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
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%
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).
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
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
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.
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.
Acquisition of shares in public companies is not
subject to the above general rules regulating foreign
investment under the jurisdiction of BKPM as described
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
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.
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
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.
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
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
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
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
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
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.
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 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
Hiswara Bunjamin & Tandjung
Level 23, Gedung BRI II
Jl. Jend. Sundirman Kav 44-46
Tel: +62 21 574 4010
Fax: +62 21 574 4670