Contributed By SSEK Legal Consultants
Investors have maintained their appetite for Indonesia’s technology, media and telecom (TMT) sector, rea. There has continued to be significant growth in the number of start-ups established across various sectors. One particular trend is online app-based start-ups, many of which are looking for venture capital as a strategic option to finance their growth. Several start-ups in Indonesia have achieved unicorn status including Gojek, Tokopedia, Traveloka and Bukalapak. Outside of the tech space, specific traditional sectors, such as banking and finance and logistics, have continued to see realised deals. Another area of activity concerns government-initiated holding company projects. After completing, in December 2018, the creation of the Indonesian Oil and Gas Holding State-Owned Enterprise, Indonesia’s largest state-owned holding company, the culmination of several years of work, the government has expanded this campaign to include sectors such as mining, real estate and pharmaceuticals.
After creating the online single submission (OSS) system, in an effort to encourage investment and streamline the licensing process, the government is migrating the OSS system to an improved platform, referred to as OSS 1.1. This new platform is expected to contain a number of new features, including the ability to identify and differentiate between the main business activity of a company and supporting business activities, so any foreign ownership limitation will be determined based solely on what is considered the main business line of a company.
The past year has seen a significant increase in the number of foreign companies pursuing investment in local companies, especially in the technology and finance sectors, as well as in crypto-brokerage companies. While private equity and venture capital firms continue to be very active in pursuing investments in Indonesia, there were also a significant number of strategic investors pursuing long-term investments in local companies engaging in those areas.
With the continued growth in e-commerce activities in Indonesia, and both the government and industry players advocating for greater financial inclusion, there has been a spike of interest from technology companies in the finance industry, including multi-finance, peer-to-peer (P2P) and payment solutions. Banking remained a favourite industry for many foreign investors in 2019, despite the rigorous procedures and requirements imposed by the Indonesian government for investors acquiring a bank.
Purchasing shares in a company, either from a selling shareholder or from the company itself, is the most common type of share acquisition in Indonesia. Asset acquisitions are also becoming more common for individuals acquiring business units.
Other methods include mergers or amalgamations, where the target company may be dissolved into the surviving company and will therefore no longer exist.
Depending on the sector in which the target company is engaged, any change of shareholding composition resulting from either a merger or acquisition must be approved or acknowledged by the Ministry of Law and Human Rights. The Ministry is the department that oversees all limited liability companies, no matter the sector, non-public or public alike.
If a foreign party wishes to acquire shares in an Indonesian company, generally, for most industries, a certain ownership limitation will be applicable, and it will be monitored by the Investment Co-ordinating Board (Badan Koordinasi Penanaman Modal – BKPM). Other industries, especially if they are heavily regulated, eg, banking, finance, and telecommunications, are under specific government agencies, such as the Financial Services Authority (Otoritas Jasa Keuangan – OJK), Bank Indonesia or the Ministry of Communication and Informatics.
The OJK has supervisory authority for the takeover of public companies and if the public company is listed on the Indonesian stock exchange (IDX), the only stock exchange in Indonesia, then the IDX’s listing and trading rules will also apply, particularly when there is trading activity due to the M&A activity.
It is possible that multiple regulators will supervise a transaction if the target company’s status and core business require it. For example, for the acquisition of a public company engaged in the telecommunications sector, both the OJK and the Ministry of Communication and Information Technology will play a supervisory role. Other government agencies may have regulatory oversight of a particular transaction, depending on the business in which the public company engages. For example, the Ministry of Transportation supervises the aviation, shipping and land transportation sectors. Regulations issued by these and other industry-specific government agencies will impact mergers and acquisitions.
There are various limitations to foreign direct investment in various sectors in Indonesia, which can be found in the general "negative investment list" issued from time to time by the President or in a specific law or regulation related to a specific sector such as banking, finance, aviation or payment systems. Some sectors are completely closed to foreign ownership, but many sectors (eg, manufacturing, IT service and management consultancy) are open for 100% foreign investment.
Post-merger notification is mandatory for any merger, consolidation or acquisition of shares between non-affiliated companies that:
The qualifying transaction must be reported to the Business Competition Supervisory Commission (Komisi Pengawas Persaingan Usaha) within 30 working days as of the effective date of the relevant merger, consolidation or acquisition.
