CHAPTER
5
DUTIES
OF DIRECTORS AND RIGHTS OF SHAREHOLDERS
In this Chapter, we try to bring
together the law relating to the duties of directors in private and public companies,
and the corresponding rights of shareholders.
Liabilities of directors in private
companies
Appointment and status of directors Directors must comply with the following requirements:
2. A person who is twenty years of age, not
incompetent or bankrupt, whether Thai or foreign, resident or non
resident, may be a director.
3. In a few special cases, the law requires
that a company has a specified number of Thai and/or resident directors.
For example, for
companies engaged in a business that is restricted under Schedule 2 of the
Foreign Business
Act that are majority
foreign owned, or companies involved in telecommunications holding a #2 or #3
license under
the Telecommunications
Act.
4. Companies existing under the US
–Thailand Treaty of Amity (see Chapter 2 The United States - Thailand
Treaty
of Amity) must have a majority of directors who are American or Thai nationals.
5. Only a general meeting of the
shareholders may remove a director. However a director is automatically
removed, if
he becomes incompetent
or bankrupt.
There is no such thing as a nominee
director - all directors have legal duties and responsibilities.
Term of office Directors are normally elected for a three-year term but at least one
third of the directors must retire annually. A retiring director is eligible
for re-election. Some companies, to avoid difficult calculations, require that
all the directors resign annually and then stand for re-election.
In the case of public companies,
directors are elected by the shareholders at a general meeting. They may be
removed from the Board by a resolution passed by 75% of the shareholders.
Directors as employees Directors are not considered to be employees, except where remuneration
is paid periodically. Directors who are employees are entitled to compensation
and severance pay and other benefits that employees are entitled to under the
Labor Protection Act and associated legislation. Foreign directors who act as
directors in Thailand require work permits. This rule is not strictly enforced
for directors who do not act as employees, but there have been cases to the
contrary. Foreign directors who sign certain documents, such as applications
for telephone lines or customs card applications, must have a work permit for
the company involved, otherwise the application will not be accepted by the
governmental agency concerned.
Compensation Directors who act only as directors (rather than as employees) are only
entitled to compensation approved by the shareholders, but may be entitled to
expenses they incur on behalf of the company.
Responsibilities of directors Directors have joint responsibility to ensure that:
2. The regular keeping of books and
documents prescribed by law.
3. The proper distribution of
dividends and interest as prescribed by law.
4. The proper enforcement of
resolutions of general meetings.
Authorized directors The board of directors, as a whole, has power to manage the company but
the company may appoint one or more directors in any combination, to manage the
company and to bind the company by their signatures. The powers of the
directors who may bind the company are described in the company certificate
(affidavit) issued by the Ministry of Commerce, upon which the public may rely.
Fiduciary duties to the company The fundamental duty of a director is that he must in the management of
the company and in his conduct of business, apply the diligence of a careful
businessman. In addition, a director:
2. may not be a partner with unlimited
liability in another commercial concern carrying on a business of the same
nature as or competing
with that of the company.
A general meeting of shareholders
may pass a resolution permitting any director to undertake such commercial
transactions, or allow a director to be a partner with unlimited liability in
such other business entities. Such a waiver of conflict of interest may also be
included in a company’s articles of association.
Duties of directors of public companies The directors of public companies are subject to slightly different
duties: they must perform their duties in accordance with the law, the objects,
the articles and shareholders resolutions; in good faith and with care to
maintain the interests of the company.
If a director is in breach of such
duties, then the company may sue the director. If the company fails to do so,
then any shareholder(s) holding at least 5% of the shares of the company may
issue such proceedings, and also request that the Court removes such director
from office. Directors are forbidden to carry on a business of the same nature
as, and in competition with that of the company. Once again, the company may
sue a director who is in breach of this duty. If the company does not do so,
shareholders holding at least 5% of the shares of the company may do so.
