The Commission for the Supervision of Business Competition (the "KPPU") has recently proposed a draft Government Regulation regarding the mandatory pre-notification of mergers and acquisitions (the "Proposed Merger Regulation") under Law No. 5 of 1999 on the Prohibition of Monopolistic Practices and Unfair Business Competition (the "Anti-Monopoly Law").
The Anti-Monopoly law contained provisions prohibiting anti-competitive mergers, consolidations and acquisitions, however, these had not entered into effect pending implementing regulations. Last year the KPPU published Regulation No. 1 of 2009 on the Pre-Notification of Mergers and Acquisitions ("Regulation 1/2009") which introduced the concept of voluntary pre-notification by business entities intending to undertake a merger or acquisition. Consequently, only one merger was duly notified to the KPPU since its enactment.
With the adoption of the Proposed Merger Regulation, the KPPU will have the authority to take a much more pro-active role in regulating mergers and acquisitions in Indonesia. The Proposed Merger Regulation will implement a mandatory notification regime under the Anti-Monopoly Law, superseding the current voluntary pre-notification regime.
Indonesia's competition policy has attracted significant commentary by foreign investors in Indonesia for some time. The Proposed Merger Regulation should provide increased transparency, certainty and stability to foreign investors through the introduction of clear thresholds and the obligation to file a merger notification with the KPPU. This article reviews the procedural and substantive changes brought about by the Proposed Merger Regulation, in light of the KPPU's past practice in Indonesia.
A. BACKGROUND - FOREIGN INVESTMENT IN INDONESIA
Although less well known for its foreign investment potential than its larger Asian neighbours, Indonesia is starting to attract significant interest as a destination for foreign investment. Foreign investment has always been an issue with political significance in Indonesia, and key restrictions on foreign investment are set out in Law No. 25 of 2007 on Investments (commonly known as the Foreign Investment Law) which provides for defined ownership percentages for foreign investors in certain industries to be set out in a negative investment list. In addition, various sector-specific legislative measures contain ad hoc foreign ownership restrictions, such as those under the Telecommunications Towers Law and the Broadcasting Law.
High-level legislative policy has typically been aimed at encouraging foreign investment, particularly in underdeveloped sectors that require significant capital expenditure, such as power and major energy projects. At the ground-level, however, there has been significant domestic opposition to various foreign investments in Indonesia. This may be driven by a desire to protect domestic players or a perception that foreigners are profiting too much from Indonesian national assets. It is a sweeping generalization, but domestic opposition is generally far higher in the case of a foreign acquisition of an existing business than foreign investment into a new business.
In practice, most domestic opposition is encountered in cases of acquisitions of controlling stakes of large successful Indonesian companies. We anticipate this will be a major challenge for the current interest by a number of large private equity firms in Indonesia, particularly those looking for larger buy-out deals. Routinely, these type of deals experiences significant difficulties in obtaining requisite regulatory clearances - on recent major deals we have experienced capital markets challenges, Bank Indonesia challenges for the financing, foreign ownership restrictions, court challenges and even prohibitive legislation or regulations being passed while the deal is in progress!
Of course, these issues have also been faced with buyouts by large domestic groups (often with significant private equity and offshore financial investor backing), but a major Indonesian group is usually much better placed to handle these challenges than a foreign private equity firm.
This article will focus on another potential regulatory obstacle to foreign investment: merger control. The Indonesian Anti-Monopoly Law has already attracted significant offshore attention in the Carrefour and Temasek cases outlined below. Now, provided that the Proposed Merger Regulation is adopted, mergers and acquisitions will be subject to mandatory pre-merger notification where the relevant thresholds are satisfied.
B. CASE STUDY: CARREFOUR
In January 2008, PT Carrefour Indonesia ("Carrefour"), the Indonesian arm of the French hypermarket, acquired 75% of the shares of a local minimarket operator, PT Alfa Retailindo Tbk. ("Alfa") for a reported price of Rp. 674 billion (approximately US$71 million). This acquisition was seen by many as not just an expansion by Carrefour into the minimarket business, but also an effort by Carrefour to strengthen its lead in the profitable and fast-growing Indonesian mass grocery retail market.
Following Carrefour's acquisition of Alfa, the KPPU commenced an investigation into whether the acquisition was in contravention of the Anti-Monopoly Law. In February 2009, the KPPU found the acquisition to be in contravention of the Anti-Monopoly Law because:
- it increased Carrefour's share in the market for hypermarkets and supermarkets from 44.75% to 66.73% hence giving Carrefour a dominant position in that market; and
- Carrefour used its dominant position to dictate unfair trading terms to suppliers and vendors in contravention of Article 25 of the Anti-Monopoly Law.
Carrefour was fined Rp. 25 billion (approximately US$2.7 million) and ordered to divest its stake in Alfa within a year. Carrefour appealed the order to the District Court of South Jakarta, on the following basis:
- Market Share of Carrefour Post-Acquisition
Article 17 of the Anti-Monopoly Law prohibits a business from having dominant control over the market that can cause monopolistic practices and/or unfair business competition. Paragraph (2) provides that a business can be considered as having dominant control over the market if it controls 50% or more of the market share of a particular type of goods or services. As in many competition law disputes worldwide, the case revolved around a dispute with respect to identification of the relevant 'market'.
