Indonesia: Indonesian Mergers & Acquisitions 2005

First published in Global Competition Review's "Getting The Deal Through - Mergers & Acquisitions 2005", www.GettingTheDealThrough.com

In Indonesia, business combinations may take a number of different forms, including mergers, consolidations and acquisitions.

Law No.1 of 1995 Regarding Limited Liability Companies (7 March 1995) (the Company Law) introduced the concepts of merger, consolidation and acquisition for business combinations. Previously, mergers, consolidations and acquisitions of companies were made based on contractual arrangements under the Indonesian civil and commercial codes (which are derived from Dutch law). An implementing regulation for the Company Law, namely Government Regulation No.27 of 1998 Regarding Mergers, Consolidations and Acquisitions (24 February 1998) (GR No.27), defines a merger as "a legal action undertaken by one or more companies to merge with another existing company, with the merging company being dissolved". A consolidation is "a legal action whereby two or more companies combine themselves into a new company, as a result of which the consolidating companies will be dissolved". An acquisition is "a legal action undertaken by an individual or a legal entity to acquire all, or a large part, of the shares of a company which may result in a change of control of the company".

In a merger or consolidation, all assets and liabilities of the merging or consolidating company(ies) by operation of law are transferred to the company resulting from the merger or consolidation. Likewise, the shareholders of the merging or consolidating company(ies) become the shareholders of the company resulting from the merger or consolidation. Further, the merging or consolidating company(ies) will then be dissolved, either with or without being liquidated first.

In practice, consolidations are less common than mergers in Indonesia. One reason for this is that a consolidation creates a new company requiring new licences, while this does not occur in a merger. Upon completion of a merger, the surviving company may change its name and amend its articles of association (AoA) to conform with its post-merger business activities, a result that is similar to a consolidation.

The Company Law imposes a lengthy procedure on the board of directors of a target company with respect to the acquisition of a majority shareholding in this company (a ‘majority’ in this context may or may not exceed 50 per cent of the shares, but will certainly constitute the single highest shareholding in the company). However, the law also allows an expedited process whereby the purchaser buys shares directly from the existing shareholders, which may result in a transfer of majority or minority shares. Such direct purchase of shares does not need to follow the acquisition procedures under the Company Law. Instead, the pre-emptive right procedures set out in the target company’s AoA must be followed.

Unlike share acquisitions, the Company Law does not explicitly cover asset acquisitions, although this form of business combination is common in Indonesia. A 75 per cent supermajority vote of shareholders and an announcement in newspapers are required for the sale or other transfer of all or substantially all of the assets of a company.

The Company Law sets out the basic rules for business combinations. Detailed procedures are found in GR No.27. Specific rules on business combinations of banks are contained in Government Regulation No.28 of 1999 Regarding Mergers, Consolidations and Acquisitions of Banks (7 May 1999) (GR No.28). GR No.28 has been implemented by Bank Indonesia Board of Directors Decision No.32/51/KEP/DIR Regarding the Procedures and Requirements for the Merger, Consolidation or Acquisition of Commercial Banks (14 May 1999). When purchasing shares in an Indonesian bank, the Bank Indonesia regulations on purchases of commercial bank shares and on the fit and proper test must be followed, respectively Bank Indonesia Board of Directors Decision No.32/50/KEP/DIR Regarding the Procedures and Requirements for Purchasing Commercial Bank Shares (14 May 1999) and Bank Indonesia Regulation No.5/25/PBI/2003 Regarding the Fit and Proper Test (11 November 2003). Foreign parties may purchase up to 99 per cent of the shares of an Indonesian bank. If the intention is to acquire control of the target bank or more than 25 per cent of its issued shares, the acquirer must obtain Bank Indonesia’s approval and pass Bank Indonesia’s ‘fit and proper’ test.

Indonesia’s Capital Market Supervisory Board (Bapepam) has issued additional rules for public companies undertaking business combinations, particularly regarding mergers and consolidations, tender offers, takeover of control, material transactions and conflicts of interest. Certain disclosures, shareholder approvals and Bapepam approvals are required to accomplish these transactions.

