World Law Group member firms recently collaborated on a Global Venture Capital Guide that covers more than 30 jurisdictions on investment approval processes, typical investment sectors and investment structures on Venture Capital deals (and more!).
The guide does not claim to be comprehensive, and laws in this area are quickly evolving. In particular, it does not replace professional and detailed legal advice, as facts and circumstances vary on a case-by-case basis and country-specific regulations may change.
This chapter covers Thailand. View the full guide.
Chandler MHM Limited
1) In your jurisdiction, which sectors do venture capital funds typically invest in?
In recent years, FinTech, E-Commerce Marketplaces, FoodTech and Restaurants have been attractive sectors for venture capital fund (VCF) investments in Thailand.
VCF investments in the HealthTech, MedTech, AgriTech, FoodTech and MARTech sectors in Thailand occur occasionally, but mostly involve VCFs currently engaging in the same line of business. The Government has encouraged firms in Thailand (including start-ups) to participate in these sectors, which are considered to be a strength in Thailand. Therefore, an increase in the number of VCF investments in those sectors may occur in the near future depending on the measures adopted by the Government, including tax incentives.
2) Do venture capital funds require any approvals before investing in your jurisdiction?
There are no specific approval requirements for VCF investments in Thailand. Each VCF needs to comply with general requirements under the laws governing each type of investment or transaction and, for VCFs established in Thailand, the laws governing corporate entities. These requirements are found in, among other regulations, the private company law, trust law, etc. For example, a trust established in Thailand for the purpose of venture capital investment must comply with regulations under the Trust for Transactions in Capital Markets Act B.E. 2550 (2007).
3) Are there any legal limitations to an offshore venture capital fund acquiring control or influencing the business, operations, or governance of an investee entity?
There are no specific restrictions on foreign VCFs acquiring control of or influencing the operations of a Thai private company. However, if the investment by an offshore VCF (including the other non-Thai investors) results in non-Thai nationals holding 50% or more of the share capital of an investee entity, the investee entity is considered a “foreign entity.” Foreign entities/companies are prohibited or restricted from operating or engaging in certain business activities in Thailand pursuant to the Foreign Business Act B.E. 2542 (1999) (FBA) as amended, unless the permission is granted.
Other than the FBA, there are several regulations that impose more restrictive shareholding ratio requirements for foreigners, depending on the business sector and business activity, such as insurance businesses.
4) Would an investor be required to undertake an antitrust analysis prior to investment? When would such a requirement be triggered?
It is recommended that an antitrust analysis is made prior to the investment in a Thai company if the investment is considered a ‘merger’ as defined by the Trade Competition Act B.E. 2560 (2017) and such “merger” could result in the creation of a monopoly, a dominant position or substantially lessened competition as prescribed by the Trade Competition Commission (TCC).
The definition of “merger” under the Trade Competition Act includes an acquisition of all or part of the shares of another business operator for the purpose of controlling the business’s administration policies, administration or management. The share acquisition is deemed “for the purpose of controlling business
administration policies, administration or management” if, in the case of a private company or a non-listed public company, the acquired shares represent more than 50% of the total voting rights of another business operator. Whether (or not) such share acquisition constitutes a monopoly resulting in a business operator gaining a dominant position or results in substantially lessened competition will be determined according to certain criteria set out by the TCC under the relevant sub-regulations under the Trade Competition Act.
5) What are the preferred structures for investment in venture capital deals? What are the primary drivers for each of these structures?
During the past few years, almost all VCF investments have been made through acquiring preference shares of investee entities. The primary drivers for such approach are the preferential rights attached to the preference shares which include ranking in priority against ordinary shares on voting rights, dividend distribution and return of capital upon liquidation.
The Civil and Commercial Code of Thailand (CCC) which governs private companies does not allow for the issuance of convertible preference shares or direct conversion (either voluntary or compulsory) of preference shares into ordinary shares. Such conversions must occur indirectly through mechanisms currently permissible under the CCC (i.e., decreasing the registered capital represented by a VCFs preference shares and then increasing the registered capital by issuing ordinary shares to replace the VCFs preference shares). These mechanisms for conversion require more cooperation among the shareholders, more steps and the process is time consuming. As such, a convertible preference share approach may be less attractive to investors.
In addition to preference share structures, some VCF investments have been implemented through convertible note/debt structures. While the CCC prohibits the settlement of share prices by means of offsetting such share price with debts, an investor may opt to implement such convertible note/debt structures through the combination of loan and share acquisition structures by agreement. This would be as permitted by laws governing the terms and conditions agreed to between the parties for manual debt-to-equity swaps (i.e., the investee entity repays the loan debts and the investor concurrently uses such repaid amounts to reinvest in the investee entity in the form of a capital injection). The convertible note/debt structure is preferable for VCF investments at the seed round or pre-series A round (pending company valuation until the next round of funding).
6) Is there any restriction on rights available to venture capital investors in public companies?