KPPU based its case on the fact that after the acquisition of Alfa, Carrefour's market share had increased to more than 50% of the market share of hypermarkets and supermarkets in Indonesia.
In its appeal, Carrefour argued that the KPPU's finding was erroneous because it took into account the market share of supermarkets and hypermarkets only. Instead, the KPPU should have taken into account the market shares of minimarkets, department stores and wholesale grocers as well. By way of support, Carrefour cited Presidential Regulation No. 112 of 2007 concerning Directions on Traditional Markets, Shopping Centers and Modern Stores ("Regulation 112/2007"), which defined a 'modern store' to include a supermarket, minimarket, department store, hypermarket and wholesale grocer.
If KPPU had followed the definition in Regulation 112/2007, then it would have found that Carrefour's market share was significantly less than 50%, even after its acquisition of Alfa. Indeed, this was the finding of three bodies who undertook independent surveys of Carrefour's market share post-acquisition. Studies by AC Nielsen, Euro Monitor and Mars Indonesia found that Carrefour's market share did not exceed 50% and in fact, Carrefour only controlled 17% of the market share of retail through modern stores and 7% of national retail.
- Trading Terms between Suppliers and Carrefour
The KPPU's finding was also based on reports from various vendors and suppliers who had relationships with Carrefour and claimed that post-acquisition, Carrefour held a dominant position in the market for hypermarkets and supermarkets and used its dominant position to pressure suppliers to agree on trading terms that were heavily in Carrefour's favour, which was a contravention of Article 25 of the Anti-Monopoly Law.
There is evidence that post-acquisition, the suppliers to Carrefour had to bear the costs of listing fees, fixed rebates, promotion fees and other related fees. For example, post-acquisition, the listing fees for cosmetic products in Carrefour increased from 13% to 33%. Additionally, the promotion fees imposed on suppliers also increased from 8.5% to 11%. Besides the increased fees, suppliers that used to exclusively supply products to Alfa minimarkets were forced to supply their products to Carrefour. It was alleged that Carrefour's market share had increased so much after its acquisition of Alfa, that suppliers had no other choice but to acquiesce to Carrefour's demands.
In February 2010, the District Court of South Jakarta revoked the KPPU's decision and held that the acquisition of Carrefour of Alfa was not in contravention of the Anti-Monopoly Law. This finding was largely based on the fact that the KPPU had erroneously limited the determination of market share to retail solely through hypermarkets and supermarkets. The Court took the view that the KPPU should have also taken into account the market share of minimarkets and convenience stores selling the same goods as larger retailers, in determining whether Carrefour had a dominant position. However, the Court did not decide on the issue of oppressive trading terms between Carrefour and its suppliers.
In March 2010, the KPPU lodged an appeal of the decision of the District Court to the Supreme Court which is still pending.
C. CASE STUDY: TEMASEK
Temasek Holdings ("Temasek"), a Singapore government-linked company, held a stake comprising 35% of the equity in PT Telekomunikasi Selular ("Telkomsel") and acquired 41.9% of the equity in PT Indosat Tbk., ("Indosat"). These were held through Temasek's subsidiaries, Singapore Telecommunications ("SingTel") and Singapore Technologies Telemedia ("STT") respectively. Telkomsel and Indosat were Indonesia's first and second largest mobile telecommunication providers.
In its 2007 decision, the KPPU held that the "Temasek Business Group", comprising of Temasek and its subsidiaries violated Article 27 of the Anti-Monopoly Law which prohibits one undertaking holding majority shares in two or more operators in the same market, if ownership of those operators results in control of more than 50% of the relevant market. Despite the fact that the Indonesian government had previously acknowledged that Temasek's respective stakes in Telkomsel and Indosat were under 50%, and thereby not majority shares, the KPPU took the view that the term "majority shares" related to control as opposed to falling above the 50% threshold.
Consequently, the KPPU found that Temasek held majority shares in Telkomsel and Indosat and thereby controlled over 88% of the Indonesian cellular telecoms market. On that basis, the KPPU found that the acquisition amounted to a monopolistic practice and gave Temasek the ability to control price on the market for the provision of telecommunication services. Temasek was subsequently ordered to divest the interest it held in either company and the KPPU also imposed a fine of S$3.8 million.
Temasek argued that its subsidiaries, SingTel and STT, were operated and controlled entirely independently, and there was no direct evidence of any price collusion between the two whatsoever. Moreover, SingTel and STT's holdings in Telkomsel and Indosat were both minority stakes, and there was no evidence that SingTel or STT would have had the ability to direct the pricing of either operator even if it had wanted to. In fact, as Temasek argued, it appeared that the Indonesian government was more likely to have "controlled" the two telecoms companies itself, through a 65% stake in Telkomsel and a 14.3% share in Indosat (including special shareholder rights such as veto powers and the right to appoint the majority of Indosat directors).
