JOINT VENTURE & THAI BUSINESS LAW

JOINT VENTURE AGREEMENTS IN THAILAND

MERGING 'KNOW-WHO' AND 'KNOW-HOW'

In contrast to many other Asian countries, especially China, a Joint Venture with a foreign company in Thailand often provides a real win-win situation. The Thai partner contributes his essential networking on the market, the Western partner his unique technology and products. Sanet Legal & Accountancy advises on the Business Law in Thailand and the entrepreneurial structure of the Joint Venture.

THE ADVANTAGES OF A JOINT VENTURE IN THALAND

1. "KNOW-WHO" is more crucial than "KNOW-HOW"

This principle reflects the greatest advantage of a Joint Venture in Thailand: with the right partner, market entry in Thailand can be achieved quickly and securely. Many key industries are economically dominated by a few major families. Here, too, it is essential to know who you are dealing with and with whom you can be connected through existing contacts based on a recommendation. This is one of the core functions of a good Joint Venture partner.

Even more than in other Southeast Asian countries, business in Thailand depends on the personal appreciation of the partners for one another. It is only after getting to know each other, perhaps spending some leisure time together, that one considers whether one would like to do business with the other side.

Once the personal aspect has been clarified, then you are ready to discuss the product, its quality, the market opportunities, prices and such like. If the personal side has not been clarified, you might as well save yourself the time. There will be no business deal.

2. Thai buy from Thai

“Thai khai Thai” loosely translated means: ‘Thai buy from Thai’. This phrase, which every businessman in Thailand has heard from time to time, means nothing other than that Thai businessmen prefer to conclude their contracts with their countrymen.

They are not against foreigners: it is considered a sign of respect if the Western manager joins the Thai salesperson in negotiating or closing a deal. However, they prefer to sign with a compatriot. This underlines their importance, builds trust and gives them the feeling that they have done a favor for the other person. Here, too, the Joint Venture with foreign company is, of course, an option that should always be considered for business consulting in Thailand.

3. Loyalty is "WIN-WIN"

Thai Joint Venture partners are loyal. This is in contrast to the painful experiences many companies have experienced with joint ventures in China. While Chinese joint venture partners very quickly assume that they will be able to adapt foreign technology immediately and use it for their own production, Thai businesspeople think differently.

Thai believe in WIN-WIN. They know that a close relationship with a foreign technology leader enables them to constantly provide their own customers in the market with the latest technology. It would be too much for most Thai companies to develop such technology on their own. On the other hand, Thai entrepreneurs generally have a dense network of relationships in various industries. This is the strength that they bring to a Joint Venture Without great products, the best network is useless.

4. Bank Financing

WITHOUT A GOOD NETWORK, EVEN THE BEST PRODUCTS ARE USELESS.
REALIZING THIS CREATES LOYALTY.

Obtaining bank financing in Thailand is no easy matter for foreign companies, especially SMEs. Thai banks are very good and highly independent. Here, too, is a natural strength of the Joint Venture: the banks know their partner, their business and their business culture. This makes it easier to finance an investment.

5. No Legal Restrictions Under Foreign Business Law

To protect the country’s own traders and service providers, Thailand’s Foreign Business Act essentially bans foreigners from trading or providing technical advisory or other services. Although these restrictions can be avoided through substantial Direct Investment, a Joint Venture might be a better option on many occasions.

As a partner in a Thai majority Joint Venture, you are not subject to any restrictions. The Joint Venture Thailand has the same privileges as any other Thai company, if the majority of the shares are in Thai ownership (yet, read below about preferred shares in Thailand)

6. Special Incentive by the Thai Board of Investment for Automotive Joint Ventures

Furthermore, since the end of 2024, the Thai BOI has been promoting Thai-majority Joint Ventures particularly for the automotive industry through additional tax incentives. The experts in corporate law Thailand at Sanet Legal & Accountancy will be happy to inform you personally about this at any time.

10 KEY PRINCIPLES OF JOINT VENTURE IN THAILAND

Not only, but especially Joint Ventures with a Thai majority require thorough entrepreneurial and legal preparation. Therefore, these 10 principles apply to any type of a Thai JV arrangement. In a Thai-majority Joint Venture, however, they are an essential element of risk management.

