During the second half of 2008 Thailand not only began seeing the adverse effects of the global economic crisis, but its economy was also hit by the country's ongoing and unresolved political situation and protests. This included the airport protest, which resulted in Bangkok's two airports being totally shut down for 10 days.
A survey of Thai private business owners found that none of the private business owners thought that M&A was an appropriate mechanism for business growth for the foreseeable future.
The Thai government has introduced a number of economic measures to stimulate the economy in general and to stimulate some aspects of M&A activity. The 30% capital reserve requirement for funds being brought into Thailand (a measure introduced to stop speculation of the Thai Baht) was dropped in March 2008. The Thai government also introduced large reductions on the taxes on real property deals.
The Thai government has had in place for some time a one-presence policy for financial institutions. Under this policy it has encouraged financial institutions in Thailand not to operate or be involved in lots of different financial institutions. It has also overseen some M&A activity. In 2008 the Bank of Nova Scotia took an initial 24.99% in Thailand's eighth largest commercial bank, Thanachart Bank, and then in February 2009 increased that holding to 49%. The Bank of Ayudhya, Thailand's fifth biggest bank, undertook the acquisition of the retail bank and credit-card businesses of AIG Card (Thailand), which were acquired from the American International Group at a value of more than THB1.605 billion ($46.8 billion). This transaction was completed on April 8 2009.
Strategic acquisitions
Thai Oil, a company renowned for its large petrochemical business in Thailand, has said that it hopes to use this global financial downturn to make acquisitions. Thai Oil successfully sold $500 million worth of debentures in April 2009 and said it planned to use those funds to acquire other oil refineries and petrochemical plants. Specific targets have not yet been announced.
M&A activity in Thailand for 2008 declined in terms of deal value, but the number of deals increased. The total number of deals was reported as 316 in 2008, up from 289 deals in 2007; the value of deals dropped to $4.8 billion as opposed to $13.2 billion in 2007. However, the total deal value for 2007 was surprisingly high, and was achieved through a few large domestic transactions and strong activity in the financial services sector.
For 2008, deals in the financial services sector continued to be strong with another solid contribution from the energy sector. Telecommunications companies appear to have stalled investment activities in 2008. This stall in investments is continuing, stemming from unclear policies towards 3G licensing, and companies are looking instead to explore opportunities for partnerships or alliances, possibly resulting in future deals.
Deals in financial services
The Financial Institutions Development Fund (FIDF) entered into a Share Purchase Agreement with CIMB Group (CIMB), the second largest Malaysian bank, to sell its 42.1% stake in Bank Thai (BT), the ninth largest Thai bank, for an estimated THB5.9 billion. CIMB also launched a tender offer for the remaining 57.8% stake of BT shares outstanding. Following the close of the tender offer CIMB holds 92.1% shares in BT. BT has just been renamed CIMB Thai.
Bangkok Commercial Asset Management (BC) and Sukhumvit Asset Management (SA) acquired non-performing loans for an estimated THB3.9 billion from BT's Sathorn Asset Management, an asset management service provider. The distressed asset sale was a condition of the CIMB investment in BT. BC and SA are 100% and 99.9% owned, respectively, by the FIDF.
Siam Commercial Bank sold a tranche of non-performing loans to Alpha Capital Asset Management and Morgan Stanley for an estimated THB8.0 billion, in an attempt to reduce its non-performing loans portfolio to under 5%.
Phatra Insurance and Muang Thai Insurance, two non-life insurance companies partially held by Lamsam family, have merged to compete in the insurance market. The merger has made the new company, Muang Thai Insurance, the seventh largest company in the market, holding a 3% market share with paid-up capital of THB590 million. Its major shareholder include Muangthai Fortis Holding Company, with a 25.2% stake, the Lamsam family with 15.4% and Fortis Insurance International with 10% of the company's shares.
Deals in energy and mining
PTT Chemical acquired a 50% interest in Cognis Oleochemicals, a 50-50 joint venture between Cognis (CG) and Golden Hope Plantations (GH), from CG, for MYR493.2 million. Originally, GH was a wholly owned unit of Synergy Drive.