There are no restrictions specified by law that prevent VCF investments in public companies. The laws and regulations for public companies (both listed and not listed companies) apply to all shareholders uniformly whether they are Thai or not.
However, investors should be aware that an acquisition which results in a VCF investor gaining 25% or more of the voting rights in a listed company will result in the investor having an obligation to conduct a mandatory tender offer.
7) What protections are generally available to venture capital investors in your jurisdiction?
Aside from the preferential rights provided by preference shares (e.g., preferential voting rights, higher priority dividend payments and return of the capital investment in the event of liquidation), VCFs can also request other rights or protections under the relevant transaction documents or other contractual agreements (e.g., anti-dilution provisions, non-competition or non-solicitor provisions for founders or majority shareholders, lock-up periods that restrict founders from selling their shares for a certain period after completion of the venture capital transaction). The enforcement of those rights or protections may be subject to certain limitations under the relevant laws governing such matters or at a court’s sole discretion. For example, the validity of non-competition provisions may be limited in terms of geography, business activity and the time period specified in the non-competition clause, as determined appropriate by a Thai court.
VCFs usually request minority shareholders protection when investments result in an acquisition of no more than 15-20% of a company’s voting rights in an investee entity. These protections are generally in the form of ‘reserved matters with respect to board of directors’ and shareholders’ meetings that require an affirmative vote from the VCF or require that the VCF be present at such meetings in order to constitute a quorum. Such reserved matters are permissible under Thai law.
In addition, statutory protections available to minority shareholders include, (a) the right to submit a case to the court in the case of misconduct by the directors; (b) the right to submit a petition to the court for cancelling any resolutions passed at improper general meetings; and (c) the right to subscribe to newly issued shares (preemptive rights) to maintain a proportionate share of the ownership of a company.
8) Is warranty and indemnity insurance common in your jurisdiction? Are there any legal or practical challenges associated with obtaining such insurance?
Traditionally in Thailand, investors generally rely on personal warranties and contractual indemnities of the founders (and, in some cases, the investee entity) to claim damages resulting from a breach of representations and warranties made by the founders and/or the investee entity, and for any nonperformance of the obligations by the founders and/or the investee entity under the transaction documents.
In recent years, investors are increasingly seeking to obtain warranty and indemnity insurance. However, insurers and brokers offering this kind of insurance are rare in Thailand. In addition, the coverage amount of such insurance can affect the cost of personal warranties and may result in lengthy negotiations on the terms of the insurance policy. This, in turn, can result in significant delays in closing the main transaction.
9) What are common exit mechanisms adopted in venture capital transactions, and what, if any, are the risks or challenges associated with such exits?
Exit mechanisms in Thailand are very common and are like those available in typical venture capital transactions in other jurisdictions. Exit mechanisms include an exit through an initial public offering (IPO), or through a put option requiring the founders/existing shareholders to buy the investors’ shares in the case of deadlock or default or non-performance by the founders or a start-up company.
If the founders are unable to purchase the investors’ shares back for any reason, the investors may request that the founders find a third party to purchase the investors’ shares or they may sell their shares to any third-party buyer without any restriction (e.g., sale restrictions to company’s competitors, rights of first refusal, or tag-along rights). In addition, investors may require the founders, by contractual obligations, to indemnify the investors for the difference in sale price if such amounts paid by the third-party buyer is lower than the put option price, or any other agreed amount that would have been paid by the founders if the founders had honored the terms under the transaction documents.
The risk or challenge associated with the exit mechanisms discussed above include, in the case of an IPO, the investee entity’s post-transaction performance being poor and other qualifications for the IPO not being met (further discussion below). We have not encountered any challenges in exit mechanisms through put options requiring the founders to buy the investor shares or sales of shares to third-party purchasers. Note that there is no Thai Supreme Court precedent on the enforcement of put options against the founders.
Note that a private company in Thailand is not permitted to engage in share buybacks.
10) Do investors typically opt for a public market exit via an IPO? Are there any specific public market challenges that need to be addressed?
Exits via IPOs have never occurred in Thailand, although they are an available exit mechanism. The Stock Exchange of Thailand (SET) has started a platform to support start-ups in the early stages of operation and to facilitate their entry into the Market for Alternative Investments (MAl).
The SET requires companies to manage their finances with transparency. Start-ups that are not properly established and that do not adhere to the requirements as stipulated by the SET, may experience significant challenges entering the market.
Please see the listing criteria as below.
Chandler MHM Limited
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The objective of this publication is to serve as a Q&A-style multi-jurisdictional guide to venture capital law in countries where WLG member firms have offices. The guide intends to provide a high level overview of the venture capital market, including key sectors, preferred investment structures, regulatory approval requirements, limitations on acquisition of control in portfolio companies, restrictions on investment, investor protection, and exits; and hopes to provide readers the benefit of the shared global knowledge and local insights among the WLG member firms.