Indonesia’s stock exchanges have also issued their own regulations on business combinations. These regulations generally concern the procedure for listing shares following a business combination.

Where a business combination has a foreign investment element, Capital Investment Coordinating Board (BKPM) approval is required.

All parties to a merger, consolidation or share acquisition must have a proposal for the business combination, prepared by the board of directors of each company involved. After these proposals are approved by the board of commissioners of each company, they will be combined into a joint plan for approval by the shareholders of the respective companies at an extraordinary general meeting of shareholders. The proposal and plan must set forth, among other things, a description of the business and the financial condition of the companies involved both before and after the business combination, the share conversion method, and the rights of the respective companies, their shareholders and other stakeholders (ie creditors, management, employees and other third parties). Once the shareholders of each company approve the plan, their authorised representatives will execute the appropriate deeds in the Indonesian language. A merger or consolidation deed usually contains the proposed AoA of the surviving or new company as well as details on the rights of stakeholders and the assets and liabilities to be transferred to the surviving or new company. An acquisition deed will describe the transfer to the acquiring company of the title to the target company and the agreed consideration to be paid.

The merger, consolidation or acquisition will usually become effective once Department of Law and Human Rights (DoLHR) approval is obtained for the amended or new AoA. In some cases, depending on the nature of the amendments, the combination will take effect upon the registration of the amendments in the Companies Register maintained by the Department of Trade (DoT).

While the Company Law does not require any specific documentation for an asset purchase, in practice, a transfer of substantial assets will be evidenced by an asset transfer agreement.

In respect of a share acquisition by way of direct purchase from the selling shareholders, the parties will usually execute a share sale and purchase agreement.

In addition, a tender offer statement and certain newspaper announcements may be required if the company to be acquired is a public company.

The board of directors of the surviving or new company and the company being acquired must make various government filings:

• DOLHR approval may be required for amendments to the AoA of the companies resulting from the merger or consolidation and the target company acquired. An application should therefore be submitted to the DoLHR attaching the merger, consolidation or acquisition deed. In some cases, only a report need be filed. A transfer of shares need only be notified to the DoLHR and the DoT.
• The amendment of the AoA attaching the merger, consolidation or acquisition deed must be recorded in the Companies Register.
• The amended or new AoA must be published in the State Gazette of the Republic of Indonesia.
• For a business combination involving banks, insurance or finance companies, approval is required from Bank Indonesia (Indonesia’s central bank) or the minister of finance.
• If the business combination involves foreign capital investment- (PMA) or domestic capital investment- (PMDN) companies, a Model IIID form must be filed with the BKPM for approval by the state minister for investment/chairperson of the BKPM.
• If the business combination results in the issuance of additional shares, an application to list the new shares should be made to the relevant stock exchanges.

Approval should be obtained from the BKPM, Bank Indonesia or the minister of finance, depending on the industry, before the amendment of the AoA is submitted to the DoLHR.

The board of directors and board of commissioners of a public company planning a merger or consolidation must submit to Bapepam a merger or consolidation statement. This statement declares that a business combination is being entered into with due attention to the interests of the company, the public and fair competition. There must also be a permanent guarantee that the rights of public shareholders and employees will be protected.

In respect of acquiring control (takeover) of a public company, the acquiring party must submit a tender offer statement to Bapepam and the relevant stock exchanges within five business days after announcing the tender offer. A mandatory tender offer is only required if the proposed acquisition is deemed a takeover under Bapepam Regulation IX.H.1.

As to stamp taxes, an IDR6,000 stamp duty (less than US$1) must be affixed to all transaction documents. No other government fees are applicable for a business combination.

GR No.27 requires merger, consolidation or acquisition plans prepared by private companies to be announced in two national Indonesian-language daily newspapers 14 days before the general meeting of shareholders is convened, while Bapepam Regulation IX.G.1 requires business combinations involving public companies to be announced within two business days after approval for the plan is obtained from the companies’ board of commissioners. A second announcement is required within 30 days after the merger or consolidation becomes effective.

Under Bapepam Regulation IX.H.1, the acquirer of a public company is obligated to keep the company, Bapepam, the relevant stock exchanges and the public fully informed on the progress in negotiations to acquire the company. Normally, a memorandum of understanding is submitted to Bapepam.

