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posted 9 years ago
The system of governance and
the maintenance of balance within the management structure of a company
constitute important mechanisms to successfully meet business objectives and to
generate value on behalf of stakeholders. Such mechanisms are accomplished by
specifying clearly in writing, in various different forms, the authority to
direct the company on the level of management policy in the company
regulations, the joint-venture agreement, or the shareholders’ agreement. This
specification of policy includes matters related to finance, operations,
management, and the overall direction of work in order that it be compliant
with the law and regulations both internal and external.
Also, although the
aforementioned mechanisms may be specified to the fullest extent, they will not
permit one with authority over a company to be able to dictate policies
according to personal desire, especially as it relates to appointment of key
management, policies regarding issuance of dividends, or the increase of the
capitalization of the company in order to maximize absolute control, i.e. in
order to dilute shares.
Having gained experience in
providing legal advice to private companies and joint-ventures involving a
Thai-based partner, it has become apparent that disputes in business operations
tend arise from the appointment of key management who are not favored by the
other business partner. Such situations tend to quickly escalate into numerous
and continuous lawsuits aimed at the cancellation of shareholders’ resolutions
and compensation for damages resulting from the breach of investment agreements
or shareholders’ agreements wherein the amount in dispute may be several
billion Thai baht. If both parties hold equal amounts of shares or are in some
other way unable to cast a decisive vote in adopting shareholders’ resolutions,
then such a situation results in operational deadlock.
Furthermore, such a situation
leads to both sides using strategies and methods recommended by legal counsel
in order to obtain control over the business of the company; whether it be by
summoning shareholders’ meetings in distant locations or a foreign country,
ordering company personnel to spend an inordinate amount of time verifying
certain shareholders before they may be allowed to enter the meeting room,
locking elevators or other equipment in order to obstruct shareholders from
attending the meeting, or colluding with postal workers to delay the delivery
of official shareholders’ general meeting invitations, or any actions aimed at
obtaining a court judgment modifying company regulations in one’s favor as it
relates to the adoption of shareholders’ resolutions.
However, regarding the
adoption of company resolutions by unlawful means, the law that Thailand
currently has in place is still not able to protect shareholders in a timely
manner. Specifically, temporary preliminary injunctions or temporary emergency
injunctions to halt enforcement of such company resolutions before the matter
is actually considered by a court have little chance to succeed. The reason is
that courts normally conclude that if a temporary preliminary injunction or
emergency injunction were issued in such cases, such an injunction would
essentially have the effect of allowing the party requesting the injunction to
win on the merits of the case; therefore, there are unlikely valid grounds for
the issuance of such injunctions.
Furthermore, at this time, the
law only provides that shareholders or directors alone have the right to file a
legal proceeding to cancel a resolution within one month from the adoption of
the resolution by a general meeting of the shareholders. The law does not
provide in any way whatsoever that the violation of company regulations or any
related laws would result in the general meeting or any resolution adopted by
it to be considered void.
The most important point to be
considered is the registration with Company Registrar of a resolution adopted
unlawfully by a general meeting of the shareholders. Where there is a claim by
one party that the registration of a certain resolution is unlawful, the
Company Registrar will register the resolution nevertheless, because the
registrar is not able to determine the issue of whether the general meeting
that adopted resolution was held in good-faith. The authority to determine this
issue lies with the Court. Therefore, if there is no plea to cancel the
resolution or such a plea is made too late, the Court may order that the
proceeding or the complaint be dismissed. Therefore, a resolution adopted
unlawfully by the general meeting would still be considered valid and
enforceable.
Furthermore, Thai courts have
established a norm whereby the cancellation of any company resolutions have
effect starting from the date that a court passes judgment. In such cases, the
unlawful resolution may have been enforced for several years before there is a
court judgment invalidating it. Therefore, such a circumstance has created a
legal loophole whereby any actions, deriving authority from unlawful
resolutions, that are taken up until the time the resolutions are finally
invalidated by a court may nevertheless be held to be lawful actions, except
only in those cases where the meeting was held in a manner that was illegal in
itself or where it could not be reasonable to consider that the meeting was
that of the company.
Therefore, the performance of
due diligence and the structuring of company regulations, including putting in
place a management strategy related to corporate governance specifically with
regards to investment in a Thai-based company is an important issue that will
greatly affect the risk of disputes and the governance of such a company well
into the future.
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Pisut Rakwong, MCIArb was an extensive experience litigation and
arbitration lawyer in Thailand for 16 years. He is the Founder and
Managing Partner of Pisut & Partners, an international law firm based
in Bangkok, Thailand. He can be reached at pisut@pisutandpartners.com
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