Author: | Published: 25 Mar 2004
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General overview

Before the introduction of Law No 1 of 1995 concerning limited liability companies (the Company Law) there was no specific detailed regulation on mergers and acquisitions in Indonesia. Before this time the rules in respect of mergers and acquisitions were primarily based on the Indonesian Civil Code - Article 1338 concerning "the principle of freedom of contract". The Company Law now sets out the basic legal rules regulating mergers and acquisitions in Indonesia.

To build on this, the Company Law, Government Regulation No 27 of 1998 regarding merger, consolidation and acquisition of limited liability companies (GR 27) was issued. GR 27 defines a merger as "a legal act conducted by one or more companies to merge itself/themselves with another existing company, and further, the absorbed company/companies is dissolved". Acquisition is defined as "a legal action taken by a legal entity/individual for the acquisition of part or the whole of the shares which may result the change of control of the company concerned". A sale and purchase of existing shares in which the target company itself is actively involved may fall within the requirements of acquisition under the Company Law. One exception is where the share acquisition is a transaction directly between the shareholders, without the target company itself actively contributing. Such direct acquisitions are essentially subject to freedom of contract.

Based on the Company Law, a merger can be classified as either merger "by way of liquidation" or merger "by operation of law" (not followed by liquidation).

The advantages of a merger by operation of law are that it should be less time consuming, as it does not involve the process of liquidation, which may take some time to complete, and that the assets and liabilities of the absorbed companies can be transferred immediately after the deed of merger becomes effective. A disadvantage of this kind of merger is that no implementing government regulation sets out the detailed procedures applicable. A merger by contract, on the other hand, is more time consuming and, because it involves the process of liquidation and the transfer of assets and liabilities of the absorbed companies, it would have to be conducted meticulously by category and, sometimes, even one by one. But a merger by contract ensures more precision and legal certainty of each transferred asset or liability and sometimes would enable the absorbing company to choose which assets and liabilities of the absorbed companies it is willing to accept or assume.

In recent times there have been a number of big M&A transactions in Indonesia, both domestic and involving foreign investors. A noticeable trend has been the rise of foreign investment from Asia, particularly China, and renewed interest from Japan. A number of large Singaporean companies have also made strategic acquisition. Examples of big transactions are the acquisition of large stakes in Indosat, an Indonesian international line telecommunication provider, and in Bank Central Asia, the largest Indonesian private bank. A number of Chinese energy companies have also acquired substantial interest in Indonesian oil and gas.

The rules governing foreign ownership in shares where the relevant company is listed are different from where the company is a private, unlisted company.

Foreign acquisition of private companies

Most areas of business in Indonesia are now open to direct foreign shareholding. There is however a negative list of areas in which foreign investment in unlisted Indonesian companies is closed. This list is periodically revised and has been considerably reduced in size in recent years. Also, foreign ownership of shares in unlisted companies conducting projects in certain infrastructure sectors still require at least 5% Indonesian shareholding.

Foreign direct shareholdings in unlisted Indonesian companies is only permitted in a special form of Indonesian limited liability company, known as a foreign investment (Penanaman Modal Asing - PMA) company, after obtaining approval from the Capital Investment Coordinating Board (BKPM). Existing Indonesian companies may apply for BKPM approval (subject to the negative list mentioned above) to convert to PMA status to allow introduction of foreign shareholders. In some sectors, a recommendation from the relevant technical department or government agency may also be required.

There is no longer any general divestment requirement for foreign investors in a PMA joint venture company where the initial foreign shareholding is not more than 95%. In most cases a foreign company may also own 100% of shares of a PMA, subject to the negative list mentioned above. But a small amount of Indonesian equity ownership must be introduced within 15 years of commencing commercial operations (with the amount to be agreed upon by the shareholders).

Public companies

Investment and acquisition of shares in public listed companies are not subject to the above general rules regulating foreign investment under the jurisdiction of BKPM as described above. The primary source of regulation of Indonesia's securities market is Law Number 8 of 1995 concerning capital markets (the new capital market law). The Indonesian securities industry watchdog is the Capital Markets Supervisory Board (Bapepam), which is responsible for developing, regulating and supervising the operation of the capital markets and is responsible to the Minister of Finance.

In general, foreign ownership of listed public companies is not restricted. But certain restrictions do apply under specific legislation limiting foreign ownership of Indonesian companies operating in certain sectors, such as broadcasting and banking.

