INDONESIAN BUSINESS NEWS
Jonathan Streifer
is a senior foreign advisor at SSEK law firm. Prior to joining SSEK, he worked for six years as a legal advisor to law firms in Jakarta
focusing on corporate finance, debt restructuring, bank lending, acquisitions and other international business transactions. He is
recognized as a leading practitioner in M&A, capital markets, and projects and natural resources.
(jonathanstreifer@ssek.com)
Covering your bases:
Mergers & Acquisitions in indonesia
Mergers and acquisitions in Indonesia
have the potential to involve a myriad of
laws and regulations, and parties looking
to undertake such transactions would be
wise to keep the most important areas of
law, and the issues arising under them,
in mind.
Mergers and acquisitions are principally
governed by Law No. 40 of 2007 regarding
Limited Liability Companies (the Company
Law). They also implicate other areas of
law, including Indonesias Labour Law (Law
No. 13 of 2003 regarding Manpower);
tax laws and regulations; the Investment
Law (Law No. 25 of 2007 regarding
Capital Investment) and implementing
regulations; antitrust and unfair business
competition laws and regulations; and
industry-specific laws and regulations,
particularly in regulated industries such
as mining and telecommunications.
Merger vs Acquisition
In Indonesia, a company typically obtains
control of another company through
a share acquisition. Mergers are less
common unless they are undertaken
for operational or tax reasons. The
Company Law does not contemplate or
permit a foreign company to merge with
an Indonesian company, and a share
acquisition is the only structure under
which foreign companies can acquire
Indonesian companies, unless the foreign
company first establishes an Indonesian
subsidiary to undertake the merger.
In a share acquisition, Company Law
compliance is only required if there is a
change of control. Often the threshold
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question of determining whether a
transaction involves a change of control
is easily determined. For instance,
where a party acquires a majority of the
share capital and controls the board of
directors and board of commissioners
of the company being acquired, change
of control will be obvious. Under other
circumstances the question may require
further factual analysis. For example, an
Indonesian shareholder may hold all of
the issued share capital of an Indonesian
company. If the Indonesian shareholder
disposes of half of that shareholding to
a foreign party, other factors must be
reviewed and analysed to determine
whether a change of control has occurred.
Company Law Compliance
Mergers are typically less common than
acquisitions in Indonesia because the
Company Law provisions governing them
are viewed as more burdensome than
those applicable to an acquisition. The
tax-free treatment of a merger is also
typically only confirmed by the Indonesian
Tax Oce after the merger is completed,
resulting in transaction risk if the tax
oce does not ultimately approve tax-
free treatment.
The parties to a merger must prepare a
merger plan that includes, among other
things, the names and domiciles of the
companies planning to conduct the
transaction, the reasons for the merger
as provided by the board of directors
of each company, the procedures for
valuation and conversion of the shares
of the merged company into shares of
the surviving company, the financial
statements of both companies for the last
three years, the draft amendment of the
Articles of Association of the surviving
company, a pro forma balance sheet of
the surviving company using Indonesian
generally accepted accounting principles,
and other requirements in respect of the
settling of obligations to third parties,
employees and members of the board of
directors and board of commissioners of
each company.
An acquisition can be undertaken through
a purchase of existing or new shares, and
the Company Law distinguishes between
the two structures. A further reason
why acquisitions are more common in
Indonesia is that while an acquisition of
new shares requires preparation of an
acquisition plan, which contains some
but not all of the elements of a merger
plan, an acquisition of existing shares is
permitted without a detailed plan all
that is required is an announcement of the
acquisition in an Indonesian newspaper,
notification to creditors and employees,
and shareholder approval.
Shareholders holding 75 percent of the
shares at a general meeting of shareholders
subject to a 75 percent quorum must
approve the merger or acquisition.
Creditors may object to the merger or
acquisition within 14 days of being notified.
