Indonesia s New Company Law

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1 Indonesia s New Company Law

2 It should be noted that the material in this publication is designed to provide general information only. It is not offered as advice on any particular matter, whether it be legal, procedural or other, and should not be taken as such. The authors expressly disclaim all liability to any person in respect of the consequences of anything done or omitted to be done wholly or partly in reliance upon the whole or any part of the contents of this publication. No reader should act or refrain from acting on the basis of any matter contained in it without seeking specific professional advice on the particular facts and circumstances at issue.

3 Table of Contents A. Introduction...1 B. Material Considerations Name and Domicile Establishment of a New Company and Legal Entity Status Amendments to Articles of Association Company Registry Announcement in State Gazette Increases in Capital Reduction of Capital Transfer of Shares Business Plan/Work Plan Annual Report Appropriation of Profit and Dividends Corporate Social Responsibility General Meetings of Shareholders Board of Directors Board of Commissioners Cross Shareholdings Merger, Consolidation, Acquisition, and Spin-Off Dissolution, Liquidation, and Termination of Status as Legal Entity Other and Transitional Provisions...15

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5 Indonesia s New Company Law A. Introduction Indonesia enacted a new Company Law, effective as of 16 August 2007 (Law No. 40/2007) ( New Company law ). The New Company Law has been long in concept and is an improvement on the previous Company Law. However issues that are familiar to clients in common law countries (such as redeemable cumulative convertible preference shares) are still not regulated as in more detailed legislation in other jurisdictions. In addition, as is usual with Indonesian laws, there is still much that needs to be supplemented by additional implementing regulations. There is no news as yet as to when these regulations might be issued. B. Material Considerations The following is a summary of some, but not all, of the key material areas of which clients should be aware. 1. Name and Domicile The name of a company must reflect the business activities of the company and may not reflect only the identity of the company. The name may not resemble the name of another company or (ii) the name of a State organization or institution, or an international organization except with the approval of the relevant organization or institution. The company must also have a complete address in accordance with its domicile in Indonesia. These requirements are similar to those of the previous Company Law. However, at a socialization seminar held by the Indonesian Notaries Association in August 2007, the Director General of General Law Administration stated that the Articles of Association of a company (i.e. Article 1.1) must clearly state the regency (kabupaten) or municipality (kotamadya) where the company is domiciled. Therefore, any change in the regency or municipality of a company will be considered an amendment to the Articles of Association and must be approved by the Ministry of Law and Human Rights ( MOLHR ). In our view, this is an unnecessary approval for a mere change in location. 2. Establishment of a New Company and Legal Entity Status Under the New Company Law, the procedures for establishing new companies (including obtaining legal entity status) have been changed in many respects and are as follows: A company must have a minimum of two shareholders, except for: (ii) (iii) (iv) (v) companies that are wholly-owned by the State; companies that manage a stock exchange; clearing and guarantee institutions; central securities depositories; and other institutions, as stipulated under the Indonesian Capital Markets Law. The minimum capital for a company is now Rp. 50,000,000. However, a higher minimum capital requirement may be applied by law for companies engaging in certain business activities. 1

