06BANGKOK1549 SHIN CORP DEAL IS LEGAL, SO WHAT?

“56360”,”3/14/2006 0:14″,”06BANGKOK1549″,

 

“Embassy Bangkok”,”UNCLASSIFIED//FOR OFFICIAL USE ONLY”,””,

“This record is a partial extract of the original cable.

The full text of the original cable is not available.

 

“,”UNCLAS SECTION 01 OF 03 BANGKOK 001549

 

SIPDIS

 

SENSITIVE

 

STATE FOR EAP/MLS AND EB

TREASURY FOR OASIA

COMMERCE FOR 4430/EAP/MAC/OKSA

STATE PASS TO USTR FOR WEISEL

 

E.O. 12958: N/A

TAGS: EFIN, ECON, ETRD, PREL, TH

SUBJECT: SHIN CORP DEAL IS LEGAL, SO WHAT?

 

1.(SBU) SUMMARY: Notwithstanding recent speculation on the front

pages of Bangkok\’s newspapers that the Temasek Holdings takeover of

Thailand\’s Shin Corporation will unravel, Embassy contacts

universally expect the deal to go through when the tender offer is

completed on Tuesday, March 14. Telecom sector analysts and

attorneys regard the buyout as being in technical compliance with

Thai law and practice. While the opposition continues to level a

variety of charges against the transaction, the sole legal challenge

to date focused on individual misconduct, and Thailand\’s

Constitutional Court found insufficient evidence to hear a case

charging Prime Minister Thaksin Shinawatra with violating conflict

of interest law – effectively the same charge for which the court

found him innocent when he was first elected PM in 2001. In what may

be tacit recognition of the legal realities, the opposition has

focused more on the ethics of the transaction. This issue

underscores the critical need for strengthening the judicial and law

enforcement institutions in Thai society, particularly with regard

to their perceived impartiality and legitimacy. END SUMMARY

 

Speculation and Speculators

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2. (SBU) Front page stories in papers like the Nation and the

Bangkok Post have speculated during the past week that the takeover

of Shin Corp by Singapore\’s Temasek Holdings (REF A) could be facing

difficulties in the face of

widespread public opposition to the deal and a drop in the Shin

share price of about 8 percent in one day. Such public discussion of

the 73-billion baht acquisition includes many voices, including, for

example, those urging Temasek to halt the deal, others urging a

boycott of products with a significant connection to Shin Corp or to

Singapore, and still others seeking to use the issue to unseat Prime

Minister Thaksin. Some market observers claim that the sudden

decline in Shin Corp\’s share price to an 11 percent discount to the

tender offer was, in fact, manipulation by speculators trying to

scare minority shareholders into selling so that they could earn a

quick profit. (Note: The SEC has thus far not investigated this

unusual stock action. End Note.)

 

Nominees as Holding Companies

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3. (SBU) Telecom analysts and attorneys familiar with the structure

of the Temasek buyout have all expressed the view that it complies

with existing law, and is not open to legal challenge regardless of

how unpopular it may be – especially since the Shinawatra family has

already received payment for its 49 percent share in the company.

One telecom analyst who was asked to review the deal explained to

Econoff that there is no record of a successful court challenge to

the legal device used by Temasek to effect the deal, i.e., the use

of alleged nominees in structuring purchases.

 

4. (SBU) The creation of nominee holding companies as majority

shareholders in operating companies – in which stock with varying

voting rights or the use of controlled investors is used to get

around restrictions on foreign ownership regulations or other

restrictions – is a very common practice in Thailand. As one lawyer

told us, \”There must be 10,000 nominee companies in Thailand, and

virtually every businessman and lawyer of any consequence is

involved with one.\” Even the restriction on foreign ownership of

real estate (other than condominiums) is circumvented through the

creation of a Thai nominee corporation as the beneficial owner of

the property. Only in this way can the thousands of foreign real

estate investors in Phuket enjoy their place in the sun. Thais also

use nominees themselves to get around the requirement that any

corporation have a minimum of seven shareholders. While it may be

confusing to a westerner, this arrangement is a very \”Thai way\” of

reconciling the political mandate of de jure restrictions on foreign

ownership of things Thai versus the de facto desire/need for

foreigners\’ money.

5. (SBU) That the jurisprudence is so supportive of the Temesek

deal\’s legality is not surprising. The opposition\’s case, that the

nominees do not count as a real owner, is almost impossible to

prove: it requires that a party\’s status as a \”non-owner\” be set

forth expressly in writing. The notifications filed with the RTG

authorities in the Shin deal have not made such a declaration.

Significantly, nominee status may not be inferred from such

arrangements as unequal dividend splits or uneven division of voting

rights. An attorney who has handled many such transactions explained

to Econoff that the customary practice to \”prove\” the bone fides of

nominees is to require all shareholders to pay for their shares, as

it appears the parties to the Shin deal did.

Derailment Fails

—————-

 

6. (SBU) Petitions lodged by over several civil society groups such

as the Federation of Consumer Organizations (FCO), which launched a

successful challenge to the partial privatization of the state-power

producer EGAT Plc in November 2005, have failed to yield any result.

