Tag Archives: Money

Walter Bau vs. Thailand: A Funny Thing Happened on the way to the Second Circuit

Confirmation of Arbitration Award – 14 March 2010

When Walter Bau sought confirmation of the Swiss arbitral award in the US with the US District Court in New York, Thailand opposed that petition on two grounds: (1) the “arbitrability” of the award (discussed in the prior blog post); and (2) forum non conveniens.  The doctrine of forum non conveniens applies when the forum is oppressive and vexatious – totally inappropriate.  Thailand argued the US was an oppressive and inappropriate forum to address any issues relating to the arbitration award.

“Thailand strongly asserts that the Parties and the disputes lack of contacts with the United States, coupled with the facts that Thailand has no assets in the United States, favors strongly in favor of dismissal”, said the US District Court.  The US District Court seemed to show some sympathy to this argument, saying: “Thailand is correct that a lack of assets is a factor that weighs in favor of dismissal”.

But the US District Court also said that Walter Bau: “disputes that Thailand has no assets in the United States and that any search of assets should be the product of post judgment discovery.”  Citing other reasons as well, the US District Court confirmed the Arbitral Award against Thailand on 14 March 2010.

Boeing 737 Seized in Germany – 12 July 2011

On 12 July 2011 a Boeing 737 is seized in Germany pursuant to a court order Walter Bau’s liquidator obtains to enforced the arbitration award.  Later that week, in Thailand, news of this seizure appears in the press and the Thai government claims the seizure was improper because the jet did not really belong to the Thai government.

When asked why Thailand had not paid the arbitration award in the first place – after all, if it had been paid, there would have been no seizure of the plane – the press describes the Thai government’s response as follows:

The prime minister said a separate legal battle between the German company and the government was underway in New York, and that the Thai side was going to file an appeal with a court in the United States on July 29. Therefore, he said, there should have been no urgent need for German authorities to impound the plane.
“Thailand is ready to follow the final court verdict [the appellate court in the US] even if it means we will have to pay the money. The government will not escape from the responsibility. Besides, we have lots of assets,” he said. http://www.nationmultimedia.com/home/Kasit-seeks-a-meeting-with-German-deputy-FM-over-i-30160380.html

But wait a minute?  Hadn’t Thailand previously argued that United States was the wrong forum for deciding the dispute?

Thailand Files it’s Opening Brief – 28 July 2011

In one short sentence of its 71 page opening brief, Thailand announces it is dropping its challenge on forum non conveniens grounds.  Thailand now has no objection to the US Second Court of Appeals addressing their argument (summarized in the blog post above) that – under US law – the US District Court should conduct a de novo review the “arbitrability” of the dispute.  Thailand also, of course, also acknowledges that: “The New York Convention affords the district court no power to vacate the Final Award [the arbitration award that is supposedly on appeal], and Thailand did not ask the district court to do so.”

But isn’t this curious?  First, Thailand says the US is totally inappropriate, oppressive no less, for deciding any part of this dispute.  But after the airplane seizure in Germany  and questions are raised about why Thailand had not paid the award in the first place, Thailand argues it was not obliged to pay because the matter is still on appeal in the US.  And then, in it’s opening brief, Thailand drops its objection to having the US courts address any part of this dispute.

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A Possible Solution to the Arbitration Row with Walter Bau?

The dispute between Walter Bau AG and the Thai government goes far beyond the Boeing 737 currently impounded in Munich, Germany.   Walter Bau has an arbitration award against the Thai government – not against any Thai person – and the amount of that arbitration award exceeds the value of the impounded aircraft.  That means additional assets can be seized if Walter Bau can make a prima facie claim they are owned by the Thai government and not subject to sovereign immunity.  If it happens, it will likely happen without warning or notice.  And this creates an on-going headache for the Thai government that is not limited to this one incident.

Walter Bau’s administrator has demonstrated that he will aggressively use every procedural mechanism available to him to recover on this claim.  That is his job, and like him or not, he seems to be good at it.  He employed a similar technique before. He says he was forced into this position because the Thai government ignored his earlier requests to resolve this matter amicably.  I don’t know if this is true or not.

But I do know that arbitration is intended to provide for prompt enforcement of arbitration awards.  Arbitration is designed to avoid endless appeals and certainly lengthy stays of enforcement pending an appeal.  This is why arbitration is attractive to the international business community. Enforcement is typically not delayed during an appeal.

