What is Illegal Nominee Shareholding under the FBA?


There is no simple and clean answer.  To start, even though news reports, journals and blogs (including this one) use the term “nominee”, that word does not appear anywhere in the Foreign Business Act (FBA), let alone the relevant provision of the FBA, Section 36. FBA Section 36 refers to Thais “aiding and abetting…by holding shares on behalf of foreigners…in order for foreigners to operate a business in violation of the [FBA]…”

The word “nominee” is shorthand for the much more complicated language of Section 36, and it is useful shorthand in many ways because it does help capture parts of this provision of the FBA.  But it is also misleading in some ways because it implies certain concepts (such as trusts) that don’t work well in Thai law (more about that later).

Whenever there is a reference to “aiding and abetting”, you know that intent matters.  Here, you not only need to look at the intent of the shareholders, but also the intent and precise language of the law itself.  This is a criminal provision, and criminal provisions should be and are construed narrowly.  This means you look at the actual language of Section 36, not the “spirit” of Section 36.  You don’t commit crimes by violating the “spirit” of a law (assuming there is such a thing); you commit crimes by intentionally violating the express provisions of a law.

When you look at the history of this law (previously summarized on this blog), its apparent there was no intent for the FBA to provide that a nominee relationship exists simply because foreigners hold shares with greater voting rights or control a company.  The word “alien” is precisely defined so as to exclude any reference to voting rights.  If the FBA was intended to cover voting rights and control, it should have said so expressly.  It didn’t and still doesn’t.

References to voting rights and control are conspicuous by their absence.

Efforts to amend the law so as to include a reference to voting rights have been rejected several times now by several Thai parliaments.  The Ministry of Commerce is on record as saying that a company is not employing a nominee structure simply because foreigners hold shares with superior voting rights or can somehow exercise control over a company.

What matters is whether the Thai shareholders are “genuine investors”.  When the Ministry of Commerce vets company registrations for nominee shareholding, it asks for evidence of the shareholders ability to pay for the shares and, sometimes, evidence that they paid for their shares with their own money.

This makes sense when you look at commercial investments generally.  Individuals make genuine investments all of the time into companies and funds they don’t control.  That doesn’t make the investments any less genuine.  Investors in companies, Thai or otherwise, make all sorts of arrangements about who is responsible for what and who has control over this and that.  A party is not a nominee simply because they lack control over a company.  There are bona fide commercial reasons why parties agree to such arrangements, and a blanket rule saying that certain types of arrangements are illegal per se would do serious damage to the Thai economy.   It would also unreasonably limit the ability of individual Thais to make investments as they see fit.

Changing the FBA to add references to control would constitute a compulsory divestiture or a “taking” from foreign investors.  This would, and did in 2007, raise create major headaches for Thailand.  The EU claimed this sort of change would violate Thailand’s obligations under WTO.  Are they right?  I honestly don’t know.  But what is clear that the efforts to redefine nominee relationships in terms of foreign control were a PR nightmare for investment in Thailand and did absolutely nothing to clarify Section 36 of the FBA.

Looking at control alone is therefore not the answer.  And because a nominee relationship does not arise out of control alone, the mere fact that foreigners hold shares with superior voting rights does not mean that an unlawful shareholding structure is being employed.

So what is an illegal nominee relationship?  In the next post on this subject I will try to give some self-evident examples of a nominee relationship.

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