Setting up and operating a joint venture

Structure

Are there any particular drivers in your jurisdiction that will determine how a joint venture is structured?

The primary driver for structuring joint ventures in Indonesia relates to the foreign ownership restrictions (if any) applicable to the relevant business sector of the joint venture company, as set out in the Negative List (see question 2). In addition, as noted under question 1, certain sectors (such as the oil and gas and construction industries) allow for the establishment of unincorporated joint ventures. Other considerations in structuring an Indonesian joint venture company include tax considerations (see question 6) and accounting considerations (eg, whether the parties want to consolidate the joint venture in their accounts).

In general, the Indonesian regulatory framework does not typically accommodate complex structuring arrangements (such as quasi-debt or quasi-equity instruments or even partially paid shares for PMA companies). However, the Indonesian Company Law does allow for different classes of shares and, in recent years, there has been an increased use of ‘share’ class structures to commercially allocate the voting and dividend rights between the relevant shareholders.

Tax considerations

When establishing a joint venture, what tax considerations arise for the joint venture parties and the joint venture entity? How can tax charges be lawfully mitigated?

The main tax consideration for joint venture parties is in relation to the withholding and income tax payable on dividends from Indonesian companies. Unless a tax treaty applies, foreign shareholders will be subject to a 20 per cent final withholding tax on dividends paid from an Indonesian joint venture company. As a result, foreign joint venture parties often closely consider the jurisdiction through which to invest in Indonesian joint ventures to best take advantage of the available tax treaties; common foreign jurisdictions include Singapore, Hong Kong and the Netherlands. Different tax treatment can apply to foreign shareholders based on whether they hold a ‘portfolio’ or ‘substantial’ holding (as those terms are defined in each relevant tax treaty) in the relevant Indonesian joint venture company. In addition, dividends received by Indonesian incorporated joint venture parties are exempt from income tax if the relevant dividends have been paid out of the retained earnings of the joint venture company and the Indonesian incorporated joint venture party holds at least 25 per cent of the paid-up capital of the joint venture company.

Asset contribution restriction

Are there any restrictions on the contribution of assets to a joint venture entity?

The Indonesian Company Law regulates the process through which assets can be used as in-kind contributions to an Indonesian joint venture company. The value of the share capital to be issued from an in-kind contribution of assets must be based on a reasonable value determined in accordance with market prices or otherwise be determined by an independent expert valuer. In-kind contributions in the form of immovable assets must be announced in at least one Indonesian newspaper no later than 14 days after the issuance of the shares.

However, not all kinds of ‘assets’ can be used as in-kind contributions to an Indonesian joint venture company. Only assets that are able to be transacted upon (ie, able to be sold, pledged as collateral security or attached upon or seized by a creditor) are able to be used as in-kind contributions. As a result, certain intangible assets, such as contractual receivables or registered intellectual property (IP), can, in theory, be used as in-kind contributions. However, other intangible assets, such as goodwill or certain contractual rights, are typically not applicable for use as in-kind contributions.

Interaction between constitution and agreement

What is the interaction between the constitution of the joint venture entity and the agreement between the joint venture parties?

While joint venture entities may enter into an agreement between themselves (which may also include the relevant joint venture company), from an Indonesian legal perspective, the articles of association of the joint venture company will take precedence in relation to the corporate actions of the joint venture company. As the articles of association of a joint venture company is the effective legal document that guides the company’s legal operations, any lawful actions that are taken in accordance with the articles of association will be legally valid and binding on the company in relation to third parties (irrespective of the provisions of any other contractual arrangements). However, if a joint venture party or a joint venture company takes an action that is consistent with the articles of association but is in breach of the relevant contractual agreement between the parties, then the non-defaulting party would be able to bring a breach-of-contract claim but would not be able to declare the relevant legal action of the joint venture company as void from the outset.

Given the general reliability and accountability issues in bringing and enforcing contractual claims in Indonesian courts, joint venture parties typically take substantial care to make sure that the articles of association of the relevant joint venture company reflects (to the extent possible) the provisions of any relevant contractual arrangements.

