Loophole from Unlawful Shareholders’ Resolution
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 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.
This article was written by Pisut Rakwong, the Founder and Managing Partner of Pisut & Partners, an international law firm based in Bangkok, Thailand.