This case came under significant international criticism. However, Temasek proceeded to sell its interest in Indosat, after its appeal against the KPPU's decision was rejected by the Indonesian Supreme Court (although a prior district court ruling significantly reduced the initial S$3.8 million fine imposed by the KPPU).
D. NOTIFICATION OF MERGERS AND ACQUISITIONS
As set out above, the body responsible for merger control in Indonesia under the Anti-Monopoly Law is the KPPU. Article 29(1) of the Anti-Monopoly Law does require business entities to file a written report to the KPPU within 30 days of a merger, consolidation or acquisition taking place. However, this requirement has been largely ignored as no filing thresholds were specified in the law, or implementing regulations, and most businesses preferred not to voluntarily invite the attention of the regulator.
Because of the absence of a pre-notification system, the KPPU's practice has been only to investigate transactions of which they became aware through public sources or through disgruntled third parties, such as the suppliers in the Carrefour case. (Numerous rumours also circulated regarding the identity of the disgruntled parties behind the Temasek investigation). In the vast majority of the cases, such investigations took place once the transaction had been implemented. This situation has led to an unevenness of approach to enforcement and a very unpredictable and uncertain legal regime for merging parties.
Consequently, following its implementation last year, the KPPU adopted a voluntary, non-suspensory pre-notification procedure, as set out in Regulation 1/2009. The Guidelines accompanying Regulation 1/2009 further indicated the KPPU's intention to impose a mandatory post-notification requirement through a Government Regulation at a later date. However, no such Government Regulation transpired, and the voluntary regime was generally regarded as unsuccessful, given that only one merger notification has so far been filed with the KPPU.
Consequently, the Proposed Merger Regulation represents an attempt by the KPPU to enable itself to take a more preventive role in Indonesian merger control by establishing a mandatory pre-merger notification regime for business entities engaging in mergers or acquisitions. However, it appears that the same thresholds and a similar process will apply as originally set out in Regulation 1/2009.
The Proposed Merger Regulation provides that business entities intending to undertake a merger or acquisition above certain thresholds are obliged to notify the KPPU, at the latest, within 30 days of completing a merger plan or proposal. Once it has completed its preliminary examination or, if necessary, its comprehensive examination, the KPPU will then issue an order for the entities to go ahead with the merger or acquisition.
Based on current proposals, it is understood that non-financial business entities will be obligated to notify the KPPU of a proposed merger or acquisition if they meet or exceed any of the following thresholds:
- the value of the combined assets of the acquirer and the target in Indonesia exceeds Rp. 2.5 trillion (approximately US$272 million); or
- the combined turnover generated by the acquirer and the target in Indonesia exceeds Rp. 5 trillion (approximately US$540 million); or
- the transaction leads to the acquisition or control of more than a 50% market share in the relevant market.
Pre-merger notification requirements of financial services industry-related mergers are subject to much higher thresholds.
Following the notification, the KPPU will undertake a preliminary examination to determine whether the intended merger or acquisition will potentially create monopolistic practices or unfair business competition in the relevant market. An initial assessment must be undertaken by the KPPU within 30 days from the date the notification is filed by the business entities party to the proposed merger or acquisition. Following the first-phase 30-day period, the KPPU can either approve the intended transaction or further order a comprehensive assessment to be undertaken within an additional 60-day period. A comprehensive assessment will be conducted where the preliminary examination by the KPPU concludes that a high level of market concentration is likely to result from the merger or acquisition. The KPPU can then either issue an approval, a conditional approval or a prohibition of the intended merger or acquisition. Any disagreement with the KPPU's decision resulting from the comprehensive assessment can be appealed by the parties to the District Court in accordance with Supreme Court Regulation No. 3 of 2005.
At present, it is understood that the Proposed Merger Regulation is still at a draft stage and is awaiting approval from the President. Once enacted, the Proposed Merger Regulation will for the first time, oblige business entities to file a merger notification with the KPPU where the relevant thresholds are exceeded. The Proposed Merger Regulation is currently expected to come into force during the first half of 2010.
Overall, it appears that Indonesia has now broadly accepted leading international standards of merger control such as those promulgated by the OECD and the International Competition Network.
Some speculation exists to the effect that the Proposed Merger Regulation could ultimately be used as an additional block to foreign investment in Indonesia. However, it is also clear that it will nevertheless provide much needed transparency, certainty and stability to foreign investors making significant investments into the Indonesian economy. An approval or conditional approval of a proposed transaction will provide a clear legal framework for the transaction to go ahead, and will remove the possibility of the transaction being challenged on anti-competitive grounds after its implementation, as previously occurred in the Carrefour and Temasek cases.
The next installment in Indonesia's merger control regime represents a long-awaited conclusion to a piece of legislation which introduced a basic merger control provision over a decade ago, but has so far remained dormant and ineffective. It is therefore hoped that once it takes effect, the KPPU will enforce the Proposed Merger Regulation without unnecessary limitations on foreign investment, and in line with best international practices.
O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.
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