As one other lawyer in this area wrote: “Most arbitral awards are voluntarily complied with and do not require judicial enforcement.”  There is a plan to appeal the judgement Walter Bau obtained in the Southern District of New York to confirm the arbitration award, but Walter Bau is not going to refrain from enforcing the arbitration award while an appeal is pending before a U.S. Circuit Court when “an international award…has substantially greater (executory) legal force than a domestic court decision.”

The New York Convention requires that the states that have ratified it to recognize and enforce international arbitration agreements and foreign arbitral awards issued in other contracting states, subject to certain limited exceptions. And those exceptions are very limited.

On the other hand, the current Prime Minister, Khun Abbhisit, says the Thai government has strong arguments to prevail on the appeal it plans to file and that if the government loses that appeal, they will pay.  Unfairly or otherwise, Walter Bau’s administrator doesn’t believe this.

The Thai government refuses to put up a bank guarantee now for release of the airplane.  If they did put up a bank guarantee now, it could be construed as a tacit admission that they own the plane.  It creates other obvious problems and it’s not surprising that no bank guarantees will be provided for the release of the plane alone.

Moreover, even if Walter Bau’s seizure of this asset is set aside, it can pursue other assets of the Thai government.  And even if the seizure of this one asset stands, Walter Bau can and presumably will still pursue other assets to make up for the shortfall between the value of this plane and amount of its award. The headaches for the Thai government will continue.  This dispute is really not about the plane.  It goes beyond the plane, and that point seems to get lost in the controversy surrounding this matter.

But there is a solution: why doesn’t the Thai government simply propose – unilaterally, on its own – to put up a bond for the full award amount plus a bit on top to cover costs to the U.S. court in return for a stay on all efforts to enforce the award, including the seizure of the jet in Munich?  In other words, the jet is released and no other assets of anyone are seized to enforce this arbitration award.

This is what large companies do to avoid a prevailing claimant from interfering in their operations while an appeal is pending on what they firmly believe to be an unjustified award or judgment.  If they can’t get the judgment stayed – and its very hard to stay a judgment on an arbitration award – they bond around it to avoid unexpected levies that will interfere with business operations and tarnish their reputation.  No matter how strongly a company may disagree with an award or judgment, this simply makes good business sense.

The current prime minister says he is confident Thailand will win on appeal.  Thailand certainly has enough money to bond around this award.  Why don’t they do so?  They don’t stand much to lose if, as Khun Abbhisit says, they expect to win on appeal.

If the Thai government wins, they get the money back. If not, Walter Bau gets paid.  While the bond is in place, Walter Bau would agree to be stayed from seizing any other assets from the Thai government or anyone else to enforce the award.  No one is harassed with surprise levies by Walter Bau and the Thai government can go about its business without worrying about getting blind-sided with a boat, plane or bank account getting seized in some foreign jurisdiction.

Since Thailand has not even yet filed an appeal in the second circuit, this risk of getting blind-sided with an asset seizure could go on for years.  This is not good for Thailand.

Perhaps this solution is not possible with the current government.  Perhaps emotions run so hard with the current government that this sort of compromise is not possible.   But a new government will likely come in soon, and I don’t see why it could not agree to this sort of arrangement.  There are plenty of good practical and policy reasons to do so.  It demonstrates that Thailand does honor arbitration awards.  It prevents Walter Bau from seizing other assets that it claims, rightly or wrongly, belong to the Thai government and are not subject to sovereign immunity.

It seems like a sensible way to cut the Gordian knot and bring all of this to an end.

2007: Proposed Amendments to the FBA – What Happened?

Following the 19 September 2006 coup that ousted the government of Thaksin Shinawatra (Thailand’s first non-constitutional change in over 15 years), the military did all of the things that you would expect of coup makers: it canceled upcoming elections, abrogated the Constitution, dissolved Parliament, banned protests and all political activities, suppressed and censored the media, declared martial law, and arrested Cabinet members.  The military also appointed members to a body called the ‘National Legislative Assembly’ (NLA), and the NLA began to consider and enact new ‘legislation’.