There are two applicable thresholds used to assess whether a transaction is subject to the merger report, whether:
Merger, consolidation or acquisition-of-shares transactions conducted between affiliated parties are exempt from the mandatory post-merger notification. Parties are considered affiliated if one controls the other (whether directly or indirectly) or if the same entity controls them. Mergers, consolidations or acquisitions of shares between companies that are controlled by the government (ie, state-owned enterprises) do not qualify for this exemption.
The Indonesian Labour Law (Law No 13 of 2003) allows an employee to resign due to a "change of ownership" of the employer entity and receive enhanced separation entitlements. Another issue concerning labour entitlements due to a change of ownership is the impact on the purchase and sale transaction. Labour entitlement payments can be costly, especially where there are many long-serving permanent employees.
There is no national security review mechanism for commercial mergers or acquisitions in Indonesia.
In June 2018, the government introduced the OSS system, an integrated online application system created to accommodate the process of obtaining business licences and permits, including those related to mergers and acquisitions. Before June 2018, the BKPM issued business licences and permits for foreign investment companies that had customarily been a condition-precedent item to closing a transaction. With the OSS system, the permits and licences will need to become a condition-subsequent and generally no longer be the responsibility of the seller or vendor.
While the intention of the OSS is to simplify all licensing processes, there remains a post-audit risk, ie, an audit by the BKPM, which still has the authority to supervise foreign investment companies. Otherwise, the relevant examinations for compliance will be conducted post-transaction, after the target company completes the online submission. Investors are expected to be aware of the applicable regulatory regime to make sure that compliance with applicable laws and regulations is maintained to minimise any post-audit risks that may ultimately affect their investment in the target company.
There were no changes in the law or regulations in the last year that have affected takeover laws in Indonesia.
If a bidder decides to build a stake in a target, they can do so either through a direct increase in shareholding or by way of derivatives. The former is more common, although the latter is becoming increasingly frequent due to commercial or tax reasons.
In general, the Ministry of Law and Human Rights maintains a registry that includes corporate information on all limited liability companies in Indonesia, including their shareholding information. Any change in shareholding composition will need to be acknowledged by the Ministry and recorded in the registry, which is accessible to the public. A buyer intending to acquire a controlling stake in a non-public company will also need to announce the transaction publicly through nationally circulated newspapers before the buyer and the seller can close the transaction.
A disclosure obligation also arises concerning an interest in securities when an investor reaches 5% of outstanding shares in an Indonesian public company. Once a shareholder reaches the 5% threshold, the shareholder must report to the OJK on any transfer of shares, provided the ownership is still above 5%.
If the shareholding ownership drops below 5%, the shareholder must still report the decrease of ownership (eg, the ownership changing from more than 5% to less than 5%), after which no reporting is necessary for any transfer of shares (provided the ownership remains less than 5%).
Also, rules from the IDX require companies listed on the IDX to make public any information relating to investors owning 5% or more of the shares in that public company (available on the IDX website). The public companies must make the disclosure no later than ten calendar days after the obligation arises, because there will have been an acquisition or disposition of shares.
The IDX identifies shareholders owning more than 5% of the shares in a public company on its website.
Any increase or change in shareholding in most non-public companies requires shareholder approval. The Company Law (Law No 40 of 2007) sets out the minimum quorum and voting requirements for shareholders' meetings. However, the articles of association can specify higher thresholds, which will prevail over those specified in Indonesian company law.
Obtaining shareholder approval may prove difficult, although not always, particularly if a company consists of many shareholders and a quorum is difficult to achieve. Other difficulties may include obtaining the licence or approval from the relevant government authority for including a foreign element in the shareholding composition, which is particularly true for certain industries such as the payment industry.
Shareholder approval is generally not required for an increase in shareholding in public companies, unless the increase is made through a rights subscription. In general, obtaining approval from the shareholders in a public company is more challenging, not only from a procedural perspective but also in the gathering of the necessary quorum, in which case securing a commitment from the incumbent controller of the company is almost always necessary.
Many acquisition transactions are preceded by an agreement involving derivatives, such as a subscription agreement to convertible or exchangeable bonds, or a call/put option agreement. These are allowed under Indonesian law and there are various reasons for pursuing such agreements. The most notable reason is tax efficiency, while another is security (eg, to secure repayment in a loan arrangement).