Party interaction

How may the joint venture parties interact with the joint venture entity? Are there any restrictions?

The way in which joint venture parties may interact with the relevant joint venture company will largely depend on the specific articles of association of the joint venture company. Typically, however, joint venture parties will primarily interact with the joint venture company through a general meeting of shareholders. An annual general meeting of shareholders must be held no later than six months after the end of the financial year of the joint venture company and must include the presentation of the company’s annual report (as prepared by the board of directors of the joint venture company). Additional extraordinary general meetings of shareholders can be held at any time, including upon the request of a joint venture party who holds at least 10 per cent of the issued voting shares of the joint venture company.

The Indonesian Company Law also enshrines the right of joint venture parties to obtain information related to the joint venture company at any general meeting of shareholders, provided that it is connected with the agenda items and does not conflict with the joint venture company’s interests. Joint venture parties that hold at least 10 per cent of the issued voting shares of the joint venture company can also (through a petition to the relevant district court) exercise inspection rights for the purpose of obtaining data or information if there is reasonable suspicion that the joint venture company has conducted unlawful actions that are detrimental to the joint venture parties. The Indonesian Company Law is otherwise silent on the ability of nominee directors to pass information about the joint venture company to the relevant nominating shareholder. In practice, whether or not information will be able to be disclosed by the joint venture company to the joint venture parties will depend on the status of the relevant information (including whether such information is subject to contractual or regulatory disclosure restrictions).

Exercising control

How may the joint venture parties exercise control over the joint venture entity’s decision-making?

One of the most common control mechanisms for joint venture parties over a joint venture company’s decision-making is to nominate members of the board of directors and board of commissioners of the joint venture company. Typically, the right to nominate members of the board of directors and board of commissioners of the joint venture company is set out in the contractual arrangements between the joint venture parties. In Indonesian companies, the board of directors serves as the body responsible for the operational and daily management of the joint venture company. The role of the board of commissioners is to supervise the activities of, and provide advice to, the board of directors. Joint venture parties will typically have significant flexibility in structuring the controlling mechanisms for the board of directors and board of commissioners (including in relation to the number of directors and commissioners, limitations on their powers and authorities and arrangements in relation to quorum and voting thresholds for meetings of the boards). While all members of the board of directors and board of commissioners will owe primary legal duties of good faith to the joint venture company and to act in its best interest, in practice, members of the board of directors and board of commissioners will also typically seek (wherever legally possible) to represent the views of the relevant nominating joint venture party.

Another common control mechanism for joint venture parties (especially minority investors, who will not typically have rights to appoint the majority of the board of directors or the board of commissioners) is through reserved matters set out in the articles of association of the joint venture company. These reserved matters typically set out a list of critical management or business decisions, which cannot be approved by the joint venture company without the unanimous (or near-unanimous) approval of the board of directors, board of commissioners or the general meeting of shareholders of the joint venture company. This mechanism will serve as an effective veto right for each of the joint venture parties in relation to the relevant critical decision.

Governance issues

What are the most common governance issues that arise in connection with joint ventures? How are these dealt with?

The most common governance issue in Indonesian joint ventures relates to deadlock (either owing to board compositions, reserved matters or the higher quorum and voting requirements for certain corporate matters under Indonesian law). Typically, the contractual arrangements between the joint venture parties will include a framework for the resolution of such deadlock, including through referral of the issue to key management personnel, put or call options, casting votes or dispute resolution mechanisms such as independent experts (see question 22).

Another common governance issue in Indonesian joint venture companies is that, under the standard articles of association approved by the Indonesian Ministry of Law and Human Rights, the president director (or, in his or her absence for any reason, any other director) will have an almost unfettered right to act for and on behalf of the joint venture company. Unlike most jurisdictions (which would require, at the very least, approval from the board of directors for certain decisions), the custom in Indonesia is that the president director (or, in his or her absence for any reason, any other director) can act without consulting (or receiving the approval of) the other members of the board of directors. This issue is typically dealt with by expressly restricting the powers of the individual members of the board of directors (including the president director, if necessary) under the articles of association of the joint venture company or by otherwise imposing strict controls on the reporting and internal approval procedures for business decisions.

