In 2007, Indonesia saw an increase in merger & acquisition (M&A) activity, in particular in the banking and finance and resources sectors, which was driven primarily by the property and resources boom. In 2009, the Indonesian M&A landscape is a different story.
The current global economic and financial crisis has affected emerging market economies, including Indonesia. Worldwide economic decline and the crash of stock markets, including the Indonesia Stock Exchange (IDX), have seriously affected many companies, with some being forced to sell assets to raise capital and service loans. Companies also face difficulties securing loans, as the banking sector tightly holds on to its assets, with the valuation of assets (including target companies) becoming increasingly difficult.
However, the crash of stock prices has also generated some real opportunities for companies looking for growth through M&A. In many instances, target companies that were once out of reach have more recently become available at affordable prices. For companies that have strong cash positions and appetite for risk, the M&A landscape in Indonesia may offer some real opportunities.
In an effort to stabilise the Indonesian economy, in particular the banking and finance sector, the Indonesian government has introduced a range of fiscal stimuli and policies designed to improve public purchasing power. With the presidential elections scheduled to be held in July 2009, the government is expected to continue its efforts to boost the Indonesian economy and sustain economic growth.
M&A was previously regulated under Law No.1 of 1995 on limited liability companies. On August 16 2007, Law No.40 of 2007 on limited liability companies (Company Law) replaced Law No.1 of 1995. The Company Law serves as the fundamental legal framework for limited liability companies and provides various provisions on M&A for Indonesian companies. In the absence of any new implementing regulations regarding the Company Law to date, the two main regulations governing M&A are Government Regulation No.27 of 1998 on Mergers, Consolidations and Acquisitions of Limited Liability Companies, and Government Regulation No.28 of 1998 on Mergers, Consolidations and Acquisitions of Commercial Banks.
In addition, companies conducting M&A activities in Indonesia in certain industries or involving public companies must observe the rules, practices, and procedures of relevant supervising government institutions and regulatory agencies, including where applicable the Ministry of Law and Human Rights (MoLHR), the Commission for the Supervision of Business Competition (KPPU), the Capital Investment Coordinating Board (BKPM), Bank Indonesia (BI), the Ministry of Finance (MoF), the Capital Markets and Financial Institutions Supervisory Board (Bapepam-LK) and IDX. In 2008, Bapepam-LK amended the regulation on the acquisition of public companies (Bapepam-LK Rule No.IX.H.1) and the regulation of affiliated transactions and certain conflict of interest transactions (Bapepam-LK Rule No. IX.E.1).
The relevant regulatory agencies exercise significant discretion in applying the rules and regulations, which may be an important factor for companies conducting M&A activities in Indonesia. As recently as May 3 2009, KPPU issued a regulation and guidelines on prenotification of mergers, consolidations and acquisitions.
The M&A process
According to the Company Law, "Merger is legal action conducted by one or more companies to merge with another existing company resulting in the transfer by law of the merging company's assets and liabilities to the surviving company, after which the merging company's legal entity status will end by law".
"Acquisition is legal action conducted by legal entities or individuals to acquire a company's shares that results in a change of control of the company."
Mergers and acquisitions are generally conducted through the Boards of Directors (BoD) of the relevant companies. However, the Company Law also recognises that acquisitions can be conducted directly by the shareholders. In such acquisitions there are certain procedural differences, although there is also considerable overlap, as described below.
In any proposed merger or acquisition that is to be conducted through the BoDs, the BoD of each company must prepare a merger or acquisition plan including the reasons, explanations and the requirements for the merger or acquisition. Each plan must be approved by the respective Boards of Commissioners (BoC) of the relevant companies. The BoDs must announce a summary of the plan in at least one Indonesian national newspaper and announce the merger or acquisition in writing to the employees of the companies that will conduct the merger or acquisition no later than 30 days before the date of notice of a General Meeting of Shareholders (GMS). The plan must then be approved by the respective GMS of the companies.
Merger and acquisition activities must be conducted with due observance of the interests of the surviving and dissolving companies, minority shareholders, employees, creditors and other business partners of the companies, the public, and fair business competition principles. Following the announcement, these stakeholders have certain rights and obligations, including the following:
Any shareholders who disagree with the GMS that approves a merger or acquisition are entitled to ask the relevant company to purchase their shares at a reasonable price. However, objections from shareholders will not stop the merger or acquisition process from proceeding.