Directors must notify the company if they have any interest in a contract, or
hold shares or debentures in the company or any affiliate.
Public companies are subject to
detailed rules concerning the making of loans by the company to directors or to
company employees. If the articles do not contain provisions relating to
directors remuneration, then the remuneration of directors must be approved by
at least two thirds of the shareholders at a meeting.
Civil liability The relationship between the directors, the company, and third parties
is governed by the law of agency. A company may bring proceedings against a
director for any loss that he causes to the company. Since the directors are
normally the only persons who have authority to issue legal proceedings, the
Civil and Commercial Code provides that any shareholder or creditor of the
company may initiate such a claim against a director.
As to public companies, any one or
more shareholders holding an aggregate of at least 5% of the shares may bring
such an action.
If a director, acting within the
scope of his proper authority, causes loss to a third party, then that director
will not be personally liable to the third party because his actions will bind
the company. If a director acts without authority or beyond his authority and
the company does not ratify such act, then the director will be personally
liable to the injured third party. If a director acts with authority but his act
is improper (because his conduct falls below the standard of a “careful
businessman”) then the company will be liable to the third party, but the
company may claim indemnity against the director.
Criminal liability With regard to criminal liability, a person charged with a criminal act
must be found to have committed the act intentionally or negligently. The
burden of proof lies on a director to prove his innocence, once the prosecutor
has established to the court’s satisfaction that a criminal act has been
committed. Criminal liability can be imposed for failure to act, such as
failure to file a required report or a failure to file a balance sheet. A
common case of criminal liability is for bad cheques signed by a director, even
though the cheques were company cheques. Directors may be liable for false
statements contained in official documents that they sign on behalf of the
company. Directors are sometimes arrested, where there is a fire or accident
causing serious injury, on the basis that the director, by his mismanagement,
caused the accident or loss. Where a statute provides discretionary power to
prosecute or settle out of court, usually cases are settled out of court.
Liability of foreign directors Foreign directors are liable in the same manner as Thai directors.
Liability of directors in the case
of bankruptcy or liquidation Directors have no special
liability for the debts of the company in the case of bankruptcy or
liquidation, unless they personally caused loss to the company, in which case
they are liable as indicated above. However, under the 1998 amendment to the
Bankruptcy Act (see Chapter 25 Bankruptcy, Liquidation and Corporate Restructuring),
directors are criminally liable if they fail to cooperate with a bankruptcy
receiver or planner, fail to submit explanations required, fail to report false
claims or make false statements.
Indemnity and ratification An indemnity for criminal liability is void and unenforceable, because
it is contrary to public order.
An indemnity for civil liability is
permissible. A director may be relieved of liability to the company for any
acts ratified or approved by a general meeting of shareholders. A director is
also relieved of liability to any shareholder who voted to ratify his acts, but
remains liable for six months to shareholders who did not vote for
ratification.
Rights of shareholders
Rights of shareholders in private
companies The rights of shareholders in
private companies are governed by the Civil and Commercial Code. Firstly,
in order to exercise their rights as shareholders, a shareholder must be
registered as the owner of the shares, and in compliance with the Code, at
least 25% of the par value of the shares has been paid.
Ownership of at least 75% or more of
the shares Ownership of at least 75% or more
of the shares of a company will give a shareholder absolute control of all the
decisions to be made at shareholders meetings, subject to the general law. Such
a shareholder will be able to: amend the articles of association; amend the
memorandum of association; increase the capital, reduce the capital; pass a
resolution to place the company in liquidation, or to merge the company with
another company. This is because under the Code, a resolution to take any of
these major decisions must be passed at two successive shareholders meetings,
by a 75% majority at the first meeting and a two-thirds majority at the second
meeting. These provisions of the Code cannot be excluded. This applies, except in
the case where a resolution has been passed by a 75% majority of shareholders,
which adopts an article providing that resolutions of shareholders must be
passed by those shareholders holding at least 76% of the total issued shares.