6 From the authorized capital, 25 percent must be issued and fully paid-up by the founders. Payment of capital can be made in cash or in-kind (subject to a fair value, determined on the basis of the market value or by an independent expert, to ensure shares are fully paid up). (d) (e) (f) (g) (h) The application for MOLHR approval can be submitted electronically by the founders or their proxy (the proxy should be a Notary) through the Sisminbakum system (i.e. the administrative system for legal entities maintained by the MOLHR). The application for the MOLHR s approval (attaching the required supporting documents, e.g. certificate of incorporation/articles of association of the founder) must be submitted no later than 60 days after the date of the Deed of Establishment. Otherwise, the Deed of Establishment will be deemed null and void, the company will be dissolved by law, and the founders will need to arrange for the liquidation of the company. If there is no objection to the data submitted to the Sisminbakum system, the company must file the physical documents to the MOLHR within 30 days. The MOLHR will, in theory, issue its approval within 14 days as of the filing of the physical documents. A company obtains its legal entity status as of the date that the MOLHR approval is issued. Actions taken by the founders in connection with their share ownership and subscription of shares must be stated and attached in the Deed of Establishment either in the form of a notarial deed or a privately drawn deed, otherwise, such actions will not bind the company. Legal actions taken by the founders in the interests of the company prior to the establishment of the company will bind the company after it obtains its legal entity status if the first General Meeting of Shareholders ( GMS ) acknowledges and accepts the assignment of all rights and obligations arising from such legal actions. Otherwise, the founders will be personally liable for any legal consequences arising from such actions. The first GMS must be conducted no later than 60 days after the company obtains its legal entity status. The first GMS must be attended by all shareholders and resolutions must be agreed unanimously by all shareholders. Legal actions of a company conducted prior to obtaining its legal entity status must be conducted by all members of the Board of Directors, all founders and all members of the Board of Commissioners. All of them will be jointly and severally liable for such actions. Once the company obtains its legal entity status, the company will become responsible by law for these legal actions. If the legal actions are taken by the founders alone, the founders will be personally liable for such actions. These legal actions will bind the company only if approved unanimously by the shareholders in the first GMS (see item (f) above). 3. Amendments to Articles of Association Under the New Company Law, stricter corporate governance requirements are imposed in respect of applications for approval and notification of amendments to the MOLHR. The key provisions relating to amendments to the Articles of Association are as follows: Amendments to the Articles of Association must be resolved by the GMS of the company. The following amendments to the Articles of Association of a company must be approved by the MOLHR: 2

7 Indonesia s New Company Law (ii) (iii) (iv) (v) (vi) a change of name and/or domicile; a change of purposes and objectives and line of business; a change in the terms of incorporation; a change of authorized capital; a reduction of issued and paid-up capital; and/or a change of status from a private company to a public company or otherwise. (d) Any amendments to the provisions of the Articles of Association other than those stated in item above need only be reported to the MOLHR. All amendments to the Articles of Association can be made either in the form of minutes of the GMS drawn up in Indonesian in a notarial deed; or (ii) privately drawn minutes of GMS or resolutions, provided that those privately drawn minutes of GMS or resolutions are restated in a notarial deed no later than 30 days after the date of the resolutions. The quorum requirement for amending the Articles of Association is two-thirds of the total issued voting shares, and voting is based on the affirmative votes of at least two-thirds of the total votes cast in the GMS, unless the Articles of Association provide for higher quorum and voting requirements. (e) (f) An application for approval from the MOLHR on the amendments as specified in items and above must be submitted no later than 30 days after the date of the notarial deed or notarization of the resolutions, otherwise, the company needs to re-convene the GMS or reexecute the resolutions for the same amendments. The amendments as specified in item above will become effective on the date of issuance of the MOLHR s approval of the amendments. The amendments specified in item above will become effective on the date a receipt of the notification of the amendments is issued by the MOLHR. 4. Company Registry The New Company Law introduces a new Company Registry which will be maintained by the MOLHR. This Company Registry will record, among other things, the following information about a company: (d) the name, domicile, purposes and objectives, terms of incorporation and capitalization; the address of the company; the number and date of the Deed of Establishment, the MOLHR s approval and deeds of amendments of the Articles of Association, including details of the notaries responsible for those deeds; and the balance sheet and profit and loss statement of the relevant year for a company whose books and records must be audited. The data contained in the Company Registry will be open to the public. 3

