Structure and process, legal regulation and consentsStructure
How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?
In Indonesia, acquisitions are typically structured through (i) the transfer of the target company’s shares; or (ii) in the case of asset acquisition, through the transfer of the target company’s assets, from the seller to the purchaser. These transfers are usually conducted through a sale and purchase agreement that will be executed by the parties who wish to acquire or dispose the relevant company or assets.
Law No. 40 of 2007 on Limited Liability Company (the Company Law) governs the acquisition of shares in a limited liability company, which is defined as a legal action taken by a legal entity or individual person to acquire shares in a company resulting in the passing of control of that company (acquisition). The process of an asset acquisition will depend on the asset being transferred, as each is subject to different legal requirements. For tangible assets, this means signing the transfer agreement and physically handing over the assets; for intangible assets, signing the deed of assignment; and for land and buildings, signing the deed of transfer and registering the deed in the Land Registry.
The length of an acquisition or disposal process is subject to the complexity of the transaction and the number of parties involved. Some of the steps that are typically taken prior to the completion of such acquisition or disposal include:
- due diligence on the relevant company or asset to be acquired or disposed (approximately four weeks);
- drafting of the transaction documents. In most transactions, parties would start off with a conditional sale and purchase agreement (an agreement made before completion), followed by the final sale and purchase agreement on completion date;
- negotiation of the transaction documents (approximately four weeks);
- in the case an acquisition of shares of a company, announcing such acquisition in a newspaper and to the employees of the company to be acquired (two weeks); and
- fulfilment of the conditions precedent and/or conditions precedent (if any).
Aside from the processes above, the larger the company, or the more assets that will be acquired or disposed, the longer it would take to complete the whole transaction process. In general, it may take more than two months to complete the whole transaction.Legal regulation
Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?
The transfer of shares or assets (including private acquisitions and disposals) is governed under the local legal requirements - be it the Company Law (for transfer of shares), land regulations (for land and buildings), or the Indonesian Civil Code (for receivables and other intangible goods).
Further, there are also a range of other regulations, including but not limited to those regarding foreign investment restrictions, transfer of employees, title of property, competition, and use of currency, which may be relevant in the acquisition and disposal process. These local laws govern the formalities for transferring the legal title and effecting the change of ownership. However, it is possible, under the ‘freedom of contract’ principle specified in the Indonesian Civil Code, for the parties to set out the terms and conditions of the acquisition or disposal in an agreement that is governed by the law of another jurisdiction, even though the transfer of legal title is determined by Indonesian law, provided that that agreement does not contravene public policy.Legal title
What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?
In an acquisition of shares, the buyer will acquire such title to the shares that is prescribed by law and the level of assurance is not negotiable by the buyer. This legal title to the shares will be transferred once the documents evidencing the transfer of shares (ie, shareholders’ approval and the share sale and purchase agreement) has been notified and acknowledged by the Ministry of Law and Human Rights.
Whereas in an acquisition of assets, specifically assets in the form of land, the type of legal title may vary, such as in the form of a right to use, right to build, right to manage, right to exploit, or right of strata title ownership of units in a multi-storey building. In the case of land transfer, the legal title will be effectively transferred from the seller to the buyer once the registered name of the seller has been changed to the name of the buyer in the relevant land title certificate, which is processed by the land deed official. There is no difference between the legal and beneficial title in Indonesia; the legal owner will be considered as the beneficial owner.Multiple sellers
Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?
There is no provision or regulation in Indonesia that obliges all sellers to agree to sell all the shares for the buyer to acquire. The company’s articles of association may prescribe a requirement to seek first refusal of the existing shareholders prior to selling to a third party (right of first refusal).
Indonesian law also does not recognise squeeze-out requirements. If multiple sellers are acting jointly, it is typical for all sellers to execute the transaction documents together and agree to be bound by the same terms.
Regarding minority sellers, the Company Law does not stipulate tag-along and drag-along rights. However, in practice, tag-along and drag-along rights may be used in a transfer of shares. These tag-along and drag-along rights are usually agreed between the shareholders in the shareholder agreement. Hence, minority sellers that refuse to sell can be dragged along as long as there is a shareholder agreement in place that sets out the provision for them to do so.Exclusion of assets or liabilities
Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?
