request to the directors is supposed to be adhered and if held the shareholders will have the powers to call for an extra ordinary meeting after a lapse of 30 days. This option is available to shareholders holding not less than 20% of the total shareholding in the company (Sakulrat, 2006). The 2008, Civil Code amendments have been a milestone in ensuring that business ventures and companies in Thailand do not go through unnecessary restriction so as to be allowed to transact business.
The Thailand Company law has been the backbone of ethical governance and the growth of business in Thailand. The provisions of the Civil and Commercial Code Act and The Public Companies Act have overtime maintained a smooth flow of business transactions in the country. The 2008 Civil Code amendments were applauded by the business class in Thailand. The amendments provided for flexibility in Thailand’s Business system. The reduction of registration requirements was a fundamental step in ensuring flexibility. Company’s registration takes one day unlike before whereby it used to take nine days. From the above provisions of the Civil and Commercial Code, it is clear that good governance has been provided in Thailand. The 2008 amendments further confirm that by facilitating flexible way of transacting business. The company law has played a greater role in enhancing reliable and swift business transactions in Thailand.