Ownership of at least 50% of the
shares, but less than 75% Ownership of at least 50% of
the shares of a company but less than 75%, will enable a shareholder to pass
resolutions to carry out all ordinary business at a shareholders' meeting.
However, he will not be able to take the major decisions mentioned above,
unless he has the support of the minority shareholders.
Ownership of at least 20% of the
shares, but less than 50% The rights of minority
shareholders owning at least 20% of the shares but less than 50%, are very limited.
They have a right to require the company to convene an extraordinary meeting of
shareholders, but that is all. At such a meeting, they will be able to vocalise
their complaints in the presence of other shareholders, but they have no
additional voting or other rights at such meeting.
Ownership of less than 20% of the
shares Those holding less than 20% of the
shares do not even have the right to call an extraordinary general meeting of
shareholders. The only rights they might have are considered below.
General rights of shareholders
against directors Regardless of the percentage
of shares owned, the directors of a company are subject to general duties
imposed under the Code, and additional duties that may be imposed under the
articles of association. The most important duties of a director of a private
company are set out in the Code:
·
the payment of shares by the shareholders being
actually made
·
the existence and regular keeping of books and
documents prescribed by law
·
the proper distribution of dividends and interest as
prescribed by law
·
the proper enforcement of the resolutions of general
meetings.
2. A director may not, without the consent
of a general meeting of shareholders, undertake commercial transactions
of the same nature as
and competing with that of the company, either on his own account or that of a
third person,
nor may he be a
partner with unlimited liability in another commercial concern carrying on
business of the same
nature as and in
competition with that of the company. The foregoing provisions also apply to a person
representing a director.
A company may bring an action
against the directors for their breach of duty. If the company refuses to act,
then a shareholder is entitled to bring such an action.
Additional shareholders rights under
the articles or a shareholders' agreement
There is no objection in principle to the granting of additional rights to
minority shareholders under the articles of association, or under a
shareholders' agreement. The sort of matters that minority shareholders may be
concerned about, in addition to the major transactions considered above, are
such matters as:
2. Limitations on the company's
powers to sell or purchase goods.
3. Limitation on the company's
borrowing powers, or powers to give guarantees.
4. Approval of the remuneration of
directors or senior executives.
Additional articles of association
can be drafted, so that matters such as these must be passed by a super
majority of shareholders, or not without the consent of specified shareholders.
It is also generally possible to
structure the share capital into two classes of shares, with ordinary
shareholders holding a majority, but minority shareholders holding preference
shares carrying additional voting rights. In this way, the minority
shareholders may have the majority of voting rights at the shareholders
meeting.
Rights of shareholders in
public companies Shareholders in public
companies have similar rights to those in public companies, and certain additional
rights, due to the greater regulatory standards that apply to public companies.
The Public Companies Act (1992) sets out the basic law that applies to public
companies. Under the Act, different supporting majorities may be required to
transact certain business, the directors are subject to additional duties, and
the shareholders may have additional rights and protections.
Voting majorities required for major
transactions Generally speaking, only a simple
majority of the votes cast at a shareholders meeting is necessary to pass a
resolution. However the Act specifies that certain major transactions require a
higher majority:
2. Amendment of the articles.
3. Increase or reduction of capital.
4. The issue of debentures.
5. A decision to amalgamate.
6. A decision to dissolve the
company.
7. The sale or transfer of the
business, in whole or a substantial part thereof.
8. The purchase or acceptance of
transfer of the business of another company.
9. The entering into, amending or
terminating a lease of the business in whole or in an essential part.
9. Entrusting another person with the
management of the company.
10. Amalgamating the business with another
company with a view to sharing profits and losses.
11. Dissolution of the company.
All the above matters may only be
sanctioned by a resolution passed by 75% of the shareholders. In addition, at
least 50% of the shareholders must attend a general meeting to constitute a
quorum, and a shareholder who has a special interest in any matter has no right
to vote on such matter, except in the election of directors.