For the foreign business community in Thailand, proposed amendments to the Foreign Business Act (FBA) were the most controversial piece of new legislation. These amendments were intended to re-define what constituted an “alien business” under the FBA.  Foreign control would matter even if the company was majority owned by Thais.  From the post on the history on the FBA, you will recall that up until this time, Thai law expressly provided that a Thai majority owned company was not considered an “alien company” – even if it was foreign controlled – unless the Thai shareholders were  “nominees” of foreigners.

To attract investors, previous Thai governments had publicly emphasized this point when trying to explain the FBA to prospective foreign investors.  And in reliance on this very narrow definition of an “alien” in the FBA, 35 years of practice and repeated reassurances by prior Thai governments, foreigners established and controlled tens of thousands of companies, and done so for decades.  But it appeared that all of this was about to change.

The NLA put forward increasingly restrictive proposals.  Foreigners would essentially be forced to divest themselves of businesses they might have established decades ago in Thailand.  The money, time and effort that tens of thousands of foreigners had put into establishing businesses in Thailand – some of them household named businesses that employed thousands – would be subject to forced fire sales to local interests.

This was headline news in the early part of 2007 with front-page articles about pleas by foreign embassies that the NLA please refrain from enacting such legislation.  The EU said such measures would violate Thailand’s obligations under the WTO.

In the heated arguments over these controversial amendments, the then government put forward some rather interesting arguments to justify their proposed amendments to the FBA, such as

  • The new laws would only affect businesses that were already using illegal nominee structures; these businesses were already violating the law, and they therefore had no right to complain.  The response to this was obvious: if these businesses are already using illegal nominee structures, why change the law?
  • Senior officials in the Ministry of Commerce claimed that every “civilized country in the world” had laws restricting foreign ownership similar in breadth to that of Thailand’s FBA, and such laws determined a company’s “nationality” based on voting control.  While there may be some truth to the latter, the former was demonstrably untrue, unless the U.S., Australia and every member of the EU don’t count as civilized countries.  Thailand’s FBA was and is extraordinary in its breadth.

What happened? The foreign business community’s relationship with and confidence in the government was strained.  There was genuine concern – indeed, an expectation – that such changes would be enacted by the NLA before elections were held on 23 December 2007 to replace the appointed NLA with an elected parliament.  But the elections came and went without any change to the FBA.

The foreign business community sighed in relief. But even in the several weeks after those elections while the NLA remained in power before an elected parliament was seated, there was a strong press to make the FBA much more restrictive.

But it never happened.

Although no legislation was enacted, Thailand’s reputation with investors suffered tremendously.  And the foreign business community felt as though they had only gotten through this by the skin of their teeth.

In the next post on the FBA, I will take a look at the current state of the FBA.  Between now and then, perhaps something else.

Let’s Start with the Foreign Business Act

The Foreign Business Act, B.E. 2542 (FBA), is often the first obstacle a prospective foreign investor in Thailand encounters.  And this makes it an excellent place to begin our discussion of Thai law and policy since the FBA illustrates and embodies so many of the difficulties that foreign investors face in Thailand.

The FBA was enacted in 1999 and prohibits “aliens” – a carefully defined term (more about that and the controversy this has created in subsequent posts) – from owning a wide range of businesses absent certain exceptions or issuance of an “alien business license”, which is difficult to obtain in practice.

The FBA does not cover every business.  I mention this because some seem to believe it covers every business owned by a foreigner, and I want to eliminate that misconception from the outset. The FBA is very broad, applying to about 50 types of businesses (depending upon how a “type” of business is defined) divided into three categories (often called “annexes”), but it’s not so broad as to cover all business activities.  Generally speaking, for example, manufacturing is not restricted under the FBA.  But it’s easy to see how the breadth of the FBA has created the misconception that it applies to any business in Thailand owned by a foreigner.

Complicating matters further, the FBA is also not the only law that restricts foreign ownership and participation in Thai companies.  Even if the FBA does not apply, other Thai laws restricting foreign ownership and participation may apply.  We will look at a few examples of this in future posts, but for now let’s start by taking a broad brush look at the three categories (or annexes) of businesses restricted under the FBA and the rationales for these restrictions.

Annex 1

Annex 1 prohibits alien ownership of nine categories of businesses for “special reasons”, and includes such businesses as newspaper publication, ownership of television stations, forestry, rice farming and trading in land.  The FBA does not permit licenses to be issued to foreigners for ownership of businesses listed in annex 1 under any circumstances.