The merger or acquisition cannot be
completed until any creditor objections are
resolved. Minority shareholders objecting
to the transaction have the right to be paid
fair value for their shares.
The Investment Law and BKPM
Investment by a foreign company in
Indonesia is typically undertaken through
the establishment of an Indonesian
company or purchase of shares in an
existing company. If the foreign investor
owns an Indonesian company, that
company can also undertake a merger or
acquisition.
Foreign investment implicates the
Investment Law and implementing and
related regulations, including regulations
of the Indonesian Capital Investment
Coordinating Board (BKPM). Presidential
Regulation No. 36 of 2010 regulating
investment sectors closed and conditionally
open to investment, known as the Negative
List, determines the permitted percentage
of shareholding by a foreign party in the
target company, or if there is no restriction.
A new Negative List is expected to be
issued in 2013.
If one or more of the companies to a merger
or acquisition is in a regulated industry, the
license and permits of such companies and
relevant laws and regulations should be
reviewed to determine whether any other
governmental approvals are required.
Labour Law
An underlying policy of the Labour Law is
that employees in Indonesia should have
a choice of which employer they work for,
and in a merger or acquisition the change
of ownership triggers that right. In an
acquisition, an employee can terminate
his or her employment with the company
being acquired, but employees of the
acquiring company do not have such rights.
An employee choosing to terminate his or
her employment is entitled to severance
pay of one months salary for each year
worked, up to a maximum of nine months
salary. Employees who have worked for
more than three years and less than six
years are entitled to another two months
salary for long-service pay, and for each
three-year increment of employment
thereafter the employee is entitled to
another months salary (up to a maximum
of 10 months salary).
If one or more of the
companies to a merger or
acquisition is in a regulated
industry, the license and
permits of such companies
and relevant laws and
regulations should be
reviewed to determine
whether any other
governmental approvals are
required.
Employees are additionally entitled to
other compensation in the amount of
15 percent of the aggregate amount of
the severance pay and service pay. Other
compensation is paid for lost benefits such
as health care and other benefits.
In a merger, an employee of the target
company also has the right to terminate
his or her employment. Contrary to an
acquisition, the employer also has the
right to terminate an employee of the
merged companies.
Anti-Monopoly and Unfair Business
Practices
The relevant law in this area is Law No.
5 of 1999 regarding the Prohibition of
Monopoly and Unfair Business Practice
(the Anti-Monopoly Law). The Anti-
Monopoly Law and important decisions of
the Competition Supervisory Committee
known as Komisi Pengawas Persaingan
Usaha (KPPU) should be reviewed in
respect of any merger or acquisition that
results in a company acquiring a significant
share of a particular market or where the
proposed transaction has other elements
that may violate the Anti-Monopoly Law.
KPPU Regulation No. 1 of 2009 regarding
Pre-Notification for Merger, Consolidation
and Acquisition provides procedures
for a party to obtain pre-clearance
for a merger or acquisition if there is
concern that the proposed transaction
could be later reviewed by the KPPU as
potentially violating the Anti-Monopoly
Law. Obtaining prior clearance from the
KPPU for a merger or acquisition will
preclude later review assuming there are
no changes in the transaction structure
as approved by the KPPU. Government
Regulation No. 52 of 2010 requires that
all change of control transactions above a
certain value in terms of assets or sales be
notified to the KPPU within 30 days of the
eective date of such transaction.
Tax-Neutral Mergers
Under applicable tax rules and regulations,
a merger can be conducted on a tax-
neutral basis by using the book value of
assets being transferred pursuant to the
merger if certain conditions are met.
Such treatment must be approved by the
Directorate General of Taxation, typically
after the merger has been completed. The
tax consequence of using book value for
asset transfers is, among others, that there
will be no gain or loss on the transfer of
assets, and thus no income tax on such
transfers.
Shareholders of the merging companies
are also typically treated on a tax-neutral
basis, which can also be an advantage
when compared to an acquisition that
is typically a taxable event for the selling
shareholders.
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