1. Day-to-day Business Stays with the Thai Partner

It is more a case of creating further risk, rather than good risk management, if a foreign partner wants to get involved in the day-to-day business of the Joint Venture. If you think you have a say in the purchase of every pencil, you are obstructing the Joint Venture and creating frustration.

The day-to-day business belongs in the hands of the local partner. The protection of one’s own interests should concentrate on the essential points of management.

2. Cultural due Diligence

Hardly any company fails to carry out due diligence to its partner before signing a Joint Venture agreement. However, this “compulsory exercise” is usually insufficient. In principle, you only learn about the formal legal and official financial situation of the partner.

In Thailand, for example, one hears the humorous but quite realistic saying that a good Thai entrepreneur will have four balance sheets in his pocket: one balance sheet for the revenue department, one balance sheet for the banks, one balance sheet for his shareholders and another balance sheet in his other pocket, from which he can see where he really stands. More important is cultural due diligence and few Western companies think about this.

This is where most of the problems lie when it comes to subsequent cooperation:

• What is the company’s leadership culture like? It is not unusual in Thailand to find “One-man companies” with 200 employees. This means that the boss decides in all and everything. The employees follow instructions without questioning the purpose and content of them.

• Are there communication channels available that can be used later? How competent is the middle management and how good are their English skills, for example? Do employees participate actively and frankly in discussions? Or do “the crumbs keep quiet when the cake talks”?

• It is all too easy that the management representative of the western partner suddenly finds himself without a contact person in the JV when he wishes to find out about financial trends, sales, logistics or similar topics. The owner is the sole point of contact. He has full control over the communication channels.

• How high is employee turnover and what is the work climate like? Poor social benefits and a high turnover rate will certainly hinder the joint venture’s market success at a later stage.

• Are there shareholders influencing the negotiating partner and formal boss? A “gray eminence” in the background often remains hidden even during the legal due diligence.

• What is the company’s reputation in the market? An anonymized survey of the JV partner’s market, customers and competitors will reveal more than any review of the accounts.

• How do employees deal with guests? All it takes is a first impression during a visit. Are employees open and friendly when they encounter guests? For example, are guests offered a coffee at the reception desk? Or do employees walk past guests without even saying hello?

3. Check Other Connections of the Partner

A significant risk is that the partner has family and/or business connections with other companies or major clients. Very often, Sanet Asian Advisors' experts have discovered in restructuring projects that such connections have been used to shift corporate income to other investments or even to personally related clients. Interesting is here the case studies "Fraud Detection"

4. Check the Partner's Interest

Put yourself in the partner’s shoes. What is his interest in the partnership and why is he entering into a Joint Venture Agreement with you? No Thai partner enters into a relationship that is not governed by the question “Is it good for me”? This might be understandable. But what they often mean is “Is it only good for me?” A thorough examination of the partner’s motives and interests protects against surprises later on.

Of course, the legitimate interests of your joint venture partner should be taken into account. But they may not always transparently be obvious. They need to be skillfully assessed.

5. Appointment of the Management Team

It is perfectly understandable that a majority partner will expect the position of a Managing Director in the company. However, the stronger the minority shareholding and the higher the financial commitment, the greater his influence on the management should be. The minority partner should be granted a clear right of occupation, not just a right of nomination, for the position in management that he deems necessary to control the business policy.

As a rule, this will be a Finance Director. In addition, an “independent director” from the foreign partner should have the same signing rights as the minority partner or act jointly with the minority partner on important decisions.

You should pay particular attention to this:

• Even if you are aiming to fill these positions by mutual agreement, you must nevertheless ensure that you have a clear right to select and appoint the holder of that position. In case of doubt, you must ensure that the partner does not select “your trusted person” himself and keep him under his control.

• The director appointed in this manner should have a direct reporting line to the Western partner and be involved in key decisions.

• However, the local Joint Venture partner should always be in charge of one position: the active, external Sales Management should lie with the Thai partner. This follows from the fact that “Thai buy from Thai”.

• And one more thing: the business member you trust must, of course, always be based locally. A “remote” management of a business hardly works out.

6. Presence is Crucial, even with Minority Shareholding

If you are only looking for a limited participation in a minority joint venture and you do not want to appoint an active member of the management board, then you should weigh up this risk critically. Perhaps a simple distribution agreement with exclusivity on both sides is better.

