Thailand: material adverse change clauses in Thai M&A deals

Back to Corporate and M&A Law Committee publications

David Beckstead
Chandler MHM, Bangkok
david.b@mhm-global.com

Panupan Udomsuvannakul
Chandler MHM, Bangkok
panupan.u@mhm-global.com

The Covid-19 pandemic and measures taken by the government to reduce the spread of the virus have changed many aspects of daily life across the globe, shaping what is being called the ‘new normal’. The impact of the pandemic and the government response on businesses in Thailand are most apparent in the tourism and aviation sectors, though impacts are still unfolding in many other industries. The complete picture of the ramifications of Covid-19 is not yet clear.

This article will briefly discuss the impact of Covid-19 thus far in the context of M&A transactions in Thailand. Even though an assessment of the impact on an M&A deal needs to be made on a case-by-case basis, taking into account all surrounding circumstances of the target and the relevant parties, we have outlined some issues which have arisen in Thai M&A deals.

Material adverse changes in M&A contracts

Generally, traditional clauses and processes in M&A deals in Thailand are similar to those found in other jurisdictions. However, the foreign direct investment (FDI) regime in Thailand sometimes creates a significant gap between signing of the definitive agreements and closing of the transaction. As Thailand’s Foreign Business Operations Act (FBOA) and other laws impose restrictions on foreign shareholding of businesses operating in many sectors, cross-border M&A deals can often result in delays due to the target’s pre-closing licensing requirements.

In order to comply with these laws, there may be a significant gap between the signing and the closing; in cases where a foreign business licence is required in order to comply with the FBOA, the gap will typically be at least four to six months. Accordingly, buyers will generally negotiate forcefully for a condition precedent to the closing that there be no material adverse change (MAC) (or material adverse effect (MAE)) to the business, assets, profits and/or prospects of the target company. The precise definition of what constitutes a MAC/MAE will depend on the wording of the sale and purchase agreement.

In the event a MAC occurs, this condition precedent will not be satisfied and may then give rise to the buyer having the right to walk away from the transaction. In Thailand, similar mechanics are sometimes built in the seller’s representations and warranties. To illustrate, the buyer may ask the seller to represent and warrant to the buyer that there is no MAC to the business, assets, profits and/or prospect of the target company since the last accounting reference date, and ask for a condition precedent to the closing that such representation and warranty, together with other representations and warranties, being true and accurate upon closing.

Whether a MAC clause has been triggered needs to be analysed on a case-by-case basis based on specific wording of the MAC clause and the surrounding circumstances of the target company. The effects of the Covid-19 pandemic and the governmental measures contain country-specific elements and vary across various areas and industries, even in the same country. To our knowledge, there have not been any Thai Supreme Court decisions outlining MAC thresholds which could provide guidance for interpretation.

MAC under the Thai Civil and Commercial Code

In the absence of a MAC clause or price adjustment mechanism in the transaction documents, the Thai Civil and Commercial Code (CCC), as the default set of rules, will play a crucial role in determining the respective rights of the buyer and seller. Similar to civil codes in certain jurisdictions, the CCC has provisions on force majeure and impossibility of performance. However, the CCC does not contain any general provision on hardship, frustration of purpose or a catch-all provision on change of circumstanceto capture the situation when it becomes excessively (or disproportionally) unfair for a party to perform in accordance with the agreed upon terms (or the like of clausula rebus sic stantibus).

Nevertheless, if an MAC occurs before the closing, the buyers may try asking for price adjustment or rescission of the contract based on paragraph 2 of Section 371 of the CCC. This provides that if the thing which is the object of a reciprocal contract is damaged by a cause not attributable to the creditor, when the condition precedent is satisfied, the creditor may at their discretion either demand performance with reduction of the price or rescind the contract. Again, we are not aware of any Thai Supreme Court precedents which have rendered a decision based on these clauses in the context of M&A deals, but we expect to see disputes focusing on these issues in the near future given the unprecedented nature of the Covid-19 pandemic and governmental response.

MAC in tender offers

Under the Securities and Exchange Act BE 2535 (1992) and its related regulations, any person whose ownership of voting rights in any company listed on the stock exchanges in Thailand reaches 25 per cent, 50 per cent or 75 per cent (the offeror) is required to launch a mandatory tender offer. In making a mandatory tender offer, the offeror would be required to offer to buy all shares of the company based on the requirements mainly set out in the Notification of the Capital Market Supervisory Board No. ThorJor. 12/2554 (tender offer rule).

As an exception to the requirements to consummate this mandatory tender offer, subject to requirements under the tender offer rule, if there is any occurrence of an event or action after the tender offer document has been submitted to the office of the Securities and Exchange Commission (SEC) but during the offer period, which causes or may cause serious damage to the status or assets of the target and such events or actions are not caused by the acts of the offeror or any act for which the offeror must be responsible, the offeror may cancel such mandatory tender offer (or choose to amend the terms of the offer document by reducing the tender price).

Even though this exception has been in place for many years, we are not aware of any cases where an offeror has invoked this exception for the purpose of revoking its tender offer. Further, the Thai SEC does not appear to have taken an official position on this issue. Nevertheless, the possibility remains that offerors may invoke this exception to excuse themselves from consummation of a mandatory tender offer.

Final thoughts

The Covid-19 pandemic has already had an unprecedented global impact, and the likely effects on the development of the Thai legal system seems inevitable. Due to lack of court precedents which are on point, there remains a degree of uncertainty on how Thai courts will view and formulate the occurrence of MACs on Thai M&A deals. Against this backdrop, careful contract drafting will be critical in order to mitigate such uncertainty.