8 We are not aware when this Company Registry will be fully operational. At the previously mentioned August 2007 socialization seminar, the Director General of General Law Administration stated that this Company Registry would be separate from the company registry maintained by the Department of Trade, through which Company Registration Certificates (TDP) of companies are issued. 5. Announcement in State Gazette The New Company Law now provides that the MOLHR will arrange for the announcements in the State Gazette of Deeds of Establishment and deeds amending Articles of Association. Previously, the companies themselves had to make these arrangements. 6. Increases in Capital Under the New Company Law, increases in the capital of a company must be approved by the GMS. The GMS may delegate its authority to implement increases in capital to the Board of Commissioners for a maximum period of one year (five years under the previous Company Law). The quorum required for increasing the authorized capital is at least two-thirds of the total issued voting shares, and voting is based on the affirmative votes of at least two-thirds of the total votes cast in the GMS (unless the Articles of Association provide for higher quorum and voting requirements). The quorum requirement for increasing the issued and paid-up capital is more than one-half of the total issued voting shares, and voting is based on the affirmative votes of more than one-half of the total votes cast at the GMS (unless the Articles of Association provide for higher quorum and voting requirements). Similar to the previous Company Law, an issuance of new shares due to an increase of capital must first be offered to existing shareholders in proportion to their respective shareholdings (before the new shares can be offered to a third party), except now if the issuance of new shares is intended for the company s employees or holders of convertible bonds, or is carried out within the framework of a corporate re-organization or restructuring. 7. Reduction of Capital Under the New Company Law, a reduction of capital must be based on a resolution of the GMS and can be done by way of a share buy-back or a reduction in the nominal value of the shares. The quorum requirement for a reduction of capital is at least two-thirds of the total issued voting shares, and voting is based on the affirmative votes of at least two-thirds of the total votes cast in the GMS (unless the Articles of Association provide for higher quorum and voting requirements). A reduction of capital must be announced to creditors in one Indonesian national newspaper no later than seven days after the resolution of the GMS. Creditors will have the right to file objections in writing within 60 days after the announcement. The company must respond to an objecting creditor within 30 days as of the date of the filing of the objection. If the company fails to respond or rejects the objection, the creditor can file a claim with the relevant district court. A reduction in capital must be approved by the MOLHR. The MOLHR will grant its approval when the following requirements are met: there are no written objections from creditors; 4

9 Indonesia s New Company Law all claims or objections by creditors have been settled; or the creditors claims are dismissed by valid and binding court decisions. 8. Transfer of Shares The following provisions apply to a transfer of shares. Although not too dissimilar from those in the previous Company Law, there are some variations: (d) (e) a transfer of shares is conducted by way of executing a deed of share transfer. A copy of the deed of transfer of shares must be provided to the company. the Board of Directors must register every transfer of shares, including the date of transfer, in the shareholders register (and update the special register, if applicable), and must notify the MOLHR of the change of shareholders (to be recorded in the Company Registry) within 30 days after the date of the transfer of shares is recorded. If these requirements are not met, the MOLHR will reject the change of shareholding. transfers of shares in public companies are subject to the laws and regulations applicable to public companies. the Articles of Association may provide additional requirements for a transfer of shares, such as, an offer to shareholders of a certain class of shares, an offer made to employees, and the requirement to seek consent from third parties, the GSM etc. shares can be pledged or now encumbered with fiducia security, unless otherwise provided under the Articles of Association. Pledges and fiducia securities over shares must be registered in the shareholders register. Voting rights of pledged shares or shares that are subject to fiducia security remain with the shareholder. The concept of fiducia over shares does not fit well with the requirements of the Fiducia Law. There are specific additional provisions for an acquisition (including a subscription of shares) that results in a change in control of a company (see below). 9. Business Plan/Work Plan The New Company Law now requires that the Board of Directors prepare an annual business plan (including an annual budget) before the start of a financial year. The business plan must be presented to the Board of Commissioners or the GMS for approval. 10. Annual Report There are no significant changes to the obligation to prepare an Annual Report. In general, the Board of Directors is required to prepare and present an Annual Report to the GMS (after the report has been reviewed by the Board of Commissioners) within six months after the close of the Company s financial year. An Annual Report must be signed by all members of the Board of Directors and the Board of Commissioners who are in office for the relevant financial year. Certain companies are required to have their financial statements audited by a public accountant, e.g. companies with lines of business relating to the pooling of public funds, companies that issue acknowledgments of indebtedness to the public, public companies, and companies with a turnover of at least Rp.50,000,000,000. 5