Annex 2

Annex 2 is divided into three chapters.  In theory, an alien can obtain a license to own a business operating in Annex 2 with approval of the Thai Cabinet.  But in practice getting such approval can be very difficult because of the political nature of the approval required.

Chapter 1 is described as “businesses involving national safety or security” and includes the manufacture, sale and maintenance of firearms, armaments and military vehicles.  Domestic land, water and air transportations “including domestic aviation business” also falls within chapter 1 of Annex 2.  Thailand is not unique in restricting foreign participation in these kinds of businesses.

Chapter 2 is described as ‘businesses affecting arts, culture, traditional customs and folk handicrafts” and includes, among other activities, the creation of Thai wood carvings, manufacture of Thai musical instruments.  I have yet to encounter a foreigner who wanted to set up a business in these areas.

Chapter 3 is described as “businesses affecting natural resources or the environment” and includes, among other activities mining and wood processing to make furniture and utensils. Extractive industries are often the subject of controversy and special protection, and Thailand is no exception.  Because extractive industries tend to attract more than their fair share of transparency problems, investment by foreign companies in these sorts of businesses is problematic even without the FBA.

Annex 3

Annex 3 is described as “businesses in which Thai nationals are not yet ready to compete with aliens.”  Annex 3 is probably the most controversial annex and lists 21 categories of restricted business activities, including, among others, accounting service business,  engineering service business, and “other service business, unless specifically exempted by Ministry of Commerce regulations”.  The Ministry of Commerce (“MOC”) has not specifically exempted any service businesses and the MOC interprets the term “services” very broadly.

For example, the MOC takes the position that a company is engaged in a service business if it leases property.  This means, for instance, that if a manufacturing company (which is not otherwise restricted under the FBA) wants to sub-let part of its facilities to reduce its costs (not uncommon in these financially difficult times), that manufacturing company is engaged in a service activity that requires an alien business license.  Similarly, the MOC takes the position that an alien company needs an alien business license to provide a guarantee.  This means that a foreign owned Thai private limited company that is engaged in manufacturing (and not otherwise restricted under the FBA) cannot grant a guaranty in favor of the foreign parent company without first obtaining an alien business license.  This can create some serious headaches when financing or restructuring the financing of a multinational company:  “Sorry Mr. Lender, the subsidiary that owns our largest factory in Southeast Asia can’t provide a guaranty because…”

What is an ‘Alien Business’?  And Why Definitions Matter

Section 4 of the FBA strictly defines an alien juristic person in terms of ownership of share capital.  Significantly, it does not refer in any sense to voting control of stock or management of a company.  An alien is defined as follows:

“Alien” means:

(1)   a non-Thai natural person;

(2)   a juristic person not incorporated in the country;

(3)   a juristic person incorporated in the country and being of the nature as follows:

(a)   a juristic person of which one-half or more of the capital is held by persons under (1) or (2), or one-half or more of the total capital is invested by persons under (1) or (2); or

(b)   a limited partnership or a registered ordinary partnership of which the managing partner or the manager is a person under (1).

(4)  a juristic person incorporated in the country, of which one-half or more of the capital is held by persons under (1), (2) or (3), or a juristic person of which one-half or more of the capital is invested by persons under (1), (2) or (3).

For the purpose of this definition, a limited company’s shares of which the certificates are issued to bearer shall be considered belonging to aliens unless otherwise provided by ministerial regulations.

This definition is similar to the definition used in the FBA’s predecessor, “NEC 281” (we’ll discuss that when we discuss the history of this law, since you can’t understand the FBA without understanding its history).  This precise definition coupled with the broad scope of both the FBA and its predecessor, NEC 281, and the fact that Thai private limited companies can have shares with different voting rights led to the formation of what are sometimes called “preference share structures” – companies where Thai nationals own a majority of share capital, but foreigners have voting control.   Although officials in prior government publicly stated that such structures were legal provided they did not involve nominee shareholding (fodder for a future post), they have become more controversial and practices surrounding the use of such structures have been more problematic over the last several years.  In the next several posts we’ll walk through the history of the FBA, discuss these issues and explain how they have created a problematic regulatory terrain for foreign investors.