The practice of using nominee shareholders in incorporating companies in Thailand has been brought to light after the head of the military junta proposed in December to change the FBA to weed out companies that are incorporated locally but are actually controlled by their foreign investors. What is a nominee shareholder? Is the practice legal or illegal?
Thailand’s foreign investment sector has experienced a significant growth throughout the decades, thanks to the Foreign Businesses Act. Spurred on by the investment-friendly business landscape in Thailand, foreign investors have put in a significant amount of contribution to the Thai economy by setting up their businesses in the country. It is a win-win situation as the local government provides incentives and exemptions to certain businesses, especially those that are owned by nationals whose countries have a business treaty with Thailand.
Under the rules of the FBA, foreign businessmen can only set up shop in the country if at least 50% of the shares incorporated belong to local Thai shareholders. Theoretically, this is necessary in order for a company owned by a foreign national to be able to operate locally – it can have access to markets that are normally closed to foreign-owned companies, restrictions that the FBA determines. It is, on paper, a local company because the majority of the shares are owned by local Thais.
In this context, nominee shareholders are local Thais that legally sign documents that they have shares in stock in the company. However, this is all on paper. The shares are only held in trust, and are still owned and controlled by the foreigner because he or she provided the funds to convert the shares to working capital.
A shareholder becomes a nominee shareholder when he signs stocks to his name on behalf of a foreign national. The foreign national, usually the owner of the company, technically owns these shares and has the requisite voting rights within the entity. This system will, theoretically, allow foreigners to wholly control a business although it is recognized as a local company and majority-owned by locals under Thai law.
One effect to this approach is that the company, because it is majority owned by local Thais, at least on paper, it is able to work through the market restrictions that the FBA has imposed on foreign-owned companies.
Despite its apparent benefits, the actual practice of using nominee shareholders to incorporate a theoretically local company is illegal under the foreign business act. If caught, both the nominee shareholder and the foreign owner of the company will face fines or even imprisonment. It is also risky because, as minority shareholder, the foreign investor could lose control over the management of the company if the nominee shareholders decide to attempt a takeover.
If a foreign investor plans to incorporate a business in Thailand, it is best consult a legal adviser to avoid mistakes, like using nominee shareholders, which could result to problems with the law that could waste an otherwise good investment in the country.