A buyer may generally choose which assets or liabilities it wishes to acquire in a transaction that is structured as a company or asset sale. However, certain consents, notifications or approvals may be required to be obtained with regard to the transfer of assets or liabilities of a company. For example, shareholders’ consent, bank’s consent in the event that the company is a party in a loan agreement that obliges such company to acquire the bank’s consent, approval or notification when transferring an asset, or counterparty’s consent in the event of assignment or novation of a contract. Further, under the Company Law, a company is obliged to notify that it is being acquired through announcement in the newspaper and to its employees.Consents
Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?
The Company Law provides for the following restrictions that may apply to a transfer of shares, which will also be set out in a company’s articles of association:
- obligation for the selling shareholder to first offer the shares to be sold to other shareholders within the same class or other shareholders;
- obligation of the company to obtain prior approval from certain organs of the company (general meeting of shareholders, board of commissioners or board of directors); and
- obligation of the company to obtain prior approval from the authorised governmental agency in accordance with the provisions of the applicable laws and regulations.
However, the above-mentioned requirements on share transfer are not mandatory, hence each company may have different restrictions in connection with its share transfer and a review of the target company’s articles of association is necessary to identify whether such company has any share transfer restrictions. Further, agreements that are entered into by the company may also impose restrictions on the transfer of its shares or assets.
There are also restrictions on foreign ownership in Indonesia, in which there are business industries that are closed to foreign ownership or open with certain requirements. This limitation is governed under the lists of business fields closed and open with certain requirements in the fields of investment, which was amended in 2016.
The transfer of land is also subject to the agrarian regulations, which limit foreign ownership of land only to specific land titles (ie, the right to use or the right to build).
Are any other third-party consents commonly required?
Consent from third parties is commonly required in an acquisition transaction, and may include:
- as required under the Company Law, shareholders’ approval for the acquisition;
- spousal consent for a married shareholder intending to sell their shares or asset, unless there is a prenuptial agreement between the couple that provides otherwise;
- in the event that the target company is a party to agreements that restrict the sale or transfer of shares or assets without prior consent, approval or notification to the counterparty, the relevant consent must be obtained (ie, loan agreement, lease agreement); and
- in some cases, consent from the relevant governmental authority.
Must regulatory filings be made or registration (or other official) fees paid to acquire shares in a company, a business or assets in your jurisdiction?
In an acquisition, the documents evidencing transfer of shares must be registered with the Ministry of Law and Human Rights and recorded in the State Gazette, which imposes no official fee. An acquisition of assets in the form of land on the other hand does not require the evidence of asset transfer to be registered with the Ministry of Law and Human Rights; however, filings with regard to the transfer of land ownership (change of name in the land title certificate) must be registered with the relevant land office through the land deed official, and fees will be imposed for such process.
Advisers, negotiation and documentationAppointed advisers
In addition to external lawyers, which advisers might a buyer or a seller customarily appoint to assist with a transaction? Are there any typical terms of appointment of such advisers?
Aside from external lawyers, parties would typically appoint a financial adviser, an asset appraiser, or an accountant to assist with a transaction, or any other specific adviser (eg, intellectual property practitioners and a notary to formalise the agreements of the transactions). Financial advisers will provide strategic and valuation advice, while the accountants will assist with accounting matters, financial and tax due diligence and other tax-related issues. The buyer may also appoint a business consultant to provide strategic business advice and, in some cases, conduct commercial due diligence.
Most professional advisers have standard terms of engagement that they will agree with the buyer or the seller, as the case may be. The level of fees will depend on the monetary value of the deal, the complexity of the issues, the timetable for the transaction and the nature of any required work product. In aggregate, a buyer’s financial, accounting and legal advisory fees would usually amount to several percentage points of the monetary value of the deal.Duty of good faith
Is there a duty to negotiate in good faith? Are the parties subject to any other duties when negotiating a transaction?
