PKF Thailand

Amendment to the Thai Civil and Commercial Code to Promote Start-Up Enterprises

Who to contact
Thanyaluck Thongrompo
View profile
Thanyaluck Thongrompo
Home News & Events Articles Amendment to the Thai Civil and Commercial Code to Promote Start-Up Enterprises

Amendment to the Thai Civil and Commercial Code to Promote Start-Up Enterprises

Ever since the Cabinet's approval granted on October 17, 2017, the Act amending the Thai Civil and Commercial Code ("Act") is still pending consideration by the Office of the Council of State. Despite this prolonged legislative process, the draft gives us a glimpse of a striking revolution of the Thai Civil and Commercial Code ("TCCC") provisions, which have been enforced ever since its enactment in 1992. Having been initiated by the Office of Small and Medium Enterprises Promotion ("OSMEP"), the primary intent of the Act is to promote start-up enterprises in Thailand, and this draft could be another critical step toward the modernization of Thailand's corporate regulatory scheme and the essential incentives to boost the investment section.

In the light of legal changes under the proposed draft, this article aims to highlight key points of the Act, provide a comparison to the existing provisions under the TCCC, and further analysis.

Key Points of the Act

With the belief to adjust the law to keep up with the continuously evolving business regime, the Act has proposed to amend the following legal restrictions under the TCCC.

  • Prohibition to Debt-to-Equity Conversion

In Thailand, only public limited companies are allowed to execute debt to equity conversion in accordance with rules and conditions under the relating Ministerial Regulation. From many past cases, the debt-to-equity conversion has profoundly benefited many public companies to restructure their indebtedness during their crisis. On the contrary, according to Section 1119 of the TCCC, the price of shares can only be paid by either cash, asset, or labor, and shareholders cannot avail themselves to set off any debt against the share payment. With an analyzed interpretation, the conversion of debt to shares is therefore prohibited for a limited company. Being restricted by this provision, many limited companies have sought a solution by increasing capital and provide the money from the payment of newly-issued shares to their creditors instead of transferring the newly-issued shares directly to them.

With this impracticality, the Act proposes more flexibility for business operation by abolishing this strict provision and allowing the execution of the debt-to-equity conversion transaction, which shall be conductible under two requirements: (i) the plan shall be approved by a special resolution of the shareholders' meeting, and (ii) details of the transaction shall be subjected to conditions stipulated under the Ministerial Regulations to be further enacted.

  • Prohibition to Amend Rights under Preference Shares

As Section 1142 of the TCCC strictly prohibits amendments to rights under preference shares of a limited company, it is criticized as an unnecessary hindrance to the business operation that is highly considered as internal matters of the company. From the Office of the Council of State's interpretation, the prohibition in this regard extends to the conversion of preference shares to ordinary shares. In practice, a limited company that wishes to amend this particular right has to decrease its capital and then issue new shares according to the right amendment they planned.

Concerning this complication, the drafted Act suggests that the amendment of rights of preference shares should now be permissible by a special resolution of the shareholders' meeting with not less than three-fourths of the votes from (i) holders of ordinary shares and holders of preference shares whose rights will not be changed by the agenda and (ii) holders of preference shares whose rights will be changed by the agenda. Further, for the conversion of preference shares to ordinary shares, the Act specifies that this transaction shall only be conductible if such conversion is permitted under the Articles of Association of the company.

This amendment of the TCCC will reduce unnecessary legal imposition and create a more inducing environment for investors.

  • Prohibition for a Limited Company to Hold its Shares

If the vision of the company's management and that of the shareholders no longer harmonize, shareholders in public limited companies can dispose of their shares to the public or the company can alternatively purchase shares back from dissenting shareholders. In other events, this repurchase of shares also enables the company to manage its liquidity or cope with an economic downturn in the stock market. In contrast, shareholders in limited companies cannot sell their shares to the public, and it may not be sufficiently convenient to dispose of their shares. Considering this further, the prohibitions for a limited company to hold its own shares under Section 1143 of the TCCC is essentially problematic for dissenting shareholders who would like to get out of the deal. To tackle this issue, the Act allows the company to purchase the shares back from dissenting shareholders. Under which, shares held by the company shall not be counted for the resolution of shareholders' meeting, nor shall they be entitled to receive any dividend. The Act also obliges the company to dispose of those shares within a limited time or under the method prescribed by the Ministerial Regulation to be later enacted.

  • Hierarchy Distribution of the Newly Issued Shares

Section 1122 of the TCCC strictly provides that the newly issued shares shall be initially offered to the existing shareholders of the company. This rigidity disables the promotion of a Vesting Plan, an Employee Stock Option Plan ("ESOP"), and a debt-to-equity conversion plan. Considering this outdated and impractical restriction, the Act proposes the amendment to allow companies to offer shares to employees, directors, and creditors under a debt-to-equity conversion plan to provide equity interests for the company's employees to be compatible with the introduction of the debt conversion plan.

Concluding Remarks

From the Act, one could observe that many amendments concern the enhancement of flexibility in business operations and the emphasis on the impracticality of the existing laws in the TCCC to the extent of rights entitled to public limited companies under the Public Limited Company Act. This current draft of the Act tremendously impacts the business practices of limited companies of all sizes. Some proposals, such as the amendment to rights under the preference shares, are approved without much debating  of opinions. Notwithstanding that, the abolishment of certain traditional provisions may be too appalling for those legislators and regulators to accept as some provisions offer protection against bankruptcy of limited companies to third parties, such as the prohibition to set-off the debt against the share payment under the TCCC. With the reduction of such protection, it is highly skeptical whether the Act will introduce adverse impacts rather than contribute the greater good. Altogether, these might potentially serve as factors to drag out the progress, where legislative bodies will finally give the green light to the proposed draft.

Ultimately, this draft of the Act is certainly not the final one, and it might have to undergo a lot of further adjustments and revisions from the Office of the Council of State. Regardless of such cause, the integral intent of this drafted piece of legislation promises us less legal restrictions and more alternatives to efficiently manage limited companies, enhanced allure for more investments and gives a positive prospect to the future of small enterprises. As of now, we must monitor this essential legal change, for it may introduce us to further developments in Thailand's corporate regulatory regime.

Citation:
Photo by Foundry from Pixabay

See more Articles items