10 11. Appropriation of Profit and Dividends As in the previous Company Law, the New Company Law provides that a company is required to reserve a certain amount from its net profit each year as a reserve fund if it has generated profits that year. Contributions must be made to the reserve fund until it amounts to at least 20 percent of the issued and paid-up capital of the company. The reserve fund need not be in the form of cash but can also be in the form of liquid assets. Unlike the previous Company Law, the New Company Law provides that: dividends can be distributed only if the company has accumulated net profit; and an interim dividend can be distributed before the end of the company s financial year, provided that: (ii) (iii) it is permitted under the Articles of Association; the amount of the company s net worth exceeds the amount of the issued and paid-up capital plus the reserve fund; and the distribution of the interim dividends will neither cause the company to be unable to pay its obligations to its creditors, nor disrupt the company s operations. The distribution of an interim dividend is decided by the Board of Directors after first obtaining approval from the Board of Commissioners. If the company suffers losses at the end of the financial year, the distributed interim dividend must be returned by the shareholders to the company. If the shareholders fail to return the interim dividends, the Board of Directors and the Board of Commissioners will be jointly and severally liable for the failure to return the distributed interim dividends. 12. Corporate Social Responsibility The New Company Law provides that a company engaged in the business of natural resources and/or in a business relating to natural resources must meet its corporate social and environmental responsibilities. According to the elucidation, a company which engages in a business activity of natural resources refers to a company whose lines of business are managing and utilizing natural resources and (ii) a company whose lines of business relate to natural resources means a company that does not manage or utilize natural resources, but whose activities may have an impact on natural resources. The implementing regulations for this provision are yet to be issued. However, given the elucidation of Article 74, it seems that this obligation will apply to most manufacturing companies whose activities may impact the environment. The New Company Law also requires that the funding of a company s corporate social and environmental responsibilities be part of a company s budget. 13. General Meetings of Shareholders There are no significant changes to the provisions on General Meetings of Shareholders under the New Company Law. However, the following changes should be noted: 6

11 Indonesia s New Company Law The New Company Law provides that a GMS can be conducted through teleconference, video conference or other electronic media facilities, provided that all participants can see and hear each other directly [emphasis added]. The minutes of a GMS held in this manner must be approved and signed by all participants. Although many Articles of Association contain this provision, the drafting under the New Company Law unfortunately clouds whether teleconferences are permitted, given that participants using this kind of facility do not see each other. The New Company Law now makes it clear that non-voting shares need not form part of an everyday quorum. The quorum and voting requirements for a GMS must be set out in the Articles of Association and must comply with the following minimum requirements: General GMS: The quorum is more than one-half of the total issued voting shares. Resolutions are made based on consensus or, if consensus cannot be achieved, resolutions are passed based on the affirmative votes of more than one-half of the total votes cast at the meeting, unless a higher requirement is stated in the Articles of Association or the New Company Law. For an adjourned meeting (in the event of an initial inquorate meeting), the quorum is one-third of the total issued voting shares, unless a higher requirement is stated in the Articles of Association or the New Company Law; (ii) GMS for amending Articles of Association: The quorum is at least two-thirds of the total issued voting shares. Voting is based on the affirmative votes of at least twothirds of the total votes cast in the GMS, unless the Articles of Association provide for higher quorum and voting requirements. For an adjourned meeting (in the event of an initial inquorate meeting), the quorum is three-fifths of the total voting shares and voting is based on the affirmative votes of at least two-thirds of the total votes cast at the meeting, unless the Articles of Association provide for higher quorum and voting requirements; (iii) GMS for approving mergers, acquisitions, consolidations, spin-offs, insolvency, extensions of the term of incorporation, and liquidation of a company: The quorum is at least three-quarters of the total issued voting shares. Voting is based on the affirmative votes of at least three-quarters of the total votes cast at the GMS, unless the Articles of Association provide for higher quorum and voting requirements. For an adjourned meeting (in the event of an initial inquorate meeting), the quorum is two-thirds of the total issued voting shares and voting is based on the affirmative votes of at least three-quarters of the total votes cast at the meeting, unless the Articles of Association provide for higher quorum and voting requirements. Shareholders can also adopt valid and binding resolutions in lieu of a GMS provided that all shareholders agree in writing and sign the resolutions. 14. Board of Directors The New Company Law introduces some additional provisions in respect of directors. In general terms, the New Company Law provides that: the Board of Directors must act, in good faith and with full responsibility for the best interests of the company. 7