BP Overseas Development Co., Ltd. (BP), a wholly owned unit of Banpu, acquired the remaining 78.4% interest that it did not already own in Asian American Coal (ACCI), a coal mining company. The consideration was approximately $420 million in cash. BP previously owned 21.6% of AACI, and has been a major shareholder in the company since 2003. The selling shareholders are reportedly mainly private equity funds and US investors.
BC, a wholly owned unit of Asia Thai Mining, acquired all the outstanding common stock of Pan African Mining (PA), a mineral mining company, via a tender offer, for a total value of $132.4 million. The offer was conditioned upon at least 66.6% of PA's shares being tendered. The transaction was effected via a scheme of arrangement, and was subject to regulatory and shareholder approvals, but has now been completed.
Laws and regulations
The laws and regulations that apply to M&A in Thailand can vary according to the particular type of M&A activity that is to be undertaken and also will vary according to the nature of the companies involved in the M&A transaction. M&A activities involving a private limited liability company are generally prescribed under the Civil and Commercial Code of Thailand (the CCC).
M&A activities involving a public company are mainly conducted under the provisions of the Securities and Exchange Act B.E. 2535 (1992) (the SEC Act), as well as the Public Limited Company Act B.E. 2535 (1992) (the PLCA).
Public limited liability companies that are listed on the Stock Exchange of Thailand (SET), must also comply with the rules and regulations of the SET and the Securities Exchange Commission (the SEC) when involved in M&A activities.
Three main types
There are three main types of M&A in Thailand. It should be noted that the term merger is not recognised under Thai law. The correct term under Thai law is amalgamation but here we will use merger, as this is the term that is more readily understood in the international business community and legal fraternity. An amalgamation is defined as being two companies that combine to form a new third company. A merger is the combination of two companies into one. The difference is that in an amalgamation the two companies that are amalgamating cease to exist on the date of completing the amalgamation. In a merger the two merging companies continue to live on after the merger. M&As of two or more companies may be in the form of either (i) an amalgamation or a consolidation; (i) the acquisition of shares in a target company; or (iii) the acquisition of assets of the target company.
Out of these three forms of M&A in Thailand the least popular form is the consolidation of two or more companies into a new company; an amalgamation. This is because of the tax disadvantages that are more fully explained later.
The consideration for shares or assets in the target company may be in the form of cash, shares in the acquiring companies, other securities, or a combination of the above. The Revenue Department has granted a tax exemption, which is subject to certain conditions, if the acquiring entity acquires all the assets of a target company. This is called a whole business acquisition.
Foreign investment restrictions
The provisions of the Land Code provide, in essence, that foreigners may not own land (save in certain exceptional circumstances). The practice of the Land Department is to examine in detail any applications for transfer of ownership of land that involves a transferee company with foreign shareholders holding substantial shares in that transferee company, or where the transferee company includes shareholders holding preference shares.
The Foreign Business Act B.E. 2542 (1999) imposes restrictions on the involvement of foreigners in the business activities specified under the Foreign Business Act. The permitted level of involvement depends on the type of the business being undertaken
In addition to the restrictions under the Foreign Business Act there is other legislation that restricts the levels of foreign ownership and so would have an impact on any proposed merger or acquisition. The provisions of the Financial Institutions Act 2008; Casualty Insurance Act 1992; Life Insurance Act 1992; Thai Vessels Act 1938; Air Navigation Act 1952; and the Telecommunications Enterprises Act 2000 all impose varying limits upon the permitted level of foreign ownership in such businesses.
Competition and anti-monopoly
If a merger or acquisition could create a monopoly or lead to unfair competition then the parties are required to obtain permission from the Trade Competition Board (the Board) under the Trade Competition Act 1999 (the Competition Act). Under the provisions of the Competition Act business operators cannot undertake a merger that may result in a monopoly or unfair competition, without permission from the Board.