A transfer of the substantial assets (ie more than 50 per cent of the total assets) of a private or public company must be announced in two daily newspapers within 30 days after the legal action takes place, in addition to the shareholder approval requirement noted above.

Bapepam Regulation X.K.1 requires public companies to notify Bapepam and make an announcement to the public no later than two working days after a decision is taken or after information or significant facts are obtained that may influence the value of the company’s securities or the investment decisions of investors.

Bapepam requires any party holding at least 5 per cent of the shares of a public company to report that fact to Bapepam, together with any change in ownership, no later than 10 days after the acquisition or sale.

Bank Indonesia requires information on the financial standing of the ultimate shareholder of the acquirer in a bank acquisition as part of the fit and proper test on new controlling shareholders of a bank. The acquirer is also required to provide a letter of undertaking to resolve any financial and liquidity problems of the target bank after becoming the controlling shareholder.

Bapepam has recently issued a new regulation on secondary offerings that are made by shareholders of a public company. A shareholder wishing to offer their shares to the public must submit a registration statement to Bapepam. Law No.8 of 1995 on Capital Markets (the Capital Markets Law) defines a public offering as (i) an offering of securities to the public by an issuer that is made within Indonesia or to Indonesian citizens through the mass media, or (ii) an offering of securities to more than 100 parties or (iii) the selling of securities to more than 50 parties.

In addition to their standard fiduciary duties, as mentioned in 3 above, the board of directors of each company must prepare a proposal and joint plan for the business combination to be approved first by their board of commissioners and then by the company’s shareholders.

The board of directors is also required to identify any substantial and material changes to the business of the company, its financial condition as a result of the transfer of assets and liabilities from the merging or consolidating companies, the treatment of its employees and any other impacts on the company as a result of the business combination. All such impacts must be declared in the plan.

For business combinations involving public companies, please see 4 above regarding Bapepam filings.

Shareholders representing 75 per cent of all voting shares must attend the general meeting of shareholders convened to approve the plan, and the resolution must be approved by 75 per cent of all votes cast. The same quorum and voting requirements also apply for proposals to sell or transfer a substantial part of a company’s assets. If the transaction involves a conflict of interest with a principal shareholder (ie a shareholder with at least 20 per cent of the shares) or with a director or commissioner of the company or their affiliated parties, then approval from the independent shareholders is required. The merger or consolidation will cause a transfer of shareholders from the merging or consolidating company to the surviving company. Normally, independent auditors will perform an appraisal to determine the share capital of the surviving or new company.

In practice, a merger, consolidation or acquisition will result in a management reshuffle as well as the termination of redundant employees and surplus contracts with third parties, in order to ensure that the surviving or new company is in a stronger financial position. Hostile business combinations are not common in Indonesia. Business combinations are normally initiated by the controlling shareholders within a business group (internal business combinations). In the case of bank restructurings, these are initiated by the government to support economic recovery efforts.

Under the Company Law, business combinations must comply with:

• the interests of the company, its minority shareholders and employees;
• the public interest, including creditor rights; and
• the principle of fair business competition.

As mentioned in 3 above, the parties involved must commence the business combination by jointly preparing a merger, consolidation or acquisition plan (a joint plan). Certain prior notifications are required, including announcements in two daily newspapers as mentioned in 16 below.

Bapepam requires a public company planning a merger or consolidation to submit to Bapepam a statement declaring that the business combination is being entered into with due attention to the interests of the company, the public and the principle of fair business competition.

Break-up fee arrangements are permitted. They are normally used in the government divestment programme, which requires bidders to submit bank guarantees. An exclusive arrangement is also enforceable.

In addition to the mandatory provisions required by the Company Law, the AoA may incorporate special procedures for the transfer or subscription of shares. One mandatory clause is that any issuance or transfer of shares must first be offered to the existing shareholders, then to the company’s employees. Incorporating a mechanism requiring the shareholders’ approval for any transfer or issuance of shares may also be an effective antitakeover device.