The FCO and other organizations argued to the National

Telecommunications Commission (NTC) that it should consider national

security in relation to the Temasek deal, because it rendered Shin

Corp-and subsidiary companies such as mobile provider Advanced Info

Service, Shin Satellite, and broadcaster iTV-\”alien\” companies and

in violation of Thai foreign ownership restrictions on telecom and

media firms. The February 23 reply of the NTC essentially punted on

the matter. The reply said that there is no clear evidence of any

harm to national public services, and that it did not have

sufficient information to inquire further into the complaints. The

regulator did, however, request additional information so that it

could consider whether or not any laws governed by the NTC were

violated. In the view of the consumer organizations, the NTC did

not exercise its full authority.

 

7. (SBU) To the extent that the Temasek deal has given rise to legal

action, the focus has been on individual wrongdoing. On February 16,

the Constitutional Court (by an 8 to 6 majority opinion) rejected a

petition by 28 senators that the Prime Minister violated the

conflict of interest law. \”The petitioners did not state clearly how

the Prime Minister was involved in managing the share trade deal.\”

The Thai constitution forbids ministers from managing shares or

affairs of a private company. Senators opposed to the Prime Minister

have vowed to fight on, but have declined to say how. In retrospect,

it is hard to see how the Constitutional Court could have reached a

different judgment: the Senators\’ charge is effectively the same as

that which the PM won in an 8-7 Constitutional Court decision back

in 2001.

 

SEC bares teeth – Shows Gums

—————————-

 

8. (SBU) On March 10, the Securities and Exchange Commission fined

Panthongtae Shinawatra (age 27), the son of Prime Minister Thaksin,

5.98 million baht for two counts of disclosure violations and

another 2.65 million baht for one violation of tender rules.

Regulators said that Panthongtae had failed to properly report his

total shareholdings in Shin, both directly and indirectly through

the British Virgin Islands-based Ample Rich Investments, a firm set

up by his father in 1999. Thaksin transferred control of the firm to

his son in 2000. While consistent with precedent, the fines are well

under the maximum penalties that could have been imposed, namely

jail sentences of two years, fines of up to 500,000 baht, and

additional fines of up to 10,000 baht per day. For one of his

disclosure violations, for example, Panthongtae received a base fine

of 127,500 baht, and an additional fine of 1,000 baht per day for

the 3,197 days he was in violation of the law.

Checks, Balances, Something?

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9. (SBU) Criticism of the Shin transaction has focused most closely

on the fact that a transaction worth more than US$1.8 billion was

structured to incur no tax liability. The fact is, however, that the

law clearly states that transactions made via the Bangkok Stock

Exchange are not subject to tax. The Revenue Department similarly

found that transfers of shares from the PM to his children and to

his holding company (Ample Rich) were not taxable events because

they were either gifts (and no cash was exchanged) in the case of

the former, and the transfer was done at a price (below market) so

that no capital gains were earned (in the latter case).

 

10. (SBU) The various institutions that were created by the 1997

constitution to act as a check on the power of parliament and the

ruling party have failed to have any influence on the Shin Corp

debate. The Constitution Court effectively punted, the National

Counter Corruption Commission is still without the requisite number

of commissioners (even if they had decided to hear a case). The

Auditor General, whose tenure Thaksin tried to cut short only to

have the King effectively block this action and have her

re-instated, has done nothing because, according to her office, this

is a private sector transaction and she deals only with the public

sector (thus endorsing one of Thaksin\’s key assertions-that he

personally had nothing to do with the deal). It is this

ineffectiveness that Thaksin opponents say has driven them into the

streets.

 

11. (SBU) In Singapore, Temasek Managing Director for Investment, S.

Iswaran, acknowledged that the company was aware that investing

abroad brought with it political risk, but emphasized that he

expected the deal to be completed by March 14 in accordance with the

rules of the Stock Exchange

of Thailand. He reiterated that Temasek\’s investment in Shin Corp

was a commercial decision that reflected its confidence in

Thailand\’s long-term economic prospects. We note that Temasek

concluded the purchase of all the shares from the PM\’s family in

January, so that it has both a legal obligation to proceed with the

transaction (per Thai SEC regulations) as well as an incentive to

secure a majority interest in Shin Corp.

 

12. (SBU) Comment: It seems almost certain that the Temasek buyout

will go through because none of the opponents have presented a

credible reason to block it. It is unlikely however, that completion

of the deal will either quiet the political uproar over it or close

the book on all charges of individual wrongdoing in connection with

it.

 

13. (SBU) If there were credible evidence of clearly illegal aspects

of the transaction, we are confident that the former investment

bankers in the Democrat party (some of whom have made careers out of

structuring such deals for wealthy Thais and worked for the same

firm thatprovided financial advice to Temasek for the Shin

transaction) would have identified and aggressively pursued them.

The choice to make this an ethical rather than a legal issue is, we

think, a practical one, determined by the weakness of the case (the

opposition could lose, thus providing the deal with a clearer legal

imprimatur that it has now), and Thais\’ greater faith in the

precepts of Buddhist morality than the vagaries of the Thai justice

system. If citizens had more confidence in their institutions

(courts, regulators, bureaucrats), then their finding of no

significant illegality in the Shin-Temasek deal would not be

dismissed quite so quickly by so many Thais. Thaksin earns few

political points for arguing the legality of the case – Thais know

that \”legal\” here is a flexible term.

 

14. (SBU) The dismaying reality is that Thais don\’t trust the

institutions involved (suspecting them to be either dismantled,

bullied, or bribed into submission), so many Thais say \”so what\” to

the statement that the transaction has been found to be legal.

Above all, this issue underscores the need for a strengthening of

the judicial and law enforcement institutions in Thai society,

particularly with regard to their perceived impartiality and

legitimacy.

BOYCE

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