There is no disclosure requirement when the stakebuilding is carried out using derivatives (eg, convertible bonds, call/put options). The post-merger report (as discussed in 2.4 Antitrust Regulations) does not apply either. The disclosure/report obligation will arise only on the exercise/conversion of the derivatives into shares in the company if the relevant thresholds are met.
As previously mentioned, a buyer intending to acquire a controlling stake in a non-public company will need to announce the transaction publicly through nationally circulated newspapers before the buyer and the seller can close the transaction. However, in general, there is no requirement for the buyer to disclose their intention regarding control of the company.
For heavily regulated industries such as banking, a strategic investor who intends to acquire and control a particular bank must disclose their intention regarding the direction of the bank’s business, going forward, during their "fit and proper" test to become the controlling shareholder of the bank.
For takeovers of public companies using the voluntary tender offer (VTO) method (as explained in 6 Structuring), a bidder must also make known their intention for the target company, ie, whether they wish to delist the company from the stock exchange and make it a private company.
There is no requirement to disclose a deal when acquiring a non-public company, other than the newspaper announcement mentioned previously.
In terms of public company acquisitions, a prospective controller can announce that it is in negotiations with the seller in a nationally circulated newspaper. This announcement is typically made if the buyer anticipates an increase in the price of the public company's shares, which will affect the minimum price at which the buyer must purchase the shares during any subsequent mandatory tender offer (MTO) process.
Once the negotiation process is announced, a 90-day period for determining the MTO price is locked, starting backwards from the date on which the announcement was made. If an announcement is not made, the 90-day period will be calculated backwards from the date of the closing (ie, the date on which the acquisition is effective).
To the extent that the prospective controller decides not to disclose to the public information resulting from the negotiations, the parties involved must keep confidential the information that results from the negotiations.
Generally, Indonesian market practice is that the timing of disclosure is made according to the requirements prescribed in law.
There are no specific requirements or procedures for due diligence before acquiring a company. However, it is common and best practice for a bidder to perform due diligence on the target company before proceeding with an acquisition.
In practice, due diligence will cover the following:
In the case of public companies, the selling shareholder, being the incumbent controller of the public company, is considered an insider and therefore any sale of shares by that shareholder is subject to applicable rules concerning insiders. The insider rules require any selling shareholder and the buying party to enter into a confidentiality agreement, under which the buying party undertakes that any information received (including information from the due diligence process) will be kept confidential and will not be used for any purpose other than a securities transaction with the insider/selling shareholder.
During the early stage of deals (eg, term-sheet negotiation, due diligence), it is very common that a sole bidder or offeror demands exclusivity, typically lasting for three to six months from the signing of a term sheet or memorandum of understanding.
In the case of public company acquisitions, a prospective buyer of the shares may agree with the seller on certain terms related to the MTO in the share purchase agreement. It is relatively uncommon, but in certain cases the buyer may need a commitment from the seller to support the buyer in fulfilling his or her sell-down/re-float requirement following the MTO that it conducts after the takeover.
The OJK regulation on public company takeovers requires a re-float obligation that follows a takeover and MTO, which obligation, if the new controller holds shares in excess of 80% of a public company that were acquired through the MTO, requires the new controller to sell down to 80% within two years of the MTO and retain a minimum public float.
For acquiring/selling non-public or public companies, the process will generally take around three to six months, starting from the term-sheet negotiation stage, continuing with due diligence, share purchase agreement negotiation, conditions fulfilment and closing. The process will generally take twice as long if the acquisition is made through a rights subscription over a public target entity, where a general meeting of shareholders to obtain their approval must be convened.
There is no mandatory offer threshold applicable to mergers or acquisitions involving non-public companies.
For public companies, an MTO is generally required following a change of control arising from an acquisition of shares either from an incumbent shareholder or if the change of control arises from the subscription for newly issued shares in a rights offering (unless exempted under certain conditions).
A change of control is generally deemed to occur where either more than 50% of shares in the public company are acquired or, if less than 50%, there is an effective change of control over the management, or policy-making in the company.
If the acquisition is by subscription for newly issued shares issued by the non-public target company, the consideration must be either cash or in-kind. In a direct acquisition from an existing shareholder, the consideration can be in the form of cash or shares in another company. Subscription to new rights issued by public companies can only be made in cash.