Due diligence

It is common in Indonesian M&A transactions for potential purchasers to undertake pre-acquisition due diligence on the Indonesian target company. This includes both financial/accounting and legal due diligence and often extends to environmental and other technical enquiries in appropriate cases. This is strongly recommended because there is a dearth of public information available regarding Indonesian companies, particularly private companies. It is not possible to conduct a company search of the kind international investors are accustomed to and the national Register of Companies is often incomplete. The lack of public financial information regarding Indonesian companies makes investigating Indonesian companies even more difficult. To protect public interests, for public/listed companies as mentioned below, a general disclosure requirement regarding material information applies. This is tighter than for private companies.

In practice, conducting legal searches of courts, arbitration bodies, manpower dispute committees and land title search requires the cooperation of the company under review. Often, the relevant company must grant powers of attorney to the potential purchaser (or its advisers) to conduct these searches. Before disclosure of due diligence material to the potential purchaser, it is normal for the target company to require the purchaser (and often its officers and advisers) to sign a confidentiality agreement in usual international form.

There is no mandatory requirement for the seller of shares in a private company to disclose its financial or legal documents to the potential purchaser. But in the case of public company takeover, there are prescribed disclosure requirements such as the requirement to make certain public announcements through mass media.


In general, acquisition of Indonesian shares by foreign investors is subject to the investment rules described above. Different regulatory systems apply to acquisitions of, or investment in, private companies from public companies.

Unlisted companies
Purchasers of Indonesian shares may acquire either existing shares or invest in newly issued shares. BKPM approval (as described above) is required for acquisition of existing or new shares in unlisted companies.

The target company does not engage in a field of business that is closed to foreign investment under the negative list. Where a target company does not have PMA status, prior approval must be obtained from BKPM to convert it to PMA status. Changes to the articles of association of the existing unlisted company may be required to give effect to the PMA conversion and certain other consequential changes enable a foreign investor to acquire shares in the company and appoint board members.

Any change of shareholdings in a PMA company will also require prior BKPM approval depending on the type of business. Entities carrying on business may also be required to obtain a business licence from the relevant technical department, such as the Department of Trade and Industry, the Department of Health, or the Department of Communication. Before an investor commences a business, it should always seek advice as to the applicable licensing requirements for the relevant business. Obtaining such BKPM approval is normally stated to be a condition precedent to completion in the share sale-and-purchase agreement. For banks, approval from the Central Bank must first be obtained while, for the financial sector companies, approval from the Minister of Finance must be obtained for the transfer of shares.

Public companies
Acquisition of shares in public companies is not subject to the above general rules regulating foreign investment under the jurisdiction of BKPM as described above.

In general, foreign ownership of listed public companies is not generally restricted. But certain specific restrictions do apply under specific legislation limiting foreign ownership of Indonesian companies operating in certain sectors, such as broadcasting and banking.

Trading of shares in listed companies is normally effected through licensed Indonesian brokers on a stock exchange (but off-market transactions in listed shares are possible), with different taxation consequences for the seller. Increasingly, trading in Indonesian listed securities uses a scripless trading system through a centralized clearing mechanism.

Structuring the acquisition

Existing shares
It is not uncommon for the articles of association of unlisted companies to contain pre-emptive rights in favour of existing shareholders in respect of the sale and transfer of existing shares. Shareholders' agreements often also provide for, or elaborate on, such pre-emptive rights. In the absence of such express pre-emptive rights, existing shares may be freely transferred (subject to prior BKPM approval in the case of PMA companies).

In other cases, the articles of association may require approval of a general meeting of shareholders before effecting the transfer of existing shares.

The transfer of shares in public listed companies is not subject to pre-emptive rights of existing shareholders.

New shares
The Company Law requires that the increase in equity by issuing new shares must be effected by way of rights issue to existing shareholders. Each shareholder has the right to waive its rights to take up new shares. In theory, if a shareholder does not exercise its rights to take up new shares, the company should offer the shares to its employees before they are made available to third-party investors. In practice, this requirement is commonly ignored.

Exceptions to this requirement include debt-to-equity conversions.

The rights issue requirement for new share issues applies to both private and public companies. Rights offerings by public companies are further strictly regulated in detail by specific regulation issued by Bapepam.

