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Andi Refandi
Andi serves as a Senior Account Executive on Emerhub’s global team.
In Thailand, companies issue two types of shares: ordinary and preferential. Choosing between these share types can be strategic for foreign companies seeking control in restricted industries. Understanding these differences is also crucial for tailoring ownership structures to comply with corporate regulations and attract diverse investors.
In this article, we will cover the difference between ordinary shares and preferential shares. We will also outline how to ensure correct representation in Articles of Association as a requirement for establishing a company.
Understanding Common Shareholding Structures in Thailand
What are Ordinary Shares in Thailand?
Ordinary shares, also known as common shares, are the standard form of ownership in Thai companies. They represent a fraction of the company’s ownership and are typically issued to founders or investors seeking active involvement in the company’s operations. Here are key features of ordinary shares:
- Ordinary shareholders have the right to attend general meetings and exercise one vote per share. This allows them to influence key decisions such as the appointment of directors and approval of major transactions.
- While not guaranteed, ordinary shareholders are entitled to receive dividends if the company distributes profits. Dividends are paid out in proportion to the number of shares held, but only after preferred shareholders have been paid.
- In the event of company liquidation, ordinary shareholders have a claim on the company’s assets after all debts and preferred shares have been settled. This means they are last in line to receive any remaining assets.
Ordinary shares are most advantageous for those seeking capital appreciation and control over company decisions. Thanks to voting rights, shareholders can actively participate in shaping the company’s future. Ordinary shareholders also get financial benefit in any increase in the company’s value.
What Does Thailand Consider as Preferential Shares?
Preferential shares, also known as preferred or preference shares, are a type of share that offers priority rights over ordinary shares. These shares are often used by investors seeking predictable income and limited involvement in company decisions. Here are key features of preferential shares in Thailand:
- Preference shareholders receive fixed dividends before ordinary shareholders. This provides a predictable income stream, which is attractive to income-oriented investors.
- Typically, preference shares do not carry voting rights unless specified otherwise in the company’s articles of association. However, their voting rights can vary and may be the same as, less than, or greater than those of ordinary shareholders.
- In the event of company dissolution, preference shareholders have priority over ordinary shareholders in receiving their investment back after creditors have been paid.
Preference shares are often used by companies to attract investors who prioritize stable income over control or capital appreciation. They are also used in structures where foreign investors need to navigate ownership restrictions, as they can provide control through voting rights without violating foreign ownership limits. However, the use and benefits of preference shares must be clearly outlined in the company’s articles of association.
How to Ensure Correct Representation in Articles of Association
The Articles of Association (AoA) is a crucial document in establishing a company in Thailand. It serves as the rulebook that governs its internal management and operations of your company, including voting powers and dividend entitlements. By specifying these key elements, the AoA plays a vital role in maintaining regulatory compliance and facilitating the smooth operation of the company. Here’s how you ensure correct representation on your Articles of Association:
- Define Voting Rights – state whether preference shares carry voting rights. This could include equal voting rights to ordinary shares, limited voting rights, or no voting rights at all.
- Outline Dividend Terms – define the dividend rates for preference shares, including any fixed rates or conditions under which dividends can be paid. Specify if dividends are cumulative or non-cumulative and whether they can be paid even if ordinary shares do not receive dividends.
- Liquidation Preferences – detail the priority of preference shares in the event of company liquidation. Specify that preference shareholders have priority over ordinary shareholders in receiving their investment back after creditors have been paid. This ensures clarity on asset distribution rights.
- In Compliance with Thai Law – Ensure that all provisions in the Articles of Association comply with the Civil and Commercial Code and other relevant Thai laws. This includes obtaining approval from the Ministry of Commerce for the AoA.
- Transparency and Clarity – Use clear and concise language to avoid ambiguity and ensure that all shareholders understand their rights and obligations.
Keep in mind that any amendments to the AoA require shareholder approval through a special resolution. This typically needs a 3/4ths majority of voting rights present at a general meeting. Furthermore, an AoA is publicly available and enforceable against third parties, making it essential for transparency and legal compliance.
How Shareholding Structure Affects Company Registration in Thailand for Foreign Companies
In general, a Thai limited company is the most common business structure. However, you must have at least three shareholders with Thai nationals holding 51% of the majority. Foreign ownership for a limited company in Thailand is limited to 49% unless you have a Foreign Business License (FBL), are promoted by the Board of Investment (BOI), or are registering under the Treaty of Amity for U.S. Citizens.
Using Thai nominee shareholders to circumvent foreign ownership restrictions is illegal. If a company is deemed to be using nominees, it is considered foreign-owned, regardless of the shareholding percentage, and may face legal consequences.
Emerhub can help you establish your presence in Thailand with our end-to-end company registration services. We can guide you throughout the legal entity setup and obtaining necessary licenses to operate a business in Thailand. Our local experts can also help with setting up your Articles of Association to ensure compliance with local regulations.
Ready to set up a company in Thailand? Fill out the form below to get in touch with one of our local experts!
FAQs About Ordinary vs Preferential Shares
Preference shares in Thailand are generally considered less risky than ordinary shares due to their priority rights. Preference shareholders receive dividends before ordinary shareholders, providing a predictable income stream, which reduces financial risk for investors seeking stable returns. However, preference shares typically do not carry voting rights, which can limit control over company decisions, a factor that might be perceived as a risk by some investors.
Preference shares can be converted into ordinary shares under certain conditions. Many preference shares issued in Thailand have convertible features, allowing holders to convert them into ordinary shares at a specified ratio, often 1:1, without additional costs.
This conversion typically requires submitting a conversion notice and necessary documents to the Thailand Securities Depository Company Limited or a securities company. However, converting ordinary shares into preference shares is not directly possible under Thai law; instead, companies can increase their capital and issue new preference shares to achieve similar outcomes.
Articles of Association play a crucial role in defining share rights by outlining the rules and regulations governing a company’s operations. This includes how shares are issued, transferred, and the rights associated with them. They specify the entitlement to dividends, voting rights, and capital distribution upon liquidation, ensuring clarity on shareholder benefits and obligations.
Additionally, the Articles of Association can establish different classes of shares, such as ordinary and preference shares, each with distinct rights and privileges. This document acts as a binding contract between the company and its shareholders, providing a framework for decision-making processes and shareholder interactions. Any changes to these rights typically require a special resolution approved by a majority of shareholders with voting powers.