Mergers of companies
As we noted above the CCC prescribes the rules that apply to mergers of private companies, and the PLCA, which governs the mergers of public companies that must have shareholder approval. Once two or more companies are merged, the merged company will become a new company, and the merging companies will lose their juristic status. The new company will be entitled to all assets, liabilities, rights, duties and responsibilities of the merging companies. However, the new entity that results from the merger is not allowed to carry forward accumulated losses.
The tax audits required with regards to liquidation of the merged companies are time-consuming, depending upon how long the companies have been in existence and making the tax liabilities uncertain. Therefore, other forms of M&A transactions, such as the acquisition of shares or assets in the target company (or companies), which will not involve tax auditing, are more popular in Thailand.
The CCC does not contain a specific provision that requires a private company or its board of directors to obtain approval from the shareholders prior to any sale or transfer of all, substantially all or a major proportion of the assets of the company. However, in practice, resolutions of the shareholders' meetings of both companies are obtained.
The PLCA contains a specific provision that deals with the sale or transfer of all, or a major part of, the assets of a public company. The provision requires a vote of not less than three-quarters of the total number of votes of shareholders who attend the meeting and have the right to vote.
Under Thai law some assets are not transferable. Non-transferable assets include some governmental concessions and licenses, litigation claims pending in courts, and land with a restriction of transfer. Therefore, special procedures may need to be adopted on a case-by-case basis to overcome this obstacle.
Disposing of assets
A listed public company is also subject to the SET Assets Disposition Rules when disposing of its assets. A listed public company is required to report any incident that affects or is likely to affect the rights and interests of the securities holders of a listed public company. It must also report anything that may influence investment decisions by the general public, particularly the manner in which the assets of the listed company are acquired or disposed of.
Several requirements under the SET's Notification regarding Rules, Procedures, and Disclosure of Information Concerning the Acquisition and Disposition of Assets of Listed Companies (the Notification) are imposed on a listed public company wishing to acquire or dispose of its assets, depending upon the importance of the transaction contemplated. It may be necessary to publish notice of the transaction in a newspaper, file a report with the SET and take other action before the acquisition or disposition can take place.
Acquiring shares
Under Thai law it is relatively simple to undertake an acquisition of shares in a private company. A transfer of shares to an acquirer is valid only if made in writing and signed by the transferor and the transferee, with the signatures certified by at least one witness. Such transfer is ineffective against the company and third persons until the share transfer and the name and address of the transferee are recorded in the Share Register Book of the company.
If the shares in question are to be newly issued shares, the target company must increase its capital and issue the new shares to the acquiring company. However, under the CCC, any newly issued shares can be allocated only to existing shareholders in proportion to their shareholdings, a policy referred to as pre-emptive rights.
Under the PLCA, a transfer of shares to an acquirer shall be valid upon the transferor's endorsement of the share certificate. This is done by stating the name of the transferee and having it signed by both the transferor and the transferee and upon delivery of the share certificate to the transferee. The transfer of shares will be effective against the company upon the company having received a request to register the transfer of the shares but it may be effective against a third party only after the company has registered the transfer of the shares in the Share Register Book.
Public companies requirements
Under the SEC Act, any person who has acquired shares up to the percentage that is significant to the management of a public listed company (trigger point) may be required to make a tender offer to purchase the company's shares and other shares-related securities. Apart from the tender offer requirement, the SEC Act also provides certain provisions and notifications that can help alert target companies, and shareholders of those target companies, to be aware of any attempts to acquire an amount of shares that would allow material voting rights.
The SEC Act requires any person who has acquired or disposed shares up to every 5% of the total number of shares of a business to report his acquisition or disposition to the Office of the Securities and Exchange Commission (the Office of the SEC) within the next business day.
The SEC Act requires any person who has acquired shares up to the trigger point to make a tender offer. The rationale behind this requirement is to allow the existing shareholders to have an opportunity to sell their own securities.
Trigger points
The trigger points for a mandatory tender offer are the acquisition of: (i) 25% of all issued shares or 25% or more of ordinary shares in special circumstances (unless less than 25% of the total voting rights are acquired); (ii) 50% of the total voting rights; and (iii) 75% of the total voting rights.
There are exemptions from having to make a mandatory tender offer provided for under the takeover rules, and it may be possible to apply for a waiver from the Office of the SEC.
