Acquisition and exitAcquisitions of controlling stakes
Are there any legal requirements that may impact the ability of a private equity firm to acquire control of a public or private company?
There are several procedures under the Company Law that must be observed in the event of acquisition. The takeover or acquisition of a controlling interest in any Indonesian company must be approved by its shareholders, be published in an Indonesian newspaper and requires settlement of objections that creditors may have. An abridged acquisition plan must be published in a newspaper and submitted to all employees. A complicated objection procedure applies: any creditor (which may include employees) may file objections to the board of directors, but if these are not settled they must be submitted to the shareholders’ meeting that must approve the acquisition.
Further to the above, according to Government Regulation No. 57 of 2010 on Merger, Consolidation of Business Entity and Acquisition of Shares which may cause Monopoly Practice and Unfair Business Competition, there are certain reporting requirements for an acquisition (and subscription of shares) that results in a change of control of an Indonesian company (if certain thresholds are met).
In addition, as mentioned in question 5, investment in certain sectors (such as banking, insurance and finance) require prior approval from the relevant government authorities.
An approval from the Investment Coordinating Board would also be required in the case of direct investment by a foreign investor. This approval is commonly granted by taking into account the negative list, which is a list issued by the Indonesian government classifying business activities that are entirely closed or open for investment with certain conditions, for example, the following:
- limitations on foreign ownership;
- requirements for local partnership;
- limited permitted locations; and
- requirements of special licences or recommendation.
The position of listed companies and foreign ownership rules has been in a state of flux in recent years. In the past few years, the Capital Investment Coordinating Board (BKPM) issued two regulations that regulated the status of a listed company the majority of whose shares are owned by foreign investors: BKPM Regulation No. 14 of 2015 concerning the Guidance and Procedures of Principal Licence for Capital Investment (Regulation 14/2015) and BKPM Regulation No. 13 of 2017 concerning the Guidance and Procedures of Investment Licensing (Regulation 13/2017), which replaced Regulation 14/2015. These two regulations basically provide that if, as a result of transfer of shares, there is a foreign investor in a domestic investment company that has listed its shares in the Indonesian stock exchange and the name of said foreign investor is stated in the deed of such local company, then the legal status of such company must be changed into a foreign investment company (PMA Company)). The BKPM has now replaced Regulation 13/2017 with Regulation No. 6 of 2018 on the same subject, which does not provide the above provision. Accordingly, at the moment there is no clear legal basis to confirm whether a publicly listed company, which prior to the IPO was a non-PMA Company and never obtained any licences from the BKPM and after the IPO has a foreigner as its controlling shareholder, will need to be converted into a PMA Company. There is no provision that requires a listed company to include the name of its shareholders in its articles of association. However, in practice, it will depend on the notary that prepare the corporate deed of the listed company (ie, whether to include the name of the shareholders in detail or simply to include a statement that the shares are 100 per cent listed. In practice, there are a number of precedents where publicly listed companies with a foreign shareholding (either directly or indirectly and non-portfolio) exceed the limitations set out under the negative list.
The source of funds to finance the investment can be from equity or a combination of equity and loan. A foreign direct investment is required to have the following:
- a minimum total investment (excluding land and buildings) of 10 billion rupiah;
- a minimum issued and paid-up capital of 2.5 billion rupiah; and
- a minimum share participation of a shareholder of 10 million rupiah.
Additional rules apply to public companies. Pursuant to OJK Regulation No. 9/POJK.04/2018 concerning the Takeover of Publicly Listed Company, which came into force on 27 July 2018 (OJK Regulation No. 9), the transfer of shares of a public company leading to an acquisition results in the new controller having the following obligations:
- to make an announcement to the public in at least one Indonesian daily newspaper with national circulation and notify the OJK at least one business day after the takeover (the takeover announcement), which, according to article 7 of OJK Regulation No. 9, includes the following information:
- the total number of shares that have been acquired, name of the previous shareholder whose shares were acquired by the new controller if the acquisition was conducted outside the stock exchange, acquisition price per share and total number of the new controller’s share-ownership;
- the new controller’s identity including name, address, telephone, fax, line of business (if any), composition of its management and supervisors, capital structure and any other equal information if the new controller is a business entity;
- the objective of the control; and
- statement that the new controller is an organised group (if the new controller falls under the organised group definition);
- submit evidence of the daily newspaper announcement to the OJK within one business day of the date of the announcement;
- conduct a mandatory tender offer (MTO), which must extend to the shares owned by all shareholders other than those owned by the following:
- any shareholder that has taken part in the takeover transaction with the new controller;
- any other person that has already received an offer from the new controller with the same terms and conditions from the new controller;
- any other person who, at the same time, is making either an MTO or voluntary tender offer for the target company shares;
- the ‘primary shareholder’; and
- another controller of the target company; and
- submit a report to the OJK and a public announcement on the acquisition, as required under OJK Regulation No. 31/POJK/04/2015 on Disclosure of Information or Material Facts By Public Listed Companies.
