The following sets out an overview of the acquisition processes in Indonesia. Careful consideration of the issues that arise in acquisitions is required upfront as there are certain unique features to Indonesian law.
Foreign Investment Restrictions for Private Companies
Indonesia requires all foreign investment to be approved by the Capital Investment Coordination Board (BKPM) and then there are notifications to, and in some circumstances approvals from, the Ministry of Law and Human Rights (MOLHR). Whether or not a deal can be done depends on whether the sector is open to foreign investment. This is determined by looking at Presidential Regulation No. 39 of 2014 on List of Business Sectors Closed and Open with Requirements for Capital Investment (Negative List) which lists business sectors and the prescribed permitted foreign ownership (if any). Business sectors are more fully described in the Standard Indonesian Business Field Classifications which must be reviewed as well.
All sectors are open for investment unless restricted under the Negative List (or another law).
The Negative List grandfathers existing investments so that there is protection for existing "direct" foreign investments if a new negative list introduces a lower foreign investment percentage. However, as a matter of policy, usually shares in a company can also be sold to other foreign investors, the business can be expanded and changes of a limited nature can be made to the foreign investment approvals received.
Foreign Investment Restrictions for Public Companies
Public listed companies are regulated by the Financial Services Authority (OJK); although some, post-listing, will still remain under the jurisdiction of BKPM.
Where there is a restriction in the Negative List, foreigners can only own shares in public listed companies as “indirect or portfolio investment” (namely there is no voting or management control).
Documentation and Due Diligence
Many Indonesian companies do not maintain adequate records including books of account. Often, information sought in a due diligence cannot be found readily or simply does not exist.
Indonesia does not have a centralised data base where a party can access and obtain public information on a particular Indonesian company. So for example, searches, based on a power of attorney from the target company, are conducted manually and process is difficult – and at times the results can be less than satisfactory.
There are five types of transactions contemplated by the Company Law: mergers; consolidations; share acquisitions; spin-offs; and asset acquisitions. The two most common transactions are a share acquisition and an asset acquisition, with the former being more prevalent (and only these two processes for private companies will be discussed here).
The documentation will normally include a written share purchase agreement, although this is not strictly required by law and a simple share transfer deed can (and must) be executed.
All that is required to transfer legal title in the shares in a private company is for a share transfer deed to be executed by the seller and purchaser (under hand by way of an agreement or in notarial deed form).
Change in Control
There are additional procedures if there is a "change in control" (especially if a change in control occurs through a share issuance or is driven by the companies' management). Documents include:
|Execution||38 day process (minimum) – assumes prior preparation of documents|
|Days 1–3||Newspaper announcement in national newspaper to creditors and announcement to employees in writing (BKPM/foreign investment application could also be lodged at this time)|
|Days 4–18||Waiting period for creditor objections (which must be notified to the company within 14 days of announcement, otherwise deemed approved) (BKPM approval would issue during this period)|
|Day 19–33/48*||Settle creditor claims (must be done prior to general meeting of shareholders, otherwise resolutions cannot be passed)|
|Day 34||Calling a GMS (requires 14 clear days, but this might be shorten using Art. 82(5) of the Company Law)|
|Day 35/51*||The GMS passes resolutions approving the transfer etc|
|Day 37/53*||Notary issues notarial deeds|
Asset (business) acquisition
The documentation will normally include a written asset (business) purchase agreement.
In an asset (business) acquisition, each individual asset must be transferred in accordance with the formalities applicable to that type of asset. For some assets, this will simply be a case of delivering the asset to the purchaser, but the following items will require specific documentation:
Process and Issues
An asset (business) acquisition takes much longer and in particular, purchasers need to be aware of:
While these matters are not insurmountable, they do make closing an asset (business) acquisition more difficult and time-consuming than a transaction involving shares. Theoretically the business, on a business acquisition, either needs to cease operating until all licences are obtained or otherwise operate without licences for a period (this is a consequence of licences not being transferable).
The Competition Supervisory Commission (Commission) has authority to examine and approve acquisitions that “have the potential to violate the Anti-Monopoly Law [AML]”. Unlike in other jurisdictions, the AML only provides for post-transaction notifications and one sanction – cancellation of a transaction if the Commission determines that there will be monopolistic or unfair business competition. This is unique to Indonesia and makes it critical to assess the impact of a transaction on the market before negotiations.
A post-completion mandatory filing will be required where there is an acquisition which exceeds certain thresholds.
An acquisition is where there is a change in control whether in the:
The thresholds are:
The Commission has issued regulations for prior non-binding consultations, which the Commission has stated it will abide by, provided there has been no material change in circumstances since the non-binding consultation occurred.
Asset sales and transactions between affiliates fall outside the current regime.
However amendments to the AML are expected in 2015 which will include a pre-transaction approval process and will capture asset transactions and joint ventures.
A change to a company’s status, a merger, a consolidation or a change of ownership (undefined) will trigger employees' rights to demand termination.
While a "change of ownership" is frequently associated with the change of the controlling shareholder, given the concept of change in ownership (rather than control) under the Labour Law this is always the case. Any substantial changes in management and employment policies after a transaction can also trigger an employee's right to demand to be terminated (eg, in an indirect acquisition).
Discussions with the target company’s human resources department and cooperation of the employees are required to ensure a smooth transaction. There are various structures that can be adopted to deal with employee issues.
Further the issue is not a valuation issue (as there should be provisions in the target company for retirement benefits which are higher) but more of a cash flow and talent management issue.
There is no automatic transfer of employment provisions, so employees need to agree to be terminated by the seller (and paid out their statutory entitlements) and are rehired by the purchaser. Alternatively employees can also resign from the seller (with no payment benefits) and all the employees’ accrued entitlements are taken over by the purchaser. An immediate accounting provision will be required in the purchaser's accounts (which may affect the purchaser's immediate retained earnings). In either case, employees’ cooperation is required to ensure a smooth transaction.
Taxation and stamp duty
Stamp duty is nominal at 6,000 rupiahs and is affixed as a duty stamp at the time of signing. There is no ad valorem stamp duty regime.
Generally, unlisted shares sold by non-resident taxpayers are subject to a final withholding tax (approximately 5 per cent of the sale price), subject to exemptions under any applicable tax treaties.
For Indonesian corporate tax residents all gains are taxable at a 25 per cent marginal rate, and for Indonesian individual tax residents at a 30 per cent marginal rate; for public listed companies, however, this is reduced to 0.5 per cent for founders and 0.1 per cent for other shareholders.
Sellers must pay a 5 per cent final income tax on transfers of land and/or buildings and purchasers are required to pay a 5 per cent duty.
VAT is not payable on the purchase of shares; 10 per cent VAT is chargeable on assets sold to an entity and is incurred by the purchaser.