12 (d) (e) in general, a company should have at least one director. However, public companies and companies that engage in the activities of pooling or managing public funds or issuing acknowledgments of indebtedness should have at least two directors. the members of the Board of Directors are appointed, replaced, and dismissed by the GMS. The GMS should state the effective date of each appointment, replacement or dismissal, otherwise, the date of the GMS itself will be deemed the effective date of the appointment, replacement or dismissal. Furthermore, the New Company Law also requires that the MOLHR be notified of any appointment, replacement, or dismissal of members of the Board of Directors (for registration in the Company Registry) within 30 days after the date of the GMS resolutions, otherwise, any application for registration will not be entertained by the MOLHR. each member of the Board of Directors is personally liable for all losses of the company if he/she fails to perform his/her duties. If there are two or more directors, the liability will be joint and several between the directors. a director cannot be held liable for losses of the company if he/she can prove that: (ii) (iii) (iv) the losses did not result from any error or negligence on his/her part; he/she has managed the company in good faith, with due care for the interests of the company, and in line with the purposes and objectives of the company; he/she did not have a direct or indirect conflict of interest in the acts which may have caused losses; and he/she has taken actions to prevent the occurrence or continuation of such losses. (f) (g) (h) The directors are the authorized representatives of the company within or outside the courts. In the event there is more than one director, each director will be authorized to represent the company, unless otherwise provided in the Articles of Association. The Articles of Association may provide a limitation on the authority of the Board of Directors. A director is not entitled to represent the company if he/she is involved in court proceedings between the company and him/herself or (ii) has a conflict of interest with the company. In these circumstances, the authorized representative of the company will be another director who does not have a conflict of interest, the Board of Commissioners (if all directors have a conflict of interest), or other parties appointed by the GMS (if all directors and all commissioners have a conflict of interest with the company). The Board of Directors must obtain approval from the GMS to transfer the assets of the company or (ii) encumber assets of the company that constitutes more than 50 percent of the total net assets of the company in one or more transactions, whether related or not. If GMS approval is not obtained, the transaction will still bind the company if the other party acts in good faith in the transaction. The quorum requirement for the GMS is three-quarters of the total issued voting shares and voting is based on the affirmative votes of three-quarters of the total votes cast at the meeting. 8

13 Indonesia s New Company Law 15. Board of Commissioners The New Company Law introduces some additional provisions in respect of commissioners. In general terms, the New Company Law provides that: (d) (e) (f) the Board of Commissioners must supervise the policy and management of the company by the Board of Directors. the Board of Commissioners must consist of at least one commissioner. However, public companies, companies which engage in the pooling or management of public funds, or issue acknowledgments of indebtedness must have at least two commissioners. if there is more than one commissioner, the Board of Commissioners must function as a collegial organ. Members of the Board of Commissioners may not take actions independently, but must only take actions (e.g. granting approvals) based on the decision of the Board of Commissioners. the members of the Board of Commissioners are appointed, replaced, or dismissed by the GMS. The effective date of the appointment, replacement, or dismissal of a member of the Board of Commissioners is deemed to be the date of the GMS. The MOLHR must be notified of any appointment, replacement, or dismissal of a member of the Board of Commissioners (for registration in the Company Registry) no later than thirty days after the date of the GMS, otherwise, any application for registration will not be entertained by the MOLHR. each member of the Board of Commissioners is personally liable for any losses incurred by the company if he/she fails to perform his/her duties. If there are two or more members of the Board of Commissioners, the liability will be shared jointly and severally by the members of the Board of Commissioners. a member of the Board of Commissioners cannot be held liable for losses of the company if he/she can prove that: (ii) (iii) he/she has provided supervision in good faith, with due care for the interests of and in line with the purposes and objectives of the company; he/she did not have a direct or indirect conflict of interest in the acts which may have caused losses; and he/she has given advice to the Board of Directors to prevent the occurrence or continuation of a loss. (g) (h) the Articles of Association may stipulate that the Board of Commissioners must give approval or assistance to the Board of Directors in taking certain legal actions. If the Board of Commissioners approval or assistance is not obtained, such legal actions will still bind the company to the extent that the other party acts in good faith. the Articles of Association may provide that the Board of Commissioners may take certain management actions in certain circumstances and for a certain period of time (e.g. in the event of the unavailability of members of the Board of Directors). In these circumstances, all provisions on the rights, authorities, and obligations of the Board of Directors to the company and third parties will apply to the Board of Commissioners. 9