As explained previously, a new controller of a public company is obliged to make an MTO to the remaining minority shareholders, as a result of it acquiring a controlling stake from an existing controller of the public company. In the case of an MTO, conditions for offer are generally as prescribed by law.
Other means of obtaining control include mergers and VTOs. However, given the regulatory and procedural complexities that a merger will entail (particularly when it involves a public company), mergers are quite rare except where they occur for regulatory purposes in the banking and insurance sectors. VTOs are also rare and are more often used by a controlling shareholder to take a public company private and delist, in addition to acquiring a controlling stake.
There is no minimum acceptance condition for MTOs, since bidders are required to make the offer after they acquire a controlling stake and attain control of the company. In other words, they are required to buy the shares from each of the minority shareholders participating in the offer, which means a minimum acceptance condition is irrelevant.
There may be a minimum requirement in a VTO context, depending on whether the offeror wishes to have the public target delisted from the stock exchange and make it a private company. If the offeror does wish to do so, the OJK will typically allow the going-private to happen if there are fewer than 50 remaining shareholders.
Many buyers in M&A settings require third-party financing to acquire shares in a target company. It is permitted and common for the buyer and seller to agree that the transaction will close only once the buyer has secured proper financing. This is particularly important if the acquisition involves a publicly listed target, in which the buyer may need to make an MTO following the acquisition, which will require the buyer to have the necessary financial capability.
Committed funding is also required before announcing an offer in a VTO context. A party conducting a VTO must submit a statement on the availability of funds to settle the VTO, which must be supported by an opinion from the accountant, bank or securities company involved.
Deal security measures, such as break fees, are not common in Indonesia, although they are permitted. In smaller deals involving individual local vendors, some will require break fees, which are typically half the cost of lawyers' fees and other related expenses they may have incurred.
A controller does not have to own 100% of a target company to control it. A shareholder owning more than 75% of shares would have the requisite voting power to adopt any corporate actions that are subject to shareholder approval under the Company Law (as discussed in detail below).
In general, resolutions of a general meeting of shareholders (GMS) are adopted by consensus. Failing which, a resolution must be approved by more than one half of the shares in attendance or represented, except for the following corporate actions, which require higher thresholds:
Additional governance rights, other than the above, can still be agreed between the shareholders in a shareholders' agreement or even in the articles of association, by specifying certain reserved matters on which unanimous approval is required or by creating a class of shares that provide specific rights to certain shareholders.
In general, under the Indonesian Company Law one share bears one vote and each share is issued under the name of its holder. The Company Law does not allow the issue of bearer shares.
Despite the above, it is possible for a shareholder to give proxy to another party to attend a shareholders' meeting and cast his or her vote on the shareholder’s behalf.
The OJK as of this writing has never issued clear-cut guidelines for acquiring an Indonesian publicly listed company and then delisting it and taking it private. The OJK normally issues a "letter" to the prospective controller specifying the procedures and requirements on a case-by-case basis.
In general, the delisting itself requires GMS approval and the OJK's "no objection" toward a tender offer statement being submitted by the company.
In the most recent examples, the OJK has also required that the going private:
The delisting and the going-private are only effective once the aforementioned requirements have been fulfilled and the total number of the company's shareholders is fewer than 50 parties.
It is expected that all public shareholders would sell their shares during the one-month tender offer period at the price offered by the prospective buyer. In general, the price for the tender offer is required to be higher than the average of the highest daily trading price at the stock exchange for the last 90 days before the tender offer announcement is made. Once the tender offer process has been concluded and it results in the total number of shareholders dropping below 50, the company may proceed to change its status to a private company.
If the target of having fewer than 50 shareholders is not achieved, the company may not proceed with going private and the tender offer process may need to be repeated, subject to a ruling by the OJK, and this may involve an increase in the offering price. The process can be tricky and may come down to chasing individual shareholders to convince them to "participate" in the tender offer process.
Once the going-private becomes effective any shareholders who did not participate in the tender offer process will remain as shareholders of company. To fulfil the requirement of the Company Law, Article 62, which essentially gives shareholders the right to have their shares bought by the company if they think they are suffering losses due to a certain corporate action of the company, any shareholders who did not approve the going-private may request the company to buy their shares at a fair price (as determined by an appointed independent appraiser) and the company is required to do so.