Nominee directors

With an incorporated joint venture, what controls exist in your jurisdiction in relation to nominee directors? How should a nominee director balance the potentially conflicting interests of the joint venture company and the appointing shareholder?

Indonesian law does not include any specific controls in relation to nominee directors. However, as a general principle, all directors and commissioners of a joint venture company owe a primary legal duty of good faith and must act in the best interests of the joint venture company. If a director or commissioner fails to properly consider the interests of the joint venture company then he or she may be personally liable for any decisions that cause loss for the joint venture company.

Indonesian law prohibits members of the board of directors from representing a joint venture company if he or she has a personal conflict of interest with the joint venture company. However, the typical interpretation of this prohibition is that it does not apply in circumstances where the joint venture party that nominated the director (rather than the director, personally) has a conflict of interest with the joint venture company. As a result, in practice, nominee directors are not typically prevented from voting on matters that relate to the relevant nominating shareholder.

Competition law

What competition law considerations are engaged by the formation and operation of the joint venture? Is approval needed?

No specific competition law approval is currently required for the formation of a joint venture company in Indonesia (competition law filing is only required in the context of the merger or a control acquisition of an existing joint venture company that satisfies prescribed asset or sales thresholds). However, there are currently policy proposals being considered to include the formation of joint ventures in the competition approval regime.

Nonetheless, under Indonesian law, once established, the joint venture must operate its business in accordance with the relevant antimonopoly laws and regulations and must not engage in monopolistic practices or unfair business competition.

Provision of services

What are the key considerations in your jurisdiction in structuring the provision of services to the joint venture entity by joint venture parties?

From a legal perspective, the directors and commissioners of the joint venture company will need to be able to satisfy themselves that any services contract entered into with a joint venture party is entered into in good faith and in the best interests of the joint venture company.

From a tax perspective, it will be necessary to consider the transfer pricing provisions under the tax laws. In general, if transactions between related parties have not been entered into on arm’s-length terms, then the Indonesian Tax Office will recalculate the taxable income or deductible costs arising from such transactions based on arm’s-length terms.

Employment rights

What impact do statutory employment rights have in joint ventures?

The Indonesian Manpower Law does not recognise the concept of a transfer of employees. As a result, if employees are transferred from an existing (Indonesian) joint venture party to the joint venture company, then individual employees must be approached and each employee must agree to such transfer. Strictly speaking, a transfer of employees constitutes a termination of employment with the (Indonesian) joint venture party and the entering into of a new employment arrangement with the joint venture company. If this transfer of employees occurs without the relevant employee voluntarily resigning from the (Indonesian) joint venture party, then this transfer will trigger the requirement for that (Indonesian) joint venture party to pay severance package entitlements to the employee under the Indonesian Manpower Law. However, joint venture parties frequently second employees to joint venture companies on a short-term basis to assist in its operations. The transfer of employees from a foreign party to an Indonesian joint venture company will be considered as the commencement of a new employment relationship under the Indonesian Manpower Law. Also, foreign employees must obtain a permit to work in Indonesia and can only be employed by one Indonesian company at a time.

Operationally, there are also certain restrictions on the ability of, and consequences for, a joint venture company to outsource the employment of its employees to an external payroll or employee outsourcing company (eg, only employees carrying out non-core activities are permitted to be outsourced).

Intellectual property rights

How are intellectual property rights generally dealt with on the creation, operation and termination of a joint venture in your jurisdiction?

Foreign joint venture parties typically exercise great caution in relation to the use of their IP rights by Indonesian joint venture companies. To best protect the interests of the relevant joint venture party, a common mechanism is for the joint venture party to register the relevant IP rights in Indonesia in its own name and to then grant a licence (based on the agreed commercial terms) to the joint venture company to utilise such IP. By structuring the arrangements in this way, the IP rights will also remain the property of the relevant joint venture party and will be protected in the event of a dispute with, or termination of, the joint venture.