It is tempting for an operative partner to seek and secure its own advantage in a Joint Venture if, for example, the partner only visits once a year to review the annual results, sets targets and takes home his dividend. Who is going to be fair in the distribution of profits if he feels that the work is his alone?

There is a great temptation to organize your own “profit distribution” outside of the official annual financial statements. We have also documented our experience of this in a case study entitled "New Silk".

7. Planning and Reporting

In your Joint Venture Agreement, make sure that business and budget planning as well as reporting are subject to an annual agreement. There should also be an agreed reporting procedure that includes, for example, the most important company financial results on a monthly basis and a quarterly report on sales. It is of little use to complain about poor results at the end of the year. Regular monitoring is the better approach.

8. Distribution Agreement and Non-Competition Clause

If the Joint Venture deals with the distribution of the minority partner’s products through the Joint Venture, a separate distribution agreement should be concluded. Such a separation ensures that in the event of a dispute, for example about the dissolution of the JV, your own distribution activities become impossible until a decision is reached.

Caution should be exercised when agreeing competition clauses in the partnership agreement. This requires expert advice on a case-by-case basis. Sanet Legal & Accountancy Ltd., the experts for corporate law Thailand and accounting Thailand, are ready to help with their extensive business experience. They also advise on company formation and corporate structure.

9. Hands off "Good Friends" as nominees

By all means, avoid “Joint Ventures” with partners who have no legitimate economic interest as an ostensible way out of the restrictions under Thai Foreign Business Law. The use of personal acquaintances, relatives or other “fake” joint venture partners can be costly. Not only is the business at risk if the friendship comes to an unpleasant end.

So-called “nominees”, i.e. persons who facilitate foreign companies to carry out forbidden business for foreigners in Thailand, are subject to severe sanctions. These are not only severe fines. Prison sentences for all those involved in this circumvention – including the management of the foreign partner – cannot be ruled out. Serious joint venture partners can find reputable law firms or consultants in Thailand.

10. Risk Management on Joint Venture Agreements Thailand

Here is a summary of contractual clauses that a joint venture partner should always incorporate. As usual, the wording and content of each clause depends on the individual business case. The lawyers at Sanet Legal & Accountancy can provide expert advice on this.

Make sure you include these clauses:

• Qualified majorities for essential shareholder resolutions

• Appointment and dismissal of directors

• Authorized companies objectives

• Representation of the company

• Bank related powers of attorney

• Reporting rules

• Recruitment of key personnel (definition by position or salary)

• Right to issue Bylaws for the Board of Directors

• Termination, redemption and settlement values of shares

• Sale of shares, pre-emptive rights

• Inheritance regulations (for natural persons)

• Capital increases and shareholder loans

• Arbitration clause

• Other clauses depending on the individual case

SPECIAL SHAREHOLDING RULES AND PREFERRED SHARES

Balancing of interests by a third partner

Preferred Shares

In certain specific situations, the interests of the Thai and foreign partners involved can also be protected by including a third-party financial or strategic partner.

For example, a structure with 51:49 Thai majority shares can be replaced by a 48:4:48 distribution of company shares. The investor acquiring 4% of the shares should enjoy the trust of both Joint Venture partners and be a Thai natural or legal person. This ensures that the joint venture remains a Thai-majority company. The restrictions of foreigner law do not apply. Special support from the Board of Investment is possible.

The Sanet Group provides support in the search for a neutral investor and in drafting suitable contracts.

Thai law offers the option of issuing so-called “preferred shares”. There are the following variations:

– Preferred shares may entitle the holder to a higher dividends compared to regular shares. This may be of interest, if the minority shareholder financed the joint business at a substantially higher degree.

– Preferred shares can be issued with a higher voting right compared to regular shares. This means that, for example, 30% of the shares may grant 60% of the voting rights in the shareholders’ meeting.

What do the preferred shares mean for your joint venture in practice?

In practice, this means that a Joint Venture is considered a Thai majority Joint Venture because more than 50% of the shares are held by a Thai partner. In the shareholders’ meeting, however, the minority shareholder has a higher voting right, so that, depending on the JV agreement certain decisions may be dominated by the minority shareholder.

Please be aware: As a rule, the decision about Preferred Shares must generally be made at the time the company is established. It is not possible to convert regular shares into preference shares at a later date.