A.
What is Due Diligence?
"Due
Diligence" is a term which applies to many different types of legal and accounting
work. In this paper, Due Diligence refers mainly to the work of the Corporate
Services Department of Tilleke & Gibbins.
Due
Diligence is a term which lawyers are using more and more frequently nowadays.
Generally
speaking, in a commercial transaction between two parties, the most important
and fundamental rule for any party who is extending credit, or risking money,
or transferring something of value, is to know the other party. In sales transactions,
it is often advised that "you should know your buyer" or "you should
know your seller". Yet, it is amazing how often this basic and most fundamental
rule is ignored, often to the detriment of one of the parties to a transaction.
It may be that ignoring this rule creates more business for lawyers than anything
else.
By
"knowing" the other party, we mean, in general, know about his credit
worthiness and reliability, who he is and what he is. If one is dealing with a
corporation, one ought to know if it is an actual viable corporation or a mere
hollow shell with no real assets. (Companies incorporated in Thailand are called
"limited companies" instead of "corporations" as is the practice
in the United States.)
Part
of Due Diligence is knowing who you are dealing with.
We
could write a book about Due Diligence but that is not our purpose. Our purpose
in this paper is to explain about the minimal required first steps that would
usually be taken as part of Due Diligence in checking on the relevant issues in
transactions contemplated by clients of Tilleke & Gibbins where the Corporate
Services Department is assisting the client.
Simply
speaking, Due Diligence means checking out the things that should be checked on
before you make a deal.
B. Examples
of Typical Transactions where Due Diligence Should be Applied
Examples
of typical transactions handled by the Corporate Services Department where Due
Diligence should be applied are contracts for purchase and sale of shares, joint
venture agreements, contracts for sale of a business, contracts for purchases
of business assets, and/or assumption of liabilities. These examples involve contracts
with or among Thailand limited companies rather than transactions of a personal
nature or between natural persons, as such transactions comprise the bulk of the
transactional work in which the Corporate Services Department is involved.
C. The Starting
Point for Due Diligence
When
our client is contemplating a transaction with a Thailand limited company, the
starting point for Due Diligence will be to check out said limited company. This
will include, at a minimum, obtaining certain documents from the Commercial Registration
Department of the Ministry of Commerce (hereafter referred to as "CRD").
These documents will reveal, or will be an aid to investigating, the solvency
and reliability of said limited company, what the company can and cannot do, what
procedures will be required by the company's regulations, and whether or not the
company is current and in compliance with the filings that must be made with CRD
as required by Thai law. Hereinafter, we will refer to the company which is being
investigated as "the Company".
D. If You
Are a Director or Officer of a Thailand Limited Company or a Company
Doing Business in Thailand
If
the above describes you, then you should be aware of and understand the documents
which are discussed and explained in this paper. This is the bare minimum you
will need to know about how to function in the Thai business environment.
E. The Directors'
Certificate
CRD
has a certificate (hereafter referred to as "Directors' Certificate) for
every Thailand limited company which certifies various particulars of the Company
as are registered with CRD, including the name of the Company, its registered
share capital, date of formation, the names of the directors of the Company, the
binding signatory power (which is explained in detail further on), and the objects
of the Company.
F. The Memorandum of
Association
The
objects of the Company are those things that the Company is empowered to do in
its Memorandum of Association (hereafter referred to as the "Memorandum").
In the United States, the Memorandum is called "Articles of Incorporation"
in most jurisdictions. It is unlawful for a company to act outside of the objects
of the Company; this unauthorized action would be called "ultra vires"
in Anglo-American jurisprudence. For example, if the Company manufactures shoes,
but there is no object in the Memorandum which would authorize the Company to
manufacture shoes, then the manufacturing of shoes by the Company would be ultra
vires.
G. The Articles
of Association
While
the external powers of the Company are set forth in the Memorandum, the internal
regulations of the Company are set forth in its Articles of Association (hereafter
referred to as the "Articles"). In most jurisdictions in the United
States, the Articles are called "By-Laws". The Articles govern the internal
operation of the Company and ordinarily govern, among other things, quorums for
ordinary and extraordinary meetings of shareholders, quorums for meetings of the
Board of Directors, voting rights of shareholders and directors, various procedural
rules for the conduct of such meetings, election of directors, and the binding
signatory power of the Company.
The
Articles cannot be contrary to the statutes in the Civil and Commercial
Code (hereafter referred to as "CCC") which govern
limited companies (CCC Sections 1096 through 1273). Prior to registration
of the Company, CRD will vet both the Articles and the Memorandum to
check whether in its view there is anything therein which is contrary
to the relevant sections of CCC. Where the Articles are silent as to
matters relating to the internal operation of the Company, then such
matters will be governed by the relevant sections of CCC.
The
Directors' Certificate and the Memorandum and Articles of any limited company
can be obtained from CRD by anyone. Anybody dealing with a limited company is
deemed to have knowledge of the Memorandum and Articles of the Company even if
he has never read the Memorandum and Articles.
H.
Binding Signatory Power
It
is an administrative requirement of the officials of CRD that details be registered
with CRD regarding the identity and number of directors of a limited company whose
signatures, in conjunction with the Company seal, are required to be binding upon
the Company. The general public are entitled for their own protection to have
made public the identity of the particular directors who have the authority to
bind the Company by their signature.
A
Thailand limited company may, in the Articles, specify the signatory authority
of directors which will be registered at CRD.
I.
List of Shareholders
Another
document that anyone can obtain from CRD is a list of shareholders of the Company
which shows, among other things, the name of each shareholder, the number of shares
owned by each shareholder, the par value of the shares, and the amount of share
capital paid in for the shares.
Where
a Thailand limited company is one of the shareholders owning a substantial number
of shares, then minimal due diligence would require obtaining the Directors' Certificate
and list of shareholders of that Thailand limited company.
It
should be understood that the only way to be 100% certain about who the shareholders
are in the Company would be to examine the Register of Shareholders of the Company
(see CCC Sections 1129, 1138, 1139, and 1141). Furthermore, as the Directors of
the Company are required by CCC Section 1139 to file the list of shareholders
with CRD only once per year, the list of shareholders would not reflect transfers
of shares that might have taken place after the latest list of shareholders had
been filed with CRD.
J. Balance
Sheet
Another
document that anyone can obtain from CRD is a copy of the legally required audited
annual financial report of the Company, which is commonly called the balance sheet.
K.
Conclusion
Where
Due Diligence checking of a Thailand limited company is required, the first step
in the Due Diligence process will usually be to obtain from CRD the Directors'
Certificate, Articles, list of shareholders, and balance sheet of the Company.
Doing
the foregoing may raise additional questions or issues that will require further
Due Diligence; in a simple transaction, this may be all the Due Diligence that
is needed.
One
should never sign a contract with a Thailand limited company without knowing how
the binding signatory power of said company must be exercised.
©1998
Tilleke & Gibbins, Bangkok, Thailand