14 the Articles of Association may also provide for one or more independent commissioners. Independent commissioners are appointed by the GMS and should be nominated from persons not affiliated with the majority shareholders, members of the Board of Directors and/or the Board of Commissioners. 16. Cross Shareholdings The New Company Law prohibits cross shareholding arrangements. This is a new provision and was not incorporated in the previous Company Law. Effectively: shares of Company A cannot be owned by Company B if the shares of Company B are owned directly or indirectly by Company A. The term indirectly means share-ownership through one or more intermediary companies (Article 36); and companies which have cross-shareholding arrangements need to adjust with the New Company Law (transfer the shares to a qualified party) within 1 year. 17. Merger, Consolidation, Acquisition, and Spin-Off Merger The New Company Law provides for the following general procedures for the merger of companies: the Boards of Directors of the merging and surviving companies must prepare a merger plan which should contain at least the following information: (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) the names and domiciles of the companies which are merging; the reasons and explanations from the Boards of Directors for the merging of the companies and the requirements for the merger; the procedures for valuation and conversion of shares of the dissolving company into the shares of the surviving company; the draft amendments to the Articles of Association of the surviving company, if any; the financial statements (comprising at least the balance sheet of the preceding financial year consolidated with the balance sheet of the previous financial years, profit and loss statement from the relevant financial years, cash flow statement, and equity movement report including notes on the financial statements) covering three financial years of both the dissolving company and the surviving company; the plan for the continuity or termination of the business activities of the merging companies; the pro-forma balance sheet of the surviving company prepared in accordance with prevailing Indonesian GAAP (generally accepted accounting principles); the method for settling the status, rights, and obligations of the members of the Board of Directors, the Board of Commissioners, and employees of the merging companies; the method for settling rights and obligations of the merging companies to third parties; 10

15 Indonesia s New Company Law (x) (xi) (xii) (xiii) (xiv) (xv) the method for settling the rights of shareholders who disagree with the merger plan; the name of the members of the Board of Directors and the Board of Commissioners of the surviving company, including details of salary, remuneration, and compensation; the estimated timeline for completing the merger; a report on the condition, development, and results achieved by each of the merging companies; the main line of business of the merging companies; and details of the problems encountered during the current financial year of both the dissolving and surviving companies. The Board of Directors of each of the merging companies must then submit the merger proposal to the Board of Commissioners for approval. The Board of Directors of each of the merging companies must then convene a GMS to approve the merger plan in accordance with the Articles of Association and the New Company Law. The quorum for the GMS is at least three-quarters of the total issued voting shares and voting is based on the affirmative votes of at least three-quarters of the total votes cast at the GMS, unless the Articles of Association provide for higher quorum and voting requirements. For any adjourned meeting (in the event of an initial inquorate meeting), the quorum is twothirds of the total issued voting shares and voting is based on the affirmative votes of at least three-quarters of the total votes cast at the meeting, unless the Articles of Association provide for higher quorum and voting requirements. (d) The New Company Law also requires the Board of Directors of each of the merging companies, no later than 30 days prior to the date of notice of the GMS, to: (ii) announce a summary of the merger plan in at least one Indonesian national newspaper; and announce the merger in writing to the employees of each company. The announcement must also state that the stakeholders of the company may obtain a summary of the merger plan from the offices of the merging companies as of the date of the announcement until the date of the GMS. The New Company Law further provides that the merger of the companies must take into account the interests of each of the dissolving and surviving entities, minority shareholders, employees, creditors, business partners, the public and fair business competition. (e) Following the announcement, each of the creditors of the merging companies may file a claim to each of the merging companies within 14 days after the announcement. If there is an objection that cannot be settled before the date of the GMS, that objection must be presented at the GMS for resolution. 11