A tender offer is also required when any person acquires a significant degree of control of a juristic person with an existing shareholding in a business (immediate holding entity). This can be done either directly or indirectly through his or her shareholding in, or control of, other juristic persons (intermediate entities). So a tender offer is required when a person controls a company through another company that he or she also controls, or through a chain of similar companies.
It is possible to seek a waiver to the mandatory tender offer under the Chain Principle based on certain conditions. These include if there will be no change in control of the business, or if there has been a properly approved whitewash resolution by the affected shareholders.
Taxation
Transfer pricing
Transfer of shares by a juristic person incorporated under Thai law, or a foreign juristic person carrying on business in Thailand and paying tax on net profits, must not be at a price lower than the market value. Otherwise, the tax-assessment officer has the power to assess the price at market value according to Section 65 (4) of the Revenue Code. There are rules for determining the proper market price for shares.
The transfer price of assets must not be lower than their market value. The transfer of assets at a price below their market value should be carried out only if the transferor has justifiable grounds to support such a transfer. If there are no justifiable grounds, the assessment officer has the power to assess the price at market value according to Section 65 (4) of the Revenue Code and as provided under the Revenue Department's Instruction No. Paw. 113/2545.
Amalgamations
Under the provisions of the current tax law, amalgamated companies are not required to pay corporate income tax. The new company is also entitled to take, for tax calculation purposes, the price of the properties according to those shown in the books of the companies being merged until those properties are later disposed of.
Amalgamation of companies is infrequent in Thailand due to potential tax problems and disadvantages. First, the two companies are deemed to be dissolved and would be subject to a tax audit by the Revenue Department. Second, any existing losses recorded in the accounts of the companies being amalgamated cannot be utilised or carried over for use by the new company.
Asset Acquisition
The sale of assets by a corporate entity is normally subject to 30% corporate income tax. In addition, in case of a transfer of movable property, 7% VAT will be imposed unless it is a transfer of the whole business and the transferee is in the 7% VAT system.
However, in cases involving the transfer of immovable property, the transferor will normally have to pay a specific business tax transfer fee, stamp duty and withholding tax. Taxes and transfer fees may be exempted if the transaction is a whole-business acquisition. The Revenue Department reserves the right to assess taxes based on the market price of any asset transferred, even if that asset was transferred at book value.
| Author biographies |
Pradit Sahachaiyunta
International Legal Counsellors Thailand
Pradit received his law degree from Ramkhamhaeng University in 1974, was admitted to the Thai Bar in 1975, received his law degree from University of London in 1983 and received his barrister-at-law from Gray's Inn, London in 1984.
Pradit has been with International Legal Counsellors Thailand since 1985, and is a senior partner and director at the firm. He specialises in corporate restructuring work, joint-ventures, mergers and acquisitions including tender offers under SEC regulations, real estate, finance and banking, securities work, offerings of shares or other securities domestically and internationally, corporate and project financing, and debt restructuring and rehabilitation.
He used to lecture at the National Defence College of Thailand in cooperation with Kasetsart University, at Chulalongkorn University and he is currently lectures only at Assumption University.
Paul Connelly
International Legal Counsellors Thailand
Paul acquired his degree of laws in 1992 from the University of Technology Sydney, Australia and has since obtained postgraduate qualifications. Paul is admitted to practice in the Supreme Court of New South Wales and the High Court of Australia. He is a member of Law Society of New South Wales, Australia.
Paul practiced as a lawyer in Sydney, Australia for eight years before moving to Thailand. He has been working for International Legal Counsellors Thailand as a consultant since March 2001. He was appointed as a partner in June 2005. He provides advice to major publicly listed companies and multi-national corporate clients and his key areas of practice are in the fields of investment and joint ventures in Thailand (including infrastructure projects), mergers and acquisitions, securities, international arbitration, corporate restructuring, business rehabilitation & bankruptcy, finance & banking, competition (anti-trust) law and corporate governance.
Paul is a part-time lecturer in the law faculties of Chulalongkorn University and Assumption University. |