When negotiating or signing a conditional share purchase agreement, it is permissible and common to secure a commitment from the incumbent controller of the target company, especially if the transaction requires approval from shareholders and the securing of a minimum number of affirmative votes to close the deal.
A bid is made public in the case of either an MTO, which follows a change of control, or a VTO. Before the offeror can proceed with either, he or she must announce their intention to the public. The announcement must be reviewed by the OJK before it is released. The offeror can only proceed with the MTO or VTO after the OJK states that it has no objection to the tender offer statement.
In the case of a share acquisition involving a non-public company, generally no disclosure is required other than the newspaper announcement discussed in 4.2 Material Shareholding Disclosure Threshold, which contains very basic information concerning the buyer and the target and the fact that there will be a change of control over the company.
If the share acquisition is made over a public company through the issue of shares, the issue will be subject to shareholder approval through a GMS, which must be preceded by the circulation of a fully-fledged prospectus by the target company.
There is no requirement for bidders to produce a financial statement, other than the requirement that the bidder has the financial capability. Committed funding is required before announcing an offer. A party conducting a VTO must prepare a statement on the availability of funds to settle the VTO, which must be supported by an opinion from the accountant, bank or securities company involved. In practice, the same also applies to MTOs.
Transaction documents are not required to be disclosed, either in a non-public or public company merger or acquisition. The pricing, however, must be disclosed in an acquisition of a public company, particularly if an MTO is required to be conducted by the new controller following the acquisition. This is because the price to be offered by the new controller in an MTO must not be lower than the price used in acquiring the shares in the initial acquisition.
If a shareholders' agreement is signed when acquiring a public company, it may become necessary to later disclose the key terms of the agreement to the OJK. This is typically the case when the buyer must demonstrate to the OJK that there will be no change of control occurring from the transaction and that an MTO will therefore not be necessary.
All members of the board of directors of limited liability companies in Indonesia, whose primary duty is to carry out the day-to-day operations of the company and to represent the company, must perform their duties in good faith, for the best interest of the company and in accordance with the purposes and objectives of the company as specified in its constitutional documents.
The same also applies to the members of the company’s board of commissioners, whose primary duty is to supervise and monitor the directors. The board of directors and board of commissioners make up the two-board system that the Company Law requires, each has equal status despite their distinct functions. A GMS appoints the members of both boards.
The board of directors can establish a special team or committees to assist it in overseeing the M&A process, including identifying a potential target, drafting transaction documents, co-ordinating with outside advisers, as well as negotiation. Typically, however, the directors themselves make all the final decisions.
The establishment of such special teams is not intended to tackle conflict of interest issues. The Company Law does not allow a director to represent the company, including in an M&A context, if the director has a conflicting interest with that of the company. In this case, other directors in the company must represent the company (if the company’s board of directors consists of more than one director). If all directors are conflicted, the board of commissioners can represent the company. If both boards are conflicted, the shareholders can appoint another party to represent the company.
Directors and commissioners of public companies and financing companies must further follow an additional set of rules under capital markets laws, which deal with conflict of interest. Public companies must disclose to the public any transactions by the company that have a conflict of interest element involving the interest of any party affiliated with the directors or commissioners of the company. The transaction must be approved first by disinterested shareholders if it transpires that the transaction is considered to be detrimental to the public company or if it is not in the best interest of the company.
The business judgement rule, though not formally recognised under Indonesian law as a legal term, describes a concept of immunity that is similar to that provided under the Company Law. Article 92 of the Company Law gives authority to the board of directors to manage the company according to its good judgement, within the parameters of the Company Law and its constitutional documents. Article 97 further states that a member of the board of directors will not be liable for the losses of the company if it is evident that:
While the above seems clear, ie, that all business judgements rendered according to law should provide protection to directors against all liabilities that may arise from any potential business risks, it may not be the case if there is an element of potential loss to the state. A recent case shows that a business decision made by a director of a state-owned enterprise that goes wrong may put the director at risk of being accused of a criminal act. The Attorney General would, of course, need to prove that there was an intention of wrongdoing before the court could convict the defendant. However, this at least shows that the courts may look beyond the judgement of the board of directors in cases that involve loss to state-owned enterprises.