Since 1991, Bank Indonesia has prohibited Indonesian banks from extending credit for acquiring marketable securities (stocks, bonds and commercial paper). A company is also prohibited from extending loans to shareholders for subscribing or purchasing its shares. In the government divestment programme for certain banks, prospective buyers are prohibited from financing share acquisitions using loans from local banks or funds derived from money laundering.

Direct government restriction of business combinations is limited to those industries where a business combination must first be approved by the competent government authority, such as the banking, insurance, and finance sectors.

Government influence may manifest itself when amendments to the AoA are submitted to the DoLHR for approval (see 4), for example, when determining the effective date of the merger or consolidation. This may affect not only the AoA but the entire arrangement.

As the securities regulator, Bapepam may request a public company or issuer to make changes and submit additional information within 20 days of receiving the statement of business combination.

Taking over control of a public company (ie by acquiring 25 per cent of the shares or either directly or indirectly intending to control the management) will trigger a mandatory tender offer. A tender offer should first be examined to determine whether there is a conflict of interest requiring approval from the independent shareholders. The Capital Markets Law defines ‘control’ as "the ability to determine, directly or indirectly, by any means, the management and/or policies of a company". The term ‘control’ is elaborated in Bapepam Rule IX.H.1. Parties owning 25 per cent or more of the voting shares will be considered as controlling the company, unless proven otherwise. Likewise, parties owning less than 25 per cent of the total voting shares in a company will be considered as not controlling the company, unless proven otherwise. In addition, this rule also broadens the definition of a controlling party to include a party having the ability, directly or indirectly, to control a public company by means of (a) determining the appointment or removal of directors or commissioners, or (b) making changes to the public company’s AoA. So Bapepam defines a controlling person not only based on the purchase of a certain percentage of the shares but also based on actual control as evidenced by their power to influence the management or policy of the company.

The tender offer should cover all shares or equity securities of the target company that are not held by the majority shareholders or other controlling parties.

The tender offer process must commence no later than two business days after the takeover of a public company. At this time, the acquiring party should disclose to the target company, Bapepam and the relevant stock exchange information on the shares or equity securities to be taken over, the profile of the acquiring company and the purpose of taking control, and the methods and materials used during the acquisition negotiation. The tender offer should be made no later than 180 days after the commencement of negotiations for the takeover.

The Company Law requires mergers, consolidations and acquisitions to consider the interests of minority shareholders. It also provides protection for minority shareholders from the consequences of a merger or acquisition. However, as long as the required quorum for the shareholders meeting is met (see 8), the business combination will be binding on all shareholders.

Dissenting shareholders cannot be forced to sell their shares. However, if the minority shareholders find that the business combination damages their interests, they have the legal option to sell their shares to the company at a ‘fair price’. This procedure is intended to prevent dissenting shareholders from impeding a business combination. A company may not purchase more than 10 per cent of its shares as treasury stock, which purchase may only be financed from net profits.

In addition, it is possible for shareholders to request a district court judge to examine the company. To do so, they must represent at least 10 per cent of the total shares with valid voting rights and must reasonably suspect that the company or its directors or commissioners have acted unlawfully and to the detriment of the shareholders and third parties.

While there are no specific regulations governing cross-border transactions, the prior consent of the BKPM or other regulatory bodies will be required for any foreign entity wishing to invest in an Indonesian company through a share acquisition.

Companies established under Indonesian law and having foreign equity participation are generally subject to rules administered by the BKPM. However, banks, finance and insurance companies, and securities companies are all exempted from these rules and are instead subject to the foreign ownership rules imposed by Bank Indonesia, the Department of Finance and Bapepam, respectively. In addition, broadcasters are subject to dual regulation by the BKPM and the Department of Communication and Information.

For companies subject to the BKPM rules (commonly known as PMA companies), the government has issued a negative investment list in Presidential Decree No.96 of 2000 as amended by Presidential Decree No.118 of 2000 (PD No.96). Companies operating in business sectors covered by the negative list are closed to foreign direct investment. PD No.96 also includes a list of specified business sectors in which foreign direct investment is permitted, provided that the investment takes the form of a joint venture that includes domestic equity participation. Companies not included in either of these lists are not subject to the BKPM rules.

