Covering your bases: M&A in Indonesia

By Jonathan Streifer

Overview of Mergers & Acquisitions in Indonesia

Mergers and acquisitions in Indonesia are principally governed by Law No. 40 of 2007 regarding Limited Liability Companies (the Company Law). The Company Law defines a merger as "a legal act of one or more limited liability companies to merge with another limited liability company(ies) which results in the transfer by law of the merging company's assets and liabilities to the company it merges into, upon which the merging company's status as a legal entity shall cease by operation of law." An acquisition under the Company Law is distinguished from a merger, and is defined as a legal act of a legal entity or individual to acquire a company's shares that results in a change of control of the acquired company. Both a merger and acquisition are therefore statutorily governed acts that require compliance with particular provisions of the Company Law.

Mergers and acquisitions necessarily implicate many other areas of law including Indonesia's Labor Law (Law No. 13 of 2003 regarding Manpower); tax laws and regulations; the Investment Law (Law No. 25 of 2007 regarding Capital Investment) and implementing regulations, including a recent and important Presidential Regulation and regulations of Indonesia's Capital Investment Coordinating Board, known as Badan Koordinasi Penanaman Modal (BKPM); antitrust and unfair business competition laws and regulations; and industry specific laws and regulations, particularly in regulated industries such as mining and telecommunications.

This article discusses these various aspects of conducting a merger or acquisition in Indonesia, with a focus on mergers and acquisitions of shares between privately held companies. Readers should be mindful that mergers and acquisitions involving public companies are governed by the Company Law but also implicate special rules under capital markets laws and regulations, including tender offer and material transaction rules.

Merger vs acquisition

In Indonesia, a company typically obtains control of another company through a share acquisition. Mergers are generally much less common unless they are undertaken for operational or tax reasons, as further discussed below. The Company Law does not contemplate or permit a foreign company to merge with an Indonesian company, and a share acquisition is the only structure under which foreign companies can acquire Indonesian companies, unless the foreign company first establishes an Indonesian subsidiary to undertake the merger.

In a share acquisition, Company Law compliance is only required if there is a change of control. Often, the threshold question of determining whether a transaction involves a change of control is easily determined; for instance, where a party acquires a majority of the share capital and controls the board of directors and board of commissioners of the company being acquired, change of control will be obvious. Under other circumstances, the question may require further factual analysis. For example, an Indonesian shareholder may hold all of the issued share capital of an Indonesian company. If the Indonesian shareholder disposes of half of that shareholding to a foreign party, it is not always clear whether a change of control has occurred, particularly if the Indonesian shareholder retains control of the company's board of directors. In this example, the Indonesian shareholder will likely have less control than prior to the share sale but will still retain control, and the legal conclusion may be that no change of control has occurred to therefore require compliance with the Company Law.

Similar issues arise where changes of shareholding occur in a company that has several...