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Published on August 21, 2007

Like many others, I have watched the developments concerning the government's proposed revisions to the FBA with a lot of anticipation.

The portion of the proposed revisions which has caused the most resistance from foreign investors, as well as many Thais, concerns preferential voting rights for foreign shareholders of Thai-registered companies.

Under the current rules, companies which are majority-held by Thais are allowed to give preferential voting rights to the company's minority foreign shareholders giving the foreign shareholders effective control of the company while still enabling the company to be legally classified as Thai-owned.

The proposed revisions to the FBA would change this situation, however, by re-classifying companies which give preferential voting rights to foreigners as "foreign" instead of "Thai" even though the majority of the company's shares are held by Thais.

This re-classification would subject affected companies to much more government regulation and may cause many of these companies to cease their operations.

The government's reasoning behind the proposed changes is that companies structured in this way violate the spirit of the FBA, as the majority of Thai shareholders of these companies are merely nominees with no real ownership or authority.

The government also argues that this change will be good for the foreign investment climate in Thailand over the long term because it would promote an environment of greater transparency in the market, which many foreign investors would like to see.

I agree with the government that many companies in Thailand currently use nominee shareholders in violation of the law. There is no question about that. And I also agree that promoting transparency is generally a good thing.

However, I do not agree with the government's position on this issue because I believe that the proposed revisions to the FBA would be detrimental to Thailand's interests in the short-, medium- and long-term for the following reasons.

1) It would hurt Thailand's global competitiveness

Revising the law as proposed would send absolutely the wrong message to the outside world.

One of the reasons why Thailand has been so successful in attracting foreign investment over the years, in my opinion, is that its framework regulating foreign investment has been more open than that of its neighbours, specifically in comparison to China, Vietnam, Malaysia, India and Indonesia.

When I say "open" here, I mean that foreigners were generally allowed to invest in more sectors in Thailand than they were in the above mentioned countries.

This situation has subjected Thailand's local businesses to a lot of foreign competition, but as a whole, the country has received a net benefit from this policy through the jobs which have been created and the technology and know-how transferred to Thailand because of it.

However, if the government implements the proposed changes to the FBA, then this competitive advantage will cease to exist for Thailand. Thailand will be seen as having a very similar foreign-investment framework to these countries. The situation would be far worse than that as the current trend in each of these countries has been to liberalise their foreign-investment laws and become more open to foreign competition and investment.

If the government implements the proposed changes it would be clear evidence to the rest of the world that Thailand is moving in the exact opposite direction.

2) It would not be fair to existing foreign-run companies operating in Thailand

The changes proposed would be enforced against foreign investors retroactively.

This would mean that many companies which have been established to date which are in 100 per cent compliance with the current law would be required to substantially change their corporate structures in order to be in compliance moving forward.

Yes, the proposed change does provide for a grace period affording the affected companies some period of time to implement the measures necessary to come into compliance, but the point is that by doing this the government is establishing a disturbing precedent. The precedent would be that even though foreign investors complied with the letter of the law when they entered the Thai market, the government may now change its mind, and by doing so, force these companies to substantially restructure themselves because of it.

As stated above, up until now companies were allowed to grant minority foreign shareholders preferential voting rights. Right or wrong this has been the status of the law for years, and many, many companies structured their businesses exactly like this.

Now the government is telling those companies (if the proposed changes go through) that even though their companies were legally compliant at the time their companies were established, now they will be required to change.

If the proposed change only affected new foreign investors, from a time standpoint anyway, it would at least be fair. However, to make the changes applicable to existing foreign investors as well is not fair.

3) It would go against market realities

Every country on the planet is dealing with the realities of an increasingly integrated world. It is how the governments of these countries choose to deal with these realities which will in large part determine the country's long-term global competitiveness.

My own country, the US, is dealing with this as well.

Last year many people in the US went crazy when Chinese companies made serious bids to purchase Unocal and Maytag. A couple of decades before that it was the Japanese who caused alarm by buying big chunks of real estate in California and the Western US.

In both of these situations there were cries for the US government to legislate against such foreign investment.

But it didn't, and the reason that it didn't was because the government knew that in the long-term the US would benefit more by not being reactionary to what was happening at the time, but rather, by using the situation as an opportunity to show the world that the US remained open to foreign investment.

The same is true of Thailand.

In the short-term, due to political events which have transpired here and other reasons, it may be very easy for the government to justify imposing measures such as the changes to the FBA which would make it considerably more difficult for foreigners to invest here.

However, in the long term, I believe this move would show to the world that instead of becoming more integrated into the global economy Thailand seeks to isolate itself from it. That instead of embracing globalisation and finding creative ways to balance both local and international interests - Thailand withdraws.

I, for one, hope this does not occur.

Michael Doyle

 

Michael Doyle is a US attorney and author of the book "Doyle's Practical Guide to Thailand Business Law". His e-mail address is michael@serimanop.com