Additional rights of shareholders Shareholders may assert their interests by asserting any of the
following rights, as appears appropriate:
2. Challenging the agenda At shareholders meetings, the Chairman must conduct the business in
accordance with
the agenda, unless at
least two thirds of the shareholders at the meeting request him to do
otherwise.
3. Challenging the calling of a meeting or
challenging a resolution If a meeting was convened or
a resolution passed
which was ultra
vires the articles or the Act, then not less than five shareholders or shareholders
holding at least
20% of the shares, may
request the Court to revoke such resolution.
4. Questioning of the auditor The auditor has a duty to give explanations to the shareholders
meeting, and must
attend shareholders’
meetings where the balance sheet or the profit and loss account or accounting
problems are
discussed.
5. Inspection of accounts Shareholders may ask to inspect the accounts of the company during
working hours, and
obtain a copy thereof.
The Annual Report together with the financial statements, must be sent to all
the
shareholders.
6. Appointment
of an inspector Shareholders holding at least 20%
of the shares or at least two thirds of the
shareholders in number, may
request the Registrar of Partnerships and Companies to appoint an inspector to
examine the affairs and
finances of the company, and to examine the operations of the Board.
7. Request
dissolution Shareholders holding at least 10%
of the shares may request the Court to dissolve the
company on specified
grounds, including failure to comply with requirements concerning statutory
meetings,
preparation of company
reports, breach of regulations concerning payment of dividends, and other
matters; or on
the grounds that the company
is making a loss and there is no prospect of revival of the company.
Additional protection for minority
shareholders In the same way as for private
companies discussed above, there is no objection to additional protections for
minority shareholders being included in the articles, or in a shareholders agreement,
provided that that such restrictions do not contravene the Public Companies Act
or other relevant law. For example, it is not possible to place restrictions on
the transfer of shares in a public company, unless such restriction is
necessary to maintain a permitted level of foreign ownership under the Foreign
Business Act (see Chapter 1 Foreign Business Restrictions).
Reporting requirements of the
Securities Exchange Commission
Reporting major events The Securities Exchange Commission Act (1992) as amended, and
regulations or notifications issued by the Securities Exchange Commission (the
regulatory authority) or the Securities Exchange of Thailand (the stock market)
require companies that intend to make public offerings and companies already
listed to submit reports to the SEC without delay, when any of the following
events occur:
2. When its operations are partially
or completely interrupted or suspended.
3. When the company's objects or
business activities change.
4. When the company's operations or
management is partially or wholly handed over to a third party by contractual
arrangement.
5. When the company is involved in a
takeover bid, as defined by the SEC Act.
6. When there is an incident of such
a type and magnitude that it will have a bearing on the rights of securities
holders or will affect investment
decisions or the prices of securities.
The above requirements are in
addition to the regular reporting requirements to which public companies are
subject.
Reporting requirements regarding
connected persons Directors, officers,
managers and auditors of a company that has offered shares to the public must
report to the SEC the amount of shares they hold in the company, in combination
with their respective spouses and minor children. They are also required to
file reports when there is a change in their shareholdings.
Reporting changes in shareholdings
in certain cases If an individual's
shareholding in a company increases or decreases by an amount equivalent to 5%
or more of the total shares issued, the change in shareholding must be reported
to the SEC on the following business day, and a copy of the report sent to the
SET. If warrants or convertible instruments covering 5% or more of the issued
share capital are acquired or disposed of, a report must also be submitted on
the business day after the transaction.
Tender offers SEC regulations require that a tender offer be made for the purchase of
all the shares or securities of a company, when a particular shareholder's holdings
reach a certain percentage of the total shares issued.
Private placement Where a company wishes to make a private placement of shares, rather
than offering the shares to the public as a whole, then there are detailed SEC regulations
that must be observed in connection with any such private placement.
Revised 1 December 2006