16 The merger cannot be completed until the objections of the creditors have been resolved. (f) (g) A merger plan that has been approved by the GMS must be restated in a Deed of Merger drawn up in Indonesian before a Notary. A copy of the Deed of Merger must be attached by the surviving entity to the application for approval by the MOLHR of the amendments to the Articles of Association or the notification amendments to the Articles of Association as the case may be. Acquisition Amendments to the Articles of Association as a result of a merger are effective as of the date of the MOLHR s approval, or (ii) a later date as stipulated in the MOLHR s approval, or (iii) the date of receipt of the notification of the amendments to the Articles of Association by the MOLHR, or (iv) a later date as stipulated in the Deed of Merger. If there are no amendments to the Articles of Association, a copy of the Deed of Merger must be submitted to the MOLHR to be recorded in the Company Registry. The New Company Law provides for the following general procedures for the acquisition of companies (and some new provisions where there is a change in control, whether by way of transfer or by way of subscription, of a company): The New Company Law provides that an acquisition can be conducted through the Board of Directors of the target company or directly by the shareholders. An acquisition is defined as a share acquisition which results in a change of control in the company. As in the previous Company Law, the New Company Law provides that if an acquisition is instigated by the Board of Directors of the target company and the acquiring company, the Board of Directors of the target company and the acquiring company must prepare an acquisition plan which should contain at least the following information: (ii) (iii) (iv) (v) (vi) the names and domiciles of the target company and the acquiring company; the reasons and explanations for the acquisition from the Board of Directors of the target company and the acquiring company; the financial statements of both the dissolving company and the surviving company (comprising at least the balance sheet of the three preceding financial years consolidated with the balance sheet of the previous financial years, profit and loss statements from the relevant financial years, cash flow statements, and equity movement reports including notes on the financial statements); the procedures for valuation and conversion of shares of the target company to the shares to be sold in exchange for the sale shares, if the payment is made by way of exchange of shares; the number of shares to be acquired; the source of funding; 12

17 Indonesia s New Company Law (vii) (viii) (ix) (x) (xi) the pro-forma balance sheet of the target company prepared in accordance with the prevailing Indonesian GAAP; the method for settling the rights of shareholders who disagree with the acquisition plan; the method for settling the status, rights, and obligations of the members of the Board of Directors, the Board of Commissioners, and employees of the target company; the estimated timeline for completing the acquisition, including a timeline for the authorization of the transfer of shares; the draft amendments to the Articles of Association of the target company as a result of the acquisition, if applicable. The requirements for preparing this acquisition plan do not apply to acquisitions that are conducted directly by the shareholders. (d) The Board of Directors of each of the companies must then submit the acquisition proposal to the Board of Commissioners for approval. The Board of Directors of each of the companies must then convene a GMS to approve the acquisition plan in accordance with their respective Articles of Association and the New Company Law. The quorum for the GMS is at least three-quarters of the total issued voting shares and voting is based on the affirmative votes of at least three-quarters of the total votes cast at the GMS, unless the Articles of Association provide for higher quorum and voting requirements. For any adjourned meeting (in the event of an initial inquorate meeting), the quorum is twothirds of the total issued voting shares and voting is based on the affirmative votes of at least three-quarters of the total votes cast at the meeting, unless the Articles of Association provide for higher quorum and voting requirements. (e) The New Company Law also requires the Boards of Directors of both the acquiring company and the target company, no later than 30 days prior to the date of the notice calling the GMS, to: (ii) announce a summary of the acquisition plan in at least one Indonesian national newspaper; and announce the acquisition plan in writing to the employees of each company. The announcement must contain a statement that the stakeholders of the company may obtain a summary of the acquisition plan from the offices of the respective companies as of the date of the announcement until the date of the GMS. The New Company Law further provides that the acquisition of a company must take into account the interests of both the acquiring company and the target company, as well as the minority shareholders, employees, creditors, business partners, the public and fair business competition. 13

18 This notification procedure must be followed even where an acquisition is carried out directly between the shareholders. This is a new requirement under the New Company Law. (f) Following the announcement, creditors may file a claim within 14 days after the announcement. If there is an objection that cannot be settled before the date of the GMS, that objection must be presented at the GMS for resolution. The acquisition cannot be completed until the objections of the creditors have been resolved. (g) (h) The acquisition plan that has been approved by the GMS must be restated in a Deed of Acquisition drawn up in Indonesian before a Notary. A copy of the Deed of Acquisition must be attached to the application for approval by the MOLHR of the amendments to the Articles of Association or the notification amendments to the Articles of Association as the case may be. In the event of a direct acquisition, the copy of the Deed of Acquisition must be attached to the notification to the MOLHR on the change of shareholding composition. The Board of Directors must announce the result of the acquisition in one Indonesian national newspaper within 30 days as of the effective date of the acquisition. Spin-Off The New Company Law introduces a concept of spin off. There are two types of spin-off recognized by the New Company Law, namely: a pure spin-off, where all of the assets and liabilities of a company are transferred by law to two or more companies and the transferring company is dissolved by law; and a semi-pure spin-off, where a part of the assets and liabilities of a company is transferred by law to one or more companies and the transferring company still maintains its existence. In general the procedures for mergers and acquisitions as set out above also apply to spin-offs, including the requirement to obtain approval from the GMS, the announcement in newspapers, and the notification to the MOLHR. The Government is also planning to issue further implementing regulations on spin-offs. 18. Dissolution, Liquidation, and Termination of Status as Legal Entity The New Company Law provides additional reasons for dissolving a company, other than by way of a resolution of the GMS, the expiry of the term of incorporation, or a court decision, namely: with the revocation of a bankruptcy petition pursuant to a final and binding commercial court decision, the bankruptcy estate of the company is not sufficient; the bankruptcy estate of the company is in an insolvent state as regulated under the bankruptcy law; 14

