Controlling a Thai Company Through Preference Shares: How It Works

Why a Foreigner Needs Control With Less Than a 50% Stake

A foreigner cannot directly own land in Thailand, and in a condominium the foreign quota is capped at 49% of the total floor area of the building (Condominium Act, B.E. 2522). As a result, purchasing a house with land or a commercial property is often structured through a Thai limited company. Under the law, a foreigner may hold no more than 49% of the shares in such a company - otherwise the company is classified as 'foreign' under the Foreign Business Act (B.E. 2542) and loses the right to own land.

This creates a dilemma: how can one hold less than half of the shares while still exercising real control over the company and remaining independent of the wishes of Thai partners? One legitimate instrument is preference shares with enhanced voting rights. These shares allow two concepts to be separated: share in capital and share of votes.

Ordinary Shares and Preference Shares: The Difference

A Thai company must be registered with a minimum of three promoters, and throughout its existence it must have no fewer than three shareholders. A shareholder's liability is limited to the unpaid portion of their shares: once shares are fully paid up, the shareholder bears no further personal liability for the company's debts.

All shares fall into two classes:

• Ordinary shares - the classic 'one share, one vote' model. Dividends are distributed on fully paid-up shares; on liquidation, ordinary shareholders receive the return of their investment last, after debts have been settled and payments made to preference shareholders.
• Preference shares - they carry 'special' rights. Their holder is often described as 'half shareholder, half creditor': on liquidation, the preference shareholder is repaid before ordinary shareholders, and dividends may be paid regardless of whether the shares are fully paid up.

The key point for purposes of control is that the voting rights attached to preference shares are determined by the articles of association. A company may assign such a share not one vote but, for example, ten votes. It is precisely this feature that can shift the balance of power.

How This Delivers Control of the Company

The logic is straightforward: the foreigner holds a minority stake in the capital (no more than 49%), but through preference shares carrying a higher number of votes, obtains a voting majority. This makes it possible to pass the resolutions needed at a shareholders' meeting - appointing directors, approving transactions, and managing assets.

Numerical example. Registered capital: 2,000,000 baht, divided into 20,000 shares at 100 baht each, on a 'one share, one vote' basis. Mr. A holds 5,000 shares and Mr. B holds 12,000. Formally, B is in a stronger position. If the company additionally issues 2,000 preference shares carrying 10 votes each and transfers them to Mr. A, he will have 5,000 votes from ordinary shares plus 20,000 from preference shares - a total of 25,000 against B's 12,000. A's capital stake remains a minority interest, yet control over decisions rests with him.

Legal Framework and Procedure

There is an important restriction that is frequently overlooked. The law does not permit already-issued ordinary shares to be directly 'converted' into preference shares in an ordinary limited company - this is governed by the Civil and Commercial Code (CCC). Only a public company under the Public Company Limited Act (B.E. 2535) may freely change share classes.

The desired outcome is therefore achieved through a change in capital. There are two routes:

1. Increasing the registered capital. This is the most common approach. The company issues new preference shares in accordance with the rules of the Ministry of Commerce. Registration can be completed quickly, within a single day. The drawback is that the capital increase affects the balance sheet and may have tax implications.
2. Reducing capital, then increasing it. The capital may be reduced (by up to one quarter), proportionally decreasing the number of ordinary shares, and then restored to its previous level by issuing preference shares in place of some of the ordinary shares. This route takes longer and costs more - approximately 3 to 4 months - and creditors may object to the reduction.

In both cases, the company's articles of association must expressly permit a change in capital. If no such provision exists, amendments to the articles must first be filed with the Ministry of Commerce.

An Important Note on the Regulatory Direction

The authorities are intensifying their efforts against nominee Thai shareholder structures, where Thai nationals hold shares only formally while the real funds and control belong to a foreigner. As of today, there is no outright prohibition on the use of preference shares and enhanced voting rights by foreigners, but the issue is periodically discussed as a potential criterion for determining whether a company is 'foreign.' Any structure should be built so that the Thai partners are genuine participants rather than nominees.

A separate point worth noting concerns the foreign exchange aspect: bringing funds into Thailand for a purchase via an FET form (formerly Tor.Tor.3) from a bank is relevant primarily when a foreigner purchases a condominium unit directly, as it confirms the legal remittance of foreign currency.

What to Check and What to Watch Out For

• The company's articles of association - whether they permit a change in capital and the issuance of preference shares; if not, amending the articles is the first step.
• The specific rights of the preference shares - the number of votes, the dividend terms, and the liquidation priority must all be clearly set out.
• The ratio of capital stake to voting share - the foreign stake must not exceed 49%.
• The genuineness of the Thai shareholders - avoid nominee arrangements; be prepared to document the source of their funds.
• Choice of route - increasing capital is faster; reducing it takes longer and carries more risk due to potential creditor objections; consider the tax and balance sheet consequences.
• Professional assistance - entrust the registration of changes with the Ministry of Commerce and the drafting of the constitutional documents to a local lawyer.