The thin line that separates silent shareholders from nominees, coupled with the nature of the nominee definition in the Alien Business Act, should lead to no verdict on the Kularb Kaew case. But without amendments to the law, the authorities will face a more complicated issue, the Business Desk writes.

For months, the Commerce Ministry has been under pressure to come up with a ruling on whether Kularb Kaew Co Ltd and Cedar Holdings Co Ltd were acting as nominees of Singapore's Temasek Holdings in their takeover of Shin Corp Plc.

Pong Sarasin's notion that he would soon unload the shares in Kularb Kaew, as well as the sudden emergence of Surin Upatkoon - a Thai national who is better known in Malaysia than Thailand - raised doubts about who is the real owner of the investment.

Adding to the suspicion was the Business Development Depart-ment's reluctance to reveal the result of the investigation; reported intervention by politicians; as well as the ministry's decision to set up an investigation committee which has promised to come up with a ruling in two months - after the October 15 election date.

"This suspicion is absurd," said a lawyer who asked not to be named. "In the current legal context, it is impossible to identify Pong, Surin or Suphadej Poonpipat - another Thai shareholder of Kularb Kaew - as nominees of Temasek.

"Khun Pong and Khun Suphadej have the capacity to finance the investment on their own. Well-known people like them could walk into any bank and get loans. What's wrong if the foreign investor finances the investment on their behalf?" the lawyer asked.

It would be a different story if the shareholders of Kularb Kaew were unknown and could not finance the Bt100-million investment on their own, he added. "This says a lot about who is a silent shareholder or a nominee."

This issue falls under the jurisdiction of two laws: the Civil Code and the Alien Business Act.

Under the Civil Code, the registration of a company is complete when the legal binding is warranted and shareholders fulfil their objectives in forging the transaction.

Meanwhile, the Alien Business Act uses a shareholding ratio to determine if the company is a foreign or Thai entity. It would be foreign if the foreign shareholding exceeded 49.99 per cent. Enacted when Thailand was in dire need of foreign capital and technology transfer, the Alien Business Act did not cover management control in the conditions nor the number of directors representing foreign shareholders.

As a result, it is common for foreigners to register companies in Thailand with help from Thai partners. Usually in such cases the Thai partners agree to be silent shareholders, holding preferred shares which account for 51 per cent of the company's capital but having only 10 per cent of the voting rights in return for a fixed return of 3 per cent in the form of an annual dividend.

It is not illegal for Thai partners to borrow from foreign partners to finance the investment, and it is not illegal for the foreign partners to charge the Thai partners 3-per-cent per annum in interest.

It is estimated that about 100,000 companies in Thailand fall into this category. Thailand might not earn anything from this in financial terms, but such investment brings technology and knowledge transfer as the companies have to hire Thai workers.

To lawyers, Kularb Kaew's formation strictly follows this guideline, and so does that of Cedar Holdings. Cedar is also a Thai company, owned 51 per cent by a Thai company, Kularb Kaew, and 49 per cent by Temasek.

Several lawyers mentioned that without the participation of Siam Commercial Bank and Bangkok Bank, which loaned nearly Bt30 billion to Cedar, the nominee issue would never have been raised.

Questions have been asked why a majority shareholder (A) with a 51-per-cent stake has to borrow from banks, leaving the minority shareholder (B) with a 49-per-cent stake to guarantee the loan. Still, the appearance of a third party, which makes things ambiguous, does not prove that A is the nominee of B as long as A can obtain loans without B's guarantee, the lawyers said.

"The substance [in forming the company] does not change whether there is a third party or not," a lawyer noted.

The Temasek-related nominee issue has set off alarm bells about Thai-foreign joint ventures, as foreign shareholders are concerned about the consequences if the Commerce Ministry rules that Kularb Kaew is a nominee of Temasek and Thai courts order the company's liquidation.

This fear remains, but in fact Thai courts have never given any liquidation order in legal history.

To these lawyers, the nominee issue could get more complicated without amendments to the Alien Business Act. For clarity, the authorities should introduce clauses on management control and representation on the board of directors into the law.

Still, the amendment would not be retroactive, meaning that Kularb Kaew or Cedar - of which management control and director representation is biased toward the foreign shareholders - would not be identified as nominees.

Whatever the case, it seems pointless for the Commerce Ministry to continue with the investigation, for the result is a foregone conclusion.