19 Indonesia s New Company Law the revocation of the company s business license which requires the company to be liquidated pursuant to applicable laws and regulations (this applies only to companies that hold specific business licenses such as insurance companies, banks, etc). Under the New Company Law, the dissolution of a company does not result in the termination of the company s legal entity status. After dissolution, the company must also be liquidated. As under the previous Company Law, following the dissolution of a company, the company is prohibited from taking any legal action unless the action is required for liquidation purposes. If any action is undertaken after dissolution, the company, the Board of Directors and the Board of Commissioners will be jointly and severally liable for that legal action. The liquidation process under the New Company Law is similar to that provided under the previous Company Law and involves, among other matters, the following: (d) (e) (f) (g) an announcement of the dissolution by the liquidator in a newspaper and the State Gazette and notification of the dissolution to the MOLHR (to be recorded in the Company Registry) within 30 days after the dissolution becomes effective. Failure to comply with these requirements will mean that the dissolution is not binding on third parties and that the liquidator is jointly and severally liable with the company for losses incurred by third parties; the collection and registration of the company s assets and indebtedness by the liquidator and the settlement of obligations with creditors; the payment to creditors and, later, payment of remaining liquidation assets to the shareholders; the reporting of the liquidation results to the GMS or the court, as applicable; after the GMS or court ratification of the liquidation results, a notification of the liquidation results must be sent to the MOLHR and announced in a newspaper within 30 days from the date of the ratification of the liquidation results; the recording of the termination of the legal entity status of the company by the MOLHR in the Company Registry; and the announcement of the termination of the legal entity status of the company by the MOLHR in the State Gazette. 19. Other and Transitional Provisions The following transitional and administrative provisions apply: The New Company Law applies to public companies if not regulated otherwise by the prevailing capital market laws and regulations. The provisions on the responsibilities of the Board of Directors and the Board of Commissioners of a company under the New Company Law do not supersede the provisions of the Indonesian Penal Code. 15

20 (d) (e) The Articles of Association of a company which have obtained a legal entity status and amendments to Articles of Association which have been approved by or reported to the MOLHR and registered in the Company Registry prior to the enactment of the New Company Law will still be valid as long as they do not contravene the New Company Law. Companies must, within one year after the enactment of the New Company Law (namely by 15 August 2008), amend their Articles of Association to be in accordance with the provisions of the New Company Law, otherwise, the company may be dissolved pursuant to a decision of the district court at the request of the attorney-general or an interested party. Implementing regulations issued pursuant to the previous Company Law still apply to the extent that they do not contravene the provisions of the New Company Law. For further information, please contact: Mita Djajadiredja at With special thanks to Mark Innis: ********* September 2007 (revised November 2007) 16

21 The Indonesia Stock Exchange Building Tower II 21st Floor Sudirman Central Business District Jl. Jend. Sudirman Kav Jakarta 12190, Indonesia Tel: Fax: DISCLAIMER It should be noted that the material in this book is designated to provide general information only. It is not offered as advice on any particular matter, whether it be legal, procedural or other, and should not be taken as such. The authors expressly disclaim all liability to any person in respect of the consequences of anything done or omitted to be done wholly or partly in reliance upon the whole or any part of the contents of this book. No reader should act or refrain from acting on the basis of any matter contained in it without seeking specific professional advice on the particular facts and circumstances at issue All rights reserved. is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm. This may qualify as Attorney Advertising requiring notice in some jurisdictions. Prior results don t guarantee a similar outcome.

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