Takeover issues

Company Law
There are certain requirements and procedures that must be complied with if an acquisition of shares falls within the meaning of acquisition in Article 103 of the Company Law. Article 103 provides a procedure for acquisition of all or a large part of the shares in an Indonesian company that is initiated and arranged by the board of directors of the company itself, as opposed to a direct sale by the shareholder to the purchaser. In such a situation, as the target company itself is involved in the acquisition pursuant to Article 103, the board of directors of the company is required to work closely with the purchaser(s) in preparing a proposal and plan for the acquisition, which will result in a change of control of the company.

The general meeting of shareholders of the company must approve the proposal and plan for such share acquisition. Similar procedures apply in the case of merger and consolidation of Indonesian companies.

On the other hand, in the normal share sale-and-purchase situation, if the proposed sale is initiated by, and conducted with, the shareholders directly and involves a direct agreement between the shareholders and the purchaser, or the purchaser directly approaches the relevant shareholders of the target company, then the procedure in Article 103 of the Company Law is not applicable.

Tender offer for public companies
Regulation of public company takeovers is more complicated. Acquisition of a controlling interest in Indonesian public company shares may trigger the tender offer provisions under Indonesian capital market laws and Bapepam regulation. Indonesia's public company takeover and tender offer provisions are regulated by Decrees of the Chairman of Bapepam. The Tender Offer Rule applies where a party: (a) acquires 25% or more of the shares of a public company; or (b) has, directly or indirectly, the ability to control the public company by way of appointing directors and commissioners and amending its articles of association. Such party will be considered as a new controlling party for the purpose of the takeover regulations. Where such an event occurs there will be deemed to be a change of controlling party and therefore a public company takeover.

The Takeover Regulations provide that where there is a new controlling party of a public company, such controlling party must make a tender offer for all the issued shares of the public company other than: the 20% of shares owned by the principal shareholders or other controlling shareholders; any remaining shares held by the vendor from whom the purchaser bought the shares; shares owned by other parties making a competing tender offer; and shares owned by other shareholders who have received an offer to sell their shares to another party under the same terms and conditions.

The tender offer regulation prescribes a detailed public procedure for conducting the general offer under the supervision of Bapepam, including public announcements, timing the provision of offer documentation, and rules regarding trading of shares in the target company during the offer period.

There are a number of specific exceptions to the tender offer requirements under the Takeover Regulations (including, for example, where the shares are acquired through an asset disposal by the Indonesian Bank Restructuring Agency, and certain court decisions).

In the event of a breach of the Takeover Regulations, Bapepam has the authority to cancel the transaction and require the controlling party to pay fines and return the shares to the sellers and pay compensation or to conduct a tender offer. The new controlling party might also be liable subject to general criminal penalties under the Capital Markets Law.

Employee rights on change of ownership

One issue that increasingly arises in practice in Indonesian M&A transactions relates to the rights of employees in such circumstances. The increased influence of labour unions in this context should be taken into account.

A new Manpower Law No 13 of 2003 was introduced in 2003 (Law 13). Before the Law 13 came into force, the rules regarding termination of employment in Indonesia were set out in the Minister of Manpower Regulation No 150 of 2000 concerning settlement of employment termination and stipulations on severance monies, service monies and compensation (Reg 150). Under the transition terms of Law 13, the provisions of Reg 150 remain in force except to the extent amended by Law 13.

Indonesian employment laws and rules regarding termination and severance payments are detailed and require careful consideration in the circumstances of each particular transaction. However, as relevant to share acquisitions and merger, under Article 163 of the Law 13 if there is a change of ownership in a company, each employee is entitled to elect whether or not they wish to continue employment with the company under the new owner. If they decide not to continue with the employment, then the company must provide a severance package in an amount not less than the statutory severance package calculated in accordance with the principles set out in Law 13. If, upon a change of ownership, the employer decides to terminate employees, a larger severance package is payable.

The concept of change of ownership in the regulations is imprecise, and could be interpreted broadly. The focus of the Department of Manpower in practice is on the impact of the change of ownership of the employer on the employment relationship and employment terms.

Legally the severance package is only payable if the employee elects to leave the company on a change of ownership. If he or she decides to stay, they legally are not entitled to receive the severance package.