There are numerous employment issues raised in M&A deals which require careful consideration and sensitive handling, particularly if the deal involves a large number of terminated employment relationships. Accordingly, the plan must include proposed arrangements for settling the rights and obligations of the employees of the merging/acquiring companies.
Under Indonesian employment law, on legal completion of a merger or acquisition, any employees who do not wish to continue their employment relationship are entitled to exercise their rights to terminate employment with the company, following which the employees will be eligible to receive the relevant statutory benefits consisting of the statutory amount of severance pay, service pay and compensation.
Any employees who wish to continue their employment relationship, but the employer is not prepared to accept the employees following a merger or acquisition, will be eligible to receive the relevant statutory benefits from the company consisting of severance pay of double the statutory amount, service pay and compensation.
Following the announcement, creditors of the merging/acquiring companies may submit their objections to the plan within 14 days of the announcement. If there is a creditor objection which cannot be settled before the date of the shareholder meeting, the objection must be submitted to the GMS to be resolved.
An M&A deal cannot be completed until all creditor objections have been resolved.
In the case of direct acquisitions by shareholders, the relevant companies are not required to prepare a plan. However, the companies are still required to announce a summary of the information that would be required in a plan in the newspaper, and to notify employees. Apart from this procedural difference, direct acquisitions are also subject to objections from shareholders and creditors and employee entitlements as described above in the case of a merger or acquisition conducted through the BoDs.
After the GMS of each company involved in a merger or acquisition has approved the plan, the plan must then be stated in a Deed of Merger (DoM) or a Deed of Acquisition (DoA) respectively, to be made before a notary in Indonesian.
A DoM usually contains the proposed amended articles of association (AoA) of the surviving company as well as the rights of the stakeholders and the assets and liabilities to be transferred to the surviving company. A DoA usually contains a description of the transfer of title of shares in the target company and the agreed price.
The surviving entity must attach a copy of the DoM to an application that must be filed with the MoLHR either for approval of the amendments to the AoA or for notification of the amendments to the AoA, as required, depending on the nature of the amendments.
The date on which amendments to the AoA as a result of a merger will be effective vary, depending on a number of circumstances. For example, the effective date of the amendments maybe: (i) the date of MoLHR approval; (ii) a date stated in the MoLHR approval; (iii) the date of receipt of the notification by the MoLHR; or (iv) a later date as stated in the DoM.
The date on which amendments to the AoA as a result of an acquisition become effective vary depending on a number of circumstances. For example the effective date of the amendments may be: (i) the date of the MoLHR approval; or (ii) the date the DoA is registered in the Company Register. If there is no amendment to the AoA, the acquisition will be effective on the date the DoA is signed.
The BoD of the surviving company, or the BoD of the company whose shares have been acquired, must announce the results of the merger or acquisition in a newspaper within 30 days of the effective date of the merger or acquisition.
Commission for the Supervision of Business Competition (KPPU)
Under Law No. 5 of 1999 on Prohibition of Monopolistic Practices and Unfair Business Competition, business players are prohibited from carrying out M&A transactions which result in a monopoly and/or unfair business competition. Any violation of the provisions on monopoly and or unfair business competition may be subject to penalties or imprisonment.
Monopolies and/or unfair business activities are under the supervision of KPPU as an independent authority. Any M&A deal that results in an asset and/or sales value exceeding a certain amount (to be stipulated in an implementing regulation) must be notified to KPPU no later than 30 working days from the date of the deal. Furthermore, KPPU has the authority to annul mergers and acquisitions. However, the implementing regulations for the Competition Law have not yet been issued.
The Competition Law contains a post-notification requirement. However, KPPU recently issued KPPU Regulation No.1 of 2009 on Pre-notification of Mergers, Consolidations and Acquisitions. and guidelines on the pre-notification of M&A deals, including any type of mergers, and acquisitions of assets and businesses. The pre-notification has to meet certain criteria such as the assets of a resulting non-financial company must be more than Rp2.5 trillion and the assets of a resulting financial company must be more than Rp10 trillion. In KPPU's view, change of control will occur if there is an acquisition of shares in a company of at least 25%.