What are the key limitations on the ability of a private equity firm to sell its stake in a portfolio company or conduct an IPO of a portfolio company? In connection with a sale of a portfolio company, how do private equity firms typically address any post-closing recourse for the benefit of a strategic or private equity acquirer?
Indonesia’s capital market regulator has mandated minimum free float requirements (ie, the total number of shares owned by ‘non-controlling shareholders’ and ‘non-substantial shareholders’) at IPO of between 10 and 20 per cent.
If the investor contemplates an exit by way of the sale of shares in a stock exchange in Indonesia (for example, via the Indonesia Stock Exchange (IDX)), this sale would be taxed at a favourable rate (0.1 per cent of the sales proceeds amount (plus 0.5 per cent ‘founder’ tax)).
The other limitation is a lock-up for the founder meeting certain conditions (see question 16).
In relation to the sale of a portfolio company, private equity firms typically address any post-closing recourse for the benefit of a strategic or private equity buyer via a put option, management seat control and certain conditions for qualifying IPO situations.
The exit also can be structured by IPO at offshore level depending on the commercial consideration and tax treatment.Portfolio company IPOs
What governance rights and other shareholders’ rights and restrictions typically survive an IPO? What types of lock-up restrictions typically apply in connection with an IPO? What are common methods for private equity sponsors to dispose of their stock in a portfolio company following its IPO?
Generally, other than rights of first refusal, most governance rights and other shareholders’ rights and restrictions typically survive an IPO. The public company would be subject to various additional good corporate governance obligations such as ensuring the presence of an independent commissioner and director, audit committee and other committee, corporate secretary, etc.
Post-IPO, OJK regulations require an adjustment towards the newly listed company’s articles of association to conform to the requirements under the regulations. The shareholders’ agreements may state that its terms will survive post-IPO, however, in the event of conflicting provisions between the articles of association and the shareholders’ agreement, Indonesia’s courts would generally give credence to the articles rather than the terms of the shareholders’ agreement. Thus, in the case of a dispute, the investors’ rights under the shareholders’ agreement would be enforced under contract law, rather than under the Company Law, and depending upon its governing law, often at a venue outside of Indonesia’s court system. These foreign court judgments, however, cannot be enforced directly in Indonesia.
For this reason, the preferred dispute resolution mechanism in a contract involving a foreign investor is to utilise arbitration in an internationally recognised arbitration venue. Singapore is the most prominent venue, and arbitration conducted there would adopt the rules of the Singapore International Arbitration Centre. Another alternative dispute resolution mechanism is the Indonesian National Arbitration Board.
If a foreign investor successfully obtains an arbitral award offshore, enforcement against the Indonesian party requires registration and enforcement of the award through the Indonesian courts. In practice, it is rarely possible to obtain an injunction or other forms of specific performance against an Indonesian party in Indonesia. In general, awards of damages against an Indonesian party is the best outcome one can expect for a breach of contracts action.
Furthermore, a party that acquires shares or other equity securities from issuers with a price, conversion value or executing price below the IPO price during the six months prior to submission of a registration statement to the OJK, is prohibited from transferring some or all ownership of the shares and the other equity securities until eight months after the effectiveness of the registration statement.
An exit is typically done by way of public offering of stock in the local stock market (eg, IDX).Target companies and industries
What types of companies or industries have typically been the targets of going-private transactions? Has there been any change in industry focus in recent years? Do industry-specific regulatory schemes limit the potential targets of private equity firms?
There is no particular industry that has been the target of going-private transactions. However, several sectors in Indonesia remain attractive for private equity investment, including IT and internet-based industry, consumer, healthcare, banking and financial services, oil and gas and mining.
Investment in certain industries may require prior approval, licensing or notification.