New Bapepam Rules on Material Transactions and Conflict of Interest Transactions

Independent Shareholders resolutions likely to re-emerge as regular feature of transactions involving Indonesia listed companies

The Indonesian Capital Markets and Financial Institutions Supervisory Agency ("Bapepam-LK") issued new regulations on Material Transactions ("Material Transactions Rules") on 25 November 2009 and on Affiliated Transactions and Conflict of Interest (the "COI Rules") on 29 November 2009. These regulations replace and tighten the previous versions of the rules, and expand the circumstances under which an independent shareholder resolution is required.

COI Rules

Conflict of interest provisions have a long history as part of Indonesian corporate governance regulations and are intended to safeguard minority shareholders in an environment where the vast majority of public companies are dominated by a single shareholder. These regulations have traditionally required an independent valuation and a resolution of independent shareholders to approve transactions in which the controlling shareholder has an economic interest. While controlling shareholders have rarely been defeated on conflict of interest resolutions, this regulation has generally given minority shareholders an opportunity to provide informed feedback on related party transactions. Independent shareholder resolutions are therefore a common feature of Indonesian transactions involving listed companies.

The new COI Rules come as a welcome revision to previous regulations published just last year. The previous regulations had been criticized for giving companies too much flexibility in interpretation, particularly that the transaction must involve 'unfair pricing' before triggering a requirement for an independent shareholders resolution. This led to many public companies relying solely on the independent valuation to show there was no 'unfair pricing'. On the other hand, cautious issuers felt the need (or were required by cautious third party financiers) to obtain independent shareholder resolutions and independent valuations with respect to many transactions that were of no obvious detriment to the company, such as transactions between a company and its wholly owned subsidiaries.

The new COI Rules apply broadly to transactions involving loans, acquisition and disposition of assets, and transactions involving shares in the public company or subsidiaries. As with the previous regulations, they distinguish between "Affiliated Transactions" - which simply require...