The purpose of the regulation is to give legal certainty to those who wish to proceed with an M&A deal (or in other words to prevent any cancellation after the completion of the deal). Business players now have the chance to have KPPU evaluate the M&A plan and amend any plan that may potentially result in a monopoly or unfair business competition.
Under the regulation, pre-notification is voluntary. Although KPPU's findings pre-notification are not binding on the business players, in practice pre-notification is likely to become standard practice.
Even if pre-notification is filed with KPPU, this will not relieve business players from complying with the post-notification requirement.
In addition to the above general procedures, M&A transactions are subject to other relevant regulations and practices depending on the business activities of the relevant companies.
Capital Investment Coordinating Board (BKPM)
BKPM supervises all foreign investment activities in Indonesia, except for certain sectors such as upstream oil & gas, banking, securities, insurance and other non-banking financial institutions. Approval from BKPM is required for any M&A transaction involving a foreign investment company (commonly known as a PMA company). Foreign investment companies must also consider the negative investment list, which sets out the restrictions on foreign ownership in different sectors. The negative investment list was last updated by the government in 2007 and is expected to be revised in the near future.
Bank Indonesia (BI)
There has been an increase in M&A activities in the banking sector over the last few years. As the regulator for the banking sector, companies must first obtain approval from BI for any M&A transaction in the banking sector.
BI also stipulates that a controlling shareholder (owning at least 25% of the bank's issued shares with voting shares, or with the ability (directly or indirectly) to determine the management and/or the policies of the bank) will be subject to a fit-and-proper test.
Foreigners are allowed to purchase a maximum of 99% of the issued shares of a bank.
In 2006, BI issued a Single Presence Policy for Indonesian banks which permits a controlling shareholder to have a controlling interest in only one bank, subject to certain exceptions. Controlling shareholders who were already controlling shareholders in more than one bank when the Single Presence Policy came into force will have to adjust to the new requirements by no later than December 31 2010.
Ministry of Finance (MoF)
MoF is the regulator of non-banking financial institutions, including insurance. Foreign party participation in an insurance company in Indonesia must also satisfy specific requirements. For example, only a foreign insurance company in a similar line of business (such as life insurance) or a holding company with at least one subsidiary in the same type of insurance can own shares in an Indonesian insurance company. Maximum foreign ownership is 80% at the time of establishment of the insurance company.
Capital Markets and Financial Institutions Supervisory Board (Bapepam-LK)
Bapepam-LK is the Indonesian capital markets and securities sector regulator.
A securities company is defined as a party that engages in the business of underwriting, broking-dealing and/or investment management. Any change of ownership in a securities company that results in a change of control, either directly or indirectly, is subject to reporting obligations and approval from Bapepam-LK.
Foreign party participation in a securities company in Indonesia is subject to certain limitations. Only a foreign company engaged in the financial sector can own shares in an Indonesian securities company. A foreign party operating in the financial sector other than securities can own a maximum of 85% of the issued capital. A foreign party operating in the securities sector that has securities licences or is under the supervision of the capital markets regulator in its home country may have up to 99% of the issued capital.
Public company considerations
When a public company is involved in M&A activities, the public company must comply with Bapepam-LK regulations, including (if applicable) regulations on conflicts of interest, material transactions and a change in main business activities. If the public company is listed on the IDX, it must also comply with IDX rules and regulations.
Bapepam-LK requires that a merger plan must be prepared by the BoD and approved by the BoC. The BoD and the BoC must provide a statement to Bapepam-LK and the GMS (supported by an independent party's opinion) that the merger is conducted with due observance of the interests of the company and the public, the principle of fair business competition, and a guarantee that the rights of the public shareholders and the employees will be respected. Mergers are subject to GMS approval in compliance with Bapepam-LK regulations. If a plan is rejected by the GMS, then that plan may only be re-submitted to Bapepam-LK 12 months after the date of the GMS.
An acquisition is defined in the Bapepam-LK regulations as an action which directly or indirectly results in a change of controller of a public company. A controller is a party that has more than 50% of the public company's issued and paid-up shares, or a party that has the ability, directly or indirectly, to determine the management and/or the policies of the public company.
A new controller of a public company must announce and file a report to Bapepam-LK on the acquisition no later than two working days from the date of the acquisition.