Article 1338, paragraph 1 of the Indonesian Civil Code provides that any agreement governed by Indonesian law must be entered into in good faith and this obligation may include the pre-contractual and post-contractual phases.
However, good faith is defined more in the context of honesty between parties and the commitment in the execution of the agreements, as a lack of honesty may lead to misleading facts or conditions that can be used as an excuse to annul an agreement.
Besides the general requirement of good faith, directors of Indonesian-incorporated companies are subject to fiduciary and statutory duties that include the duty to act in a way that a director considers to be in good faith and that promotes the success of the company for the benefit of its members as a whole.Documentation
What documentation do buyers and sellers customarily enter into when acquiring shares or a business or assets? Are there differences between the documents used for acquiring shares as opposed to a business or assets?
When acquiring shares or assets, parties to a transaction will customarily enter into, among others:
- a sale and purchase agreement setting out the terms of the transaction, which will be substantially similar for both an acquisition of shares or assets, except that in respect of an asset acquisition, detailed provisions defining the scope of the assets will be included; and
- a disclosure letter in which general and specific disclosures are made by the seller qualifying the warranties included in the sale and purchase agreement.
In addition, parties may also enter into novation agreements in the event that during the transfer of asset or shares, there will be agreements that need to be novated to the buyer.
Are there formalities for executing documents? Are digital signatures enforceable?
There is a distinction under Indonesian law between the execution of simple contracts and the execution of notarial deeds. There are certain documents that must be executed in the form of a notarial deed. For example, in an acquisition of shares, it is a requirement under the Company Law that deeds of acquisition of shares directly from shareholders be made in a notarial deed in the Indonesian language. It is not necessary for a transfer of assets to be executed in notarial deed form; however, security documents such as fiduciary and mortgage securities will have to be executed in notarial deed form.
Digital signatures are recognised under Indonesian law and have legal force and effect, provided that the following conditions are met:
- digital signature creation data is associated only with the signer;
- digital signature creation data at the time of the electronic signing process shall be only in the authorisation of the signer;
- any alteration to digital signatures that occurs after the time of the signing must be traceable;
- any alteration to electronic information associated with the signature after the time of the signing must be traceable;
- certain methods are adopted to identify the signer; and
- certain methods are adopted to demonstrate that the signer has given his or her consent to the associated electronic information.
However, although Indonesian law recognises digital signatures, there are certain situations in which digital signatures are not recognised, such as (i) documents that pursuant to the relevant laws and regulations must be made in written form; and (ii) documents, together with their supporting papers, that pursuant to the relevant laws and regulations, must be made in notarial deed form or deed form by a land deed official.
The use of digital signatures may also be subject to the approval of the specific line-regulatory agencies. For example, in financial services, the central bank and the Financial Services Authority will have their own approach towards digital signatures.
Due diligence and disclosureScope of due diligence
What is the typical scope of due diligence in your jurisdiction? Do sellers usually provide due diligence reports to prospective buyers? Can buyers usually rely on due diligence reports produced for the seller?
Due diligence is conducted with the purpose of providing potential buyers with the opportunity to evaluate the actual condition of a company or asset. The typical full-blown legal due diligence will usually confirm the company’s compliance with law, legal ownership, the legality of its establishment, articles of association, shareholding and capital structure and its historical background, authorised company organs, material licences and fulfilment of obligations (ie, regarding employment, tax payment, environment), material agreements, assets (ie, intellectual property rights, physical assets), insurance and litigation. However, there are several cases whereby the buyers would request for only a limited scope of due diligence. Buyers usually conduct their own due diligence rather than rely on the due diligence report produced by the seller.Liability for statements
Can a seller be liable for pre-contractual or misleading statements? Can any such liability be excluded by agreement between the parties?
A seller can be liable for pre-contractual misrepresentations although, with the exception of fraudulent misrepresentations, sale and purchase agreements usually limit a seller’s liability to claims for breach of contract and exclude liability for pre-contractual and misleading statements. Practice differs widely according to the nature of the transaction and the parties, but it is customary for the buyer to confirm that it has not relied on any representation outside the contract.Publicly available information
What information is publicly available on private companