Drag-along rights are common in Thai shareholder agreements and company constitutions. They allow majority shareholders who have found a buyer for their shares to force minority shareholders to sell theirs as well.
This article examines how drag-along provisions operate under Thai law. It analyses the Thai Civil and Commercial Code, the role of the articles of association, and the enforceability of shareholder agreements. It also considers practical issues that arise when drafting these clauses for Thai companies.
What Drag-Along Rights Do
A drag-along right gives a shareholder or group of shareholders the right to require other shareholders to join a sale. The terms are the same for all. The minority shareholder has no choice but to sell.
From a commercial standpoint, drag-along rights serve a clear purpose. A buyer seeking to acquire a business usually wants the whole business. A minority shareholder who refuses to sell can kill the entire transaction. Drag-along provisions remove that risk.
For minority shareholders, drag-along rights can feel like a loss of control. They give up the freedom to decide when and to whom to sell their shares. That is why these provisions are often negotiated carefully at the start of a relationship.
The Legal Framework Under Thai Law
Thai private limited companies are governed by the Civil and Commercial Code. The Code does not specifically mention drag-along rights, nor does it prohibit them.
The starting point is freedom of contract. Thai law recognises that parties are generally free to enter into agreements according to their intentions. Shareholders can agree on corporate governance structures tailored to their needs, impose restrictions on share transfers, and create mechanisms for exiting the business. This principle gives shareholders room to include drag-along provisions in their arrangements.
But freedom of contract has limits. An agreement that contravenes the law, public order, or good morals is void. Shareholder agreements cannot override mandatory statutory provisions. Any drag-along clause must operate within these boundaries.
Two Paths to Implementing Drag-Along Rights
In Thailand, drag-along rights can be implemented in two ways. The first is through the company’s articles of association, and the second is through a separate shareholder agreement. Each approach has different legal consequences.
1. Articles of Association
The articles of association are the company’s constitutional document. They are filed with the Department of Business Development and are publicly available. They bind the company and all its shareholders.
Under section 1129 of the Civil and Commercial Code, shares are transferable without the company’s consent. But this rule applies “unless otherwise provided in the regulations of the company”. The articles can therefore restrict share transfers.
A drag-along provision in the articles would act as a transfer restriction. It would bind all shareholders from the moment they become members. No separate agreement would be required.
However, amending the articles to include a drag-along right requires a special resolution. Section 1145 of the Code requires approval at a duly called shareholders’ meeting. A special resolution typically requires at least three-quarters of the votes of shareholders present. Shareholders who disagree with the amendment may be bound against their will.
A drag-along provision in the articles forces a shareholder to sell, yet that shareholder may have voted against the amendment introducing the provision. Thai law does not contain a specific provision equivalent to section 140(2)(c) of Australia’s Corporations Act, but the principle is similar. A shareholder who becomes a member after the amendment may challenge being bound by a restriction they never agreed to.
2. Shareholder Agreement
The alternative is a private shareholder agreement. It is a contract between the shareholders and remains confidential, not filed with any government authority.
A shareholder agreement is enforceable as a contract under Thai civil law. It binds only the parties who sign it. It does not bind the company unless the company is also a party to the agreement.
This is an important distinction. A drag-along clause in a shareholder agreement creates contractual obligations among the shareholders. If a shareholder refuses to sell when the drag-along right is exercised, the other shareholders can sue for breach of contract. However, the company itself is not obliged to register the transfer unless it is bound by the agreement.
In practice, shareholder agreements often include an obligation for each shareholder to vote in favour of any necessary amendments to the articles or to take any steps required to give effect to the drag-along. This helps bridge the gap between the private agreement and the company’s constitutional documents.
Key Legal Considerations
3. Share Transfer Restrictions
Under Thai law, the default position is that shares are freely transferable. Section 1129 of the Civil and Commercial Code makes this clear. Any restriction on transfer must be set out in the articles.
A drag-along right is a restriction on transfer. It removes a shareholder’s freedom to decide whether to sell. For the restriction to be effective against all shareholders, it should be included in the articles. A shareholder agreement alone binds only the parties to that agreement. New shareholders who do not sign the agreement are not bound.
4. Protection of Minority Shareholders
Thai law does not provide a general squeeze-out provision for private limited companies. Majority shareholders cannot compel minority shareholders to sell their shares merely because they hold a majority.
This is where drag-along rights become commercially significant. They provide a contractual mechanism to achieve a result the law does not otherwise permit. But they also raise questions about fairness.
A minority shareholder who agrees to a drag-along clause at the time of investment has made a voluntary choice. The clause was part of the bargain. The difficulty arises when a drag-along clause is introduced later, either through an amendment to the articles or through a new shareholder agreement that the minority shareholder is pressured into signing.
Thai courts have not extensively considered this issue. The general principle is that contracts must be performed in good faith. A drag-along provision exercised in a way that causes unfair prejudice to a minority shareholder may be challenged.
5. Foreign Shareholding Restrictions
Thailand imposes foreign ownership limits across many industries. The Foreign Business Act restricts foreign shareholding to 49% in most cases. For companies with Board of Investment promotion, foreign shareholding may be capped at 49% or at another specified percentage.
A drag-along right can interact with these restrictions in unexpected ways. If a drag-along sale results in the transfer of shares to a foreign buyer, the company may exceed the permitted foreign shareholding limit.
Drafting must address this issue. The drag-along provision should specify that the right can be exercised only if the sale does not violate applicable foreign ownership restrictions. It may also need to address what happens if the buyer is unable to acquire the shares because of such restrictions.
6. Enforceability of Shareholder Agreements
A shareholder agreement is a private contract. It is enforceable between the parties, but it cannot override mandatory provisions of the Civil and Commercial Code.
For a drag-along clause to be fully enforceable, the agreement must be properly drafted. The clause should clearly set out the circumstances in which the right can be exercised. It should specify the price or the valuation mechanism. It should set out the procedure for giving notice to the minority shareholder.
The agreement should also address what happens if a shareholder refuses to comply. A well-drafted clause will include an undertaking by each shareholder to take all steps necessary to give effect to the transfer, including voting in favour of any required board or shareholder resolutions.
7. Interaction with the Articles of Association
A shareholder agreement that conflicts with the articles of association creates problems. The articles are the company’s constitutional document and bind the company and all shareholders. A private agreement between some shareholders cannot override the articles.
For this reason, shareholder agreements often include a provision requiring shareholders to amend the articles to reflect the agreement’s terms. However, amending the articles requires a special resolution. A minority shareholder bound by a drag-along clause in a shareholder agreement may refuse to vote in favour of the corresponding amendment to the articles. This can create a gap between the contractual obligation and the constitutional framework.
The practical solution is to include the drag-along provision directly in the articles from the outset. This avoids the need for later amendments and ensures that the provision binds all shareholders, including those who join the company after the provision is introduced.
Practical Drafting Considerations
8. Scope of the Right
The drag-along clause should clearly set out when the right can be exercised. Common triggers include a sale of shares by a specified majority of shareholders or an offer from a third party to acquire all of the company’s shares.
The threshold for exercising the right should be specified. In many agreements, the right is held by shareholders with more than 50% or more than 75% of the shares. The threshold should reflect the commercial realities of the business.
9. Valuation
The price at which shares are sold under a drag-along right is a critical issue. Minority shareholders will want assurance they receive fair value. The clause should specify how the price is determined. Common approaches include a fixed price, a formula based on the company’s earnings or assets, or a price equal to that offered to the majority shareholders.
If the price is the same as that offered to the majority, the minority shareholder has no basis to complain of unequal treatment. However, the minority may still argue that the majority accepted a low price.
10. Notice and Procedure
The clause should set out a clear procedure for exercising the drag-along right. The majority shareholder should be required to give the minority shareholder written notice. The notice should specify the buyer, the price, and the terms of the sale. The minority shareholder should have a reasonable period to comply.
The clause should also set out the mechanics of the transfer. It should state that the minority shareholder will execute all documents necessary to transfer their shares. It may include a power of attorney authorising the majority shareholder to sign on the minority shareholder’s behalf if the minority shareholder fails to comply.
11. Duration
A drag-along right can run for the life of the company, but some agreements limit the right to a specified period. This can be useful in joint ventures where the parties expect to exit after a set number of years.
Comparison with Australian Law
The Australian position, as discussed in Ringers Western and Mobile Asset Holdings, highlights the tension between contractual drag-along rights and the regulatory framework for takeovers. Chapter 6 of the Corporations Act regulates acquisitions of relevant interests in voting shares. A drag-along right can give rise to a relevant interest because it enables one shareholder to require another to dispose of their shares.
Thai law does not have an equivalent regime. There is no general prohibition on acquiring a relevant interest above a specified threshold. There is no requirement for a takeover bid or a compulsory acquisition process for private companies.
This does not mean drag-along rights are unregulated in Thailand. They must comply with the Civil and Commercial Code, not contravene public order or good morals, and be consistent with the company’s articles of association. However, the regulatory framework is less detailed than in Australia.
The absence of a specific takeover regime in Thailand means that drag-along provisions face fewer statutory hurdles. But it also leaves minority shareholders with fewer statutory protections. Their protection comes primarily from the terms of the agreement they sign.
The Balancing Act of Drag-Along Rights
Drag-along rights are a useful tool for Thai companies. They provide transaction certainty and allow shareholders to exit their investment cleanly. They are enforceable under Thai law, provided they are properly drafted and do not contravene mandatory provisions of the Civil and Commercial Code.
The best approach is to include the drag-along provision in the articles of association from the outset. This ensures the provision binds all shareholders. If the provision is included only in a shareholder agreement, it binds only the parties to that agreement. New shareholders who do not sign the agreement are not bound.
Drafting must address key issues: the threshold for exercising the right, the price or valuation mechanism, the notice procedure, and the consequences of non-compliance. Foreign ownership restrictions must be taken into account. The clause must be drafted in good faith and must not operate in a way that causes unfair prejudice to minority shareholders.
Thai law gives shareholders considerable freedom to structure their arrangements. Drag-along rights fall within that freedom. But with that freedom comes the responsibility to draft carefully. A well-drafted drag-along provision protects all shareholders’ interests and gives the company the flexibility it needs to grow and, when the time comes, to be sold.