It is almost always the case that the management of companies seeks outside counsel before entering into any definitive agreement for business combinations. Prospective acquirers seek legal counsel for the obvious reason that the transaction is legally feasible and to identify all rights and obligations that the acquirers will assume from the combination, including any legacy liabilities. A financial and tax consultant will also play an important role to help quantify any financial risks, and their findings during the due diligence will often complement those risks identified from the legal end.
In certain transactions involving targets engaged in the natural resources sector, it is also common and advisable to seek the advice of environmental consultants, since environmental issues are often a highly topical in Indonesia. The consultants will be useful in suggesting corrective measures to prevent the recurrence of legacy environmental issues, which, if not corrected, may lead to imprisonment.
Conflicts of interest of directors or shareholders have been the subject of corruption law enforcement, particularly where a potential loss to the state has been identified. The Indonesian Corruption Eradication Commission (KPK) is currently investigating a former District Head for allegedly receiving bribes from a company in connection with a regional infrastructure procurement project, in which he was also an indirect controlling shareholder of the company. The case is considered a corporate crime, and as of this writing, there has been only one company that has been found guilty of committing a crime of corruption.
The Supreme Court has issued a regulation that sets out procedures for handling corporate crimes. Since its issue there have been several instances where companies were investigated for possible corporate crimes. The KPK in particular appears to have used the regulation to investigate corporations in connection with corruption cases.
Hostile bids are not recognised in Indonesia. As explained earlier, acquisitions in Indonesia can be performed either through direct acquisition from existing shareholders, or by acquiring newly issued shares directly from the company.
In the case of public companies, almost all public companies in Indonesia have controlling shareholders in place, making hostile takeovers unlikely. Direct acquisitions require the co-operation of the incumbent controlling shareholders for the obvious reason that those controlling shareholders must be willing to sell, while rights offerings also require the support of controlling shareholders for the simple reason that they are subject to the approval of a shareholders meeting, where securing the affirmative vote from these shareholders will be necessary.
No defensive measures are available for directors, either in the context of non-public or public company acquisitions.
In a VTO situation, directors of the public target can make known publicly their objection to the offer. There are no other measures made available by the law other than this. Their announced objection may prove to be sufficiently compelling and the shareholders of the public target may think twice before saying yes to the offeror.
In general, whatever measures directors take, their fiduciary duty to act in the best interest of the company remains in place, as discussed previously.
Directors cannot "just say no" or take action that could prevent the acquisition of the company in which they hold office.
Litigation in connection with M&A deals is not common in Indonesia.
If a court dispute does occur it will most likely take place after the transaction documents have been signed, either after or before closing. A breach of contract claim by the buyer might occur if the seller cannot fulfil the warranties or undertakings as agreed in the transaction documents. This should be a sufficient basis for making a filing at a court in Indonesia.
Shareholder activism is not a defined term, not is it recognised under any laws in Indonesia. The Company Law, however, does provide minority shareholders with certain rights. These rights give them the ability to initiate certain actions that are essentially intended to protect them against potential losses that might be caused by a company’s corporate actions. In an M&A context, for example, each shareholder has the right to request that the company repurchase his or her shares at a reasonable price if a merger, consolidation or acquisition of the company causes the shareholder to suffer losses. Each shareholder is also entitled to file a lawsuit against the company if the shareholder suffers losses caused by any of the company’s actions that are considered unfair or unreasonable.
In the realm of public companies, any conflict of interest transactions that may cause a loss to the company are subject to prior approval from minority or disinterested shareholders, which is given through a general meeting of independent shareholders.
The way rights are given to minority shareholders under the Company Law is generally not intended to give them the ability to encourage certain corporate actions of the company. The company must convene a shareholders' meeting at the request of one or more shareholders who jointly represent one tenth of the total number of shares having valid voting rights, but there is no guarantee that the meeting will yield the outcome that the minority shareholders are seeking without securing the votes of the majority shareholders in the company.
The Company Law does not provide any rights to minority shareholders to interfere with transactions, particularly when they are still in the announcement stage, which typically means the shareholders or the board (as applicable) have not approved the transaction. The rights of minority shareholders are triggered only when a corporate action, including those involving M&A transactions, has obtained the requisite corporate approval either at shareholder or board level.