Although foreigners are in most cases not permitted to acquire real estate in Thailand, the gold standard and common industry practice of land acquisitions is the formation of a limited company. To fulfill the requirements under Thailand‘s foreigner legislation, such Co., Ltd. needs to have Thai majority shareholders.

If the foreigner invests in Thai property, he has no intentions to make a donation to his Thai partners. Holding just 49% of the capital in a Thai company, if would be obviously not advisable to agree on the same rights per share as the Thai 51% shareholders. However, such corporate design with equal shares for the investor and the Thai shareholders is not uncommon and widely practiced. It shows the carefreeness of some foreign investors and their believe in a Thai behavior, not to execute existing rights.

The balancing act between Thailand‘s foreigner legislation on the one side and the foreign intention to remain king of their castle has an easy solution. Under Thailand‘s company law it is explicitly allowed to grant shares with different rights. Therefore the Thai majority shares can be equipped with the preference rights of a reduced dividend of e.g. 5% of the capital contribution and a reduced voting power of one voting right per 10 shares. 

Such preference share structure, carefully implemented, gives the minority foreign shareholder a super majority voting power in the shareholders meeting. He can outvote his Thai partners in each and any shareholders resolution. Such super voting rights come with a very small price tag. The Thai shareholders do not get any participation in the increased value of the property.  

Such a preference share structure is fully in compliance with the law. Thailand‘s foreigner legislation is focussed on the participation in the company‘s capital only and ignores voting rights and profit participation rights. This inefficient legal environment has be explicitly confirmed by the government recently. 

This could be the end of this blog post, if such preference share structure would be consistently offered and implemented by Thailand‘s legal industry. However, this is not the case. Foreign investors are at an alarming rate fooled by the reverse preference share structure. It uses the good reputation of the preference share structure, but gives the foreign investor just the false illusion of a protected Thailand property investment.
 
The reverse preference share structure provides the foreigner with the (poisoned) preference shares and the Thai shareholders with common shares. Under the common shares the Thai shareholders are entitled to 51% of the profits and increase in value of the property. The foreign investor loses instantly more than half of his investment.

The bylaws of the company typically grant to the preference shares a „priority“ over the Thai‘s common shares. However, such priority has an effect only in case of an insolvency of the company, but not in normal life. Therefore, the priority clause is useless and just a daydream. 

We saw several cases where foreign investor trusted on the hollow promises of priority rights over the Thai partners just to find out that they have accepted a reverse preference share structure that gives stones to the investor instead of bread. 

A preference share structure provides the foreign investor with a super majority voting right in the shareholders meeting. However, in a reverse preference share structure it is not uncommon to see a corporate structure that allows the Thai shareholders to factually hold a shareholders meeting without the participation of the foreign investor and, as a result, to end in very unpleasant shareholders resolution from the foreign investor‘s viewpoint.

The good news are that a fraudulent reverse preference share structure can be easily identified without the help of a lawyer. If the Thai shareholders own preference shares, this is the basis of a prudent corporate governance structure and highly appreciated. However, if the foreign investor holds preference shares, this is an alarming signal. It means that the corporate structure has a serious birth defect and a restructuring is urgently required.

As a side note it should be noted that the reverse preference share structure exposes the foreign investor to the draconic penalties under Thailand`s foreigner legislation.    This results in another argument to avoid such ill-advised structure by hook or by crook.