However, a prospective controller who initiates negotiations which could lead to an acquisition may inform the target company, Bapepam-LK and the IDX about the negotiations, and announce to the public that negotiations are being held. If a prospective new controller announces such negotiations, every material development in the negotiations must be reported regularly to the relevant parties.
The benefit of making an announcement by way of a negotiations announcement is that the parameters of the price at which the shares must be purchased during a tender offer will be locked in, which provides some protection against potential movements in the share price.
A new controller must carry out a mandatory tender offer for all remaining shares in the company, except for the following:
- shares owned by the shareholders who entered into the acquisition with the new controller;
- shares owned by parties in respect of an offer which has already been made by the new controller under the same terms and conditions;
- shares owned by other parties that are also undertaking a tender offer in respect of shares of the same public company;
- shares owned by the main shareholders (that is, shareholders who hold at least 20% of the issued shares in the public company); and
- shares owned by other controllers.
The share price for a tender offer must follow the price requirements under the relevant Bapepam-LK regulations. For example, the tender offer price of a public company whose shares are listed and traded on the IDX must use the higher price of the following: (i) average price of the highest daily trading prices on the IDX during the last 90 days before the acquisition announcement or during the last 90 days before the negotiations announcement; or (ii) the acquisition price.
A tender offer must be implemented by no later than 180 days after the negotiations announcement.
The obligation to carry out a tender offer does not apply to the following (among others):
- any new controller who becomes a new controller by way of a purchase or an acquisition of shares in a public company within a period of 12 months in an amount of up to 10% of the issued shares;
- any new controller who becomes a new controller by way of a direct purchase of shares owned and/or controlled by the government, a state agency or institution, merger, spin-off, consolidation, or implementation of liquidation of shareholders.
If as a result of a tender offer, the new controller owns more than 80% of the issued capital of the public company, then the new controller must, within two years of the tender offer's completion, transfer its shares in the public company to the public so that at least 20% of the total issued shares of the public company are owned by 300 or more parties.
If as a result of an acquisition, the new controller owns more than 80% of the issued capital of the public company, then the new controller must, within two years of the acquisition's completion, transfer its shares (an amount up to the amount purchased during the tender offer) to the public so that the shares of the public company are owned by at least 300 parties.
Linda Widyati and Emalia Achmadi would like to thank Tiara Yara and Denia Isetianti
|Author biographies |
Soemadipradja & Taher
Linda Widyati joined Soemadipradja & Taher in 1992, becoming a partner in July 1999.
Linda advises major international and Indonesian clients in a broad range of high profile commercial transactions including mergers and acquisitions, capital markets, corporate, banking and finance, and restructuring and bankruptcy matters.
In merger and acquisitions activities, Linda assists clients to structure and execute some of Indonesia's leading transactions. She advises on all aspects of mergers and acquisitions including structuring and regulatory issues, comprehensive due diligence exercises, tender offers, anti-competition and unfair trading matters and employment issues.
Apart from her corporate practice, Linda has an extensive civil litigation practice and acts for clients in international arbitration.
Linda has a Sarjana Hukum (Bachelor of Laws) degree from Padjadjaran University, majoring in International Law. She is a licensed advocate and a member of the Indonesian Advocates Association (Peradi). Linda is also registered as a capital markets legal consultant with the Indonesian Capital Markets and Financial Institutions Supervisory Board (Bapepam-LK) and as a receiver and administrator for bankruptcy and suspension of payments proceedings with the Ministry of Law and Human Rights.
Linda is currently a board member of the Legal Education Committee of the Indonesian Capital Markets Lawyers Association, a member of the Inter-Pacific Bar Association and a founder of the Center for Finance, Investment and Securities Law.
Soemadipradja & Taher
Emalia Achmadi joined Soemadipradja & Taher in 1995, and has been invited to join the Partnership effective 1 July 2009.
Emalia's main areas of practice include mergers and acquisitions, capital markets, debt restructuring, banking and finance, employee stock incentive programmes and general corporate.
Emalia obtained her Sarjana Hukum (Bachelor of Laws) degree from the University of Indonesia, Jakarta, majoring in International Law. She is a licensed advocate and a member of the Indonesian Advocates Association (Peradi). Emalia is a member of the Inter-Pacific Bar Association.