PD No.96 expressly provides that its restrictions do not apply to investments made through an Indonesian stock exchange. Accordingly, public companies are exempted from the general foreign investment regime regulated by the BKPM. In the case of public companies, the only foreign ownership restrictions are those prescribed in the government regulations for the particular industry.

Where the target company is an Indonesian limited liability company, the procedures and requirements for a business combination are contained in the Company Law and GR No.27. However, a significantly different structure applies if the business combination involves a foreign investor, since additional conditions must then be fulfilled with respect to the business licences of the target company.

There are various notification periods for a business combination. The board of directors must notify creditors, employees and the public of the proposed business combination. The company’s creditors should be notified at least 30 days before the notice of the general meeting of shareholders and any objections they may have must be submitted at least seven days before the notice of the meeting. The merger may not proceed until any objections have been resolved.

To prevent objections from creditors, a company intending to merge or consolidate must make efforts to obtain the creditors’ consent beforehand by convincing them that the business combination will result in a better financial performance. It should be clarified to the creditors that all liabilities will be transferred to the surviving or new company.

The employees of all companies involved should be notified, along with the public, by a newspaper announcement at least 14 days before the notice of the shareholders meeting (see 5). The notification to employees should cover the general rights and obligations of the employees upon a mass termination (but see 18 with respect to the change of ownership situation), as well as the status of retained employees following the business combination.

As mentioned earlier, business combinations involving banks, insurance and finance companies and foreign or domestic investment companies are subject to specific regulations and require prior consent from the competent regulator. Business combinations in certain industries (eg telecommunications and transportation) will also be subject to prevailing business licensing requirements. In other industries, referring to the applicable regulations, a simple notification to the relevant authorities of the change of control or transfer of assets should be sufficient.

Merging and consolidating companies may revalue their assets so that the losses of a non-surviving company can be carried forward to the surviving company, subject to approval from the director general of taxes.

A qualifying merger or consolidation also receives the following tax incentives:

• No income tax on the merger
• 50 per cent reduction of transfer tax on the change of title to land and buildings
• No value-added tax on the assets being transferred
• No cancellation of accounts receivable as a result of the cancellation of debt liability by set-off from the merger or consolidation

The final tax year of a non-surviving company will end on the effective date of the merger or consolidation.

Indonesia’s labour law provides that either the employer or the employee may initiate termination of employment upon a change of status, merger, acquisition, or change of ownership. Interestingly, only the employee has a statutory right to initiate termination of employment (ie resignation) in the change of ownership situation.

Aside from the requirement that a summary of the merger plan be announced to all employees 14 days before the delivery of the notice of the shareholders meeting, the law is silent on protection of employees upon a business combination. However, the Department of Manpower’s general rules provide that an employee who is not willing to continue in employment must be paid severance benefits consisting of basic separation pay, service pay and compensation.

An employer who is not prepared to accept an employee following a business combination (other than a change of ownership) must pay out separation pay equal to twice the standard amount set by law, plus standard service pay and compensation. Although employers do not have the right to terminate employees’ contracts in the change of ownership situation, employers will often offer that enhanced separation package to encourage the targeted employees to resign.

With regard to asset acquisitions, an acquiring company should carefully consider the ramifications of the actio pauliana principle operating under Indonesia’s bankruptcy law. Under this principle, transactions by a bankrupt debtor prior to a declaration of bankruptcy can be overturned if deemed detrimental to the creditors. However, it must be proven that, at the time of the transaction, both the debtor and the acquiring party were aware (or should have been aware) that such action would cause losses to the creditors.

If a bankrupt debtor has, without legal compulsion, acted in a manner detrimental to creditors up to one year before being declared bankrupt, then, in some circumstances, the bankrupt debtor may be deemed to have known that the act would be damaging to creditors. Unless the bankrupt debtor can prove other- wise, such a transaction may then be annulled.

There has recently been some discussion by government officials reported in local newspapers concerning the drafting of a new regulation on mergers and consolidations of state enterprises. However, there is no certainty that such a regulation will be issued in the near future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.