But in practice, even if a statutory severance package is not payable, it has not been uncommon for a bonus to be paid to employees as an encouragement for employees to remain with the company. This is a voluntary good-will payment by the company/employer and could not be demanded as a matter of law. A strong union may, however, negotiate hard for some bonus of this kind in a change of ownership situation. Past practice at companies in a similar industry sector will also influence employees' expectations in this regard.


Indonesian competition law is governed by Law No 5 of 1999 regarding prohibition against monopolistic practices and unfair business competition (the Monopoly Law).

Under the Monopoly Law, an Business Competition Supervisory Commission (the KPPU) was established to administer and supervise the operation of the Monopoly Law. The KPPU is the agency responsible for monitoring compliance with, and enforcing, the Monopoly Law. One of the tasks of the KPPU is to review and judge business conduct and agreements that might result in the occurrence of monopolistic practices and or unfair business competition. If it determines that a contravention has occurred, the KPPU may impose a variety of administrative sanctions, including ordering the cancellation of contravening agreements unwinding transactions, ordering a business to cease its anti-competitive conduct, requiring payment of compensation and/or imposing substantial fines.

The Monopoly Law does not generally focus on the value of a business as such, rather the size of the market share controlled.

Some important concepts in the Monopoly Law are:

Business participant refers to Indonesian persons and legal entities and persons/entities that conduct activities within Indonesia, whether individually or jointly through agreement. This definition would apply primarily to companies operating in Indonesia but could also catch foreign companies operating directly in Indonesia.

Unfair business competition is defined to mean competition between business participants in conducting production and marketing activities with respect to goods and or services in a manner that is dishonest or unlawful or that hinders business competition.

Monopolistic practice means the concentration of economic power by one or more business participants which results in the control of the production and or market distribution of certain goods and or services so as to give rise to unfair business competition and which may damage the public interest.

Relevant provisions

Monopoly Law prohibits a business participant from controlling the production or distribution of goods, which may result in the occurrence of monopolistic practices or unfair business competition. One of the indicators of monopolistic practices according to the Monopoly Law is a business participant or group of business participants controlling more than 50% of the market share in respect of a particular good or service.

A business participant is not allowed to own the majority of shares of a number of companies of the same type that are engaged in the same business in the same relevant market, if such ownership causes:

  • one business participant or group of business participants to control more than 50% of the market share of a particular good or service; or
  • two or three business participants or groups of business participants to control more than 75% of the market share of a particular good or service.

Further under Article 28 of the Monopoly Law a business participant is prohibited to carry out a merger, consolidation or takeover of companies that may result in the occurrence of monopolistic practices or unfair business competition. Further detailed provisions implementing the above should be prescribed in a separate government regulation. But no such government regulation has yet been issued. In the absence of these implementing regulations, we have to rely on the general principles in the Monopoly Law itself and the Anti-Monopoly Commission's practices to date.

In essence therefore, the merger, consolidation or takeover of a business participant may be prohibited if it would result in control of production/distribution of relevant goods in an unfair/dishonest/unlawful anti-competitive manner. Accordingly, the Anti-Monopoly Commission will look to the manner/circumstances in which the relevant actions are performed. The mere fact of controlling a large/majority share of the relevant market will not necessarily be prohibited unless the above additional unfair, anti-competitive element is present or the dominant position is otherwise misused. The risk of investigation is likely to be greater where a clear market dominance/majority market share exists.

Lastly, a merger, consolidation or takeover of business that results in the value of assets or sales exceeding a certain amount must be reported to the Anti-Monopoly Commission not later than 30 days after the date of such merger, consolidation or takeover. The decision on the value of assets or sales and the procedure to report this to the Anti-Monopoly Commission will be determined in a government regulation. Once again, the government has not yet issued this implementing regulation.

Author biographies

Santi Darmawan

Hiswara Bunjamin & Tandjung

Santi Darmawan is a founding partner of Hiswara Bunjamin & Tandjung. She has worked on many significant cross-border transactions in Indonesia in a number of sectors, with a specialization in foreign investment.

Zaky Tandjung

Hiswara Bunjamin & Tandjung

Zaky is a founding partner of the firm. He has advised on many significant cross-border M&A transactions across a range of sectors, such as telecommunication, energy, and joint-venture disputes. He is also head of the firm's litigation practice.

Hiswara Bunjamin & Tandjung
Level 23, Gedung BRI II
Jl. Jend. Sundirman Kav 44-46
Jakarta 10210
Tel: +62 21 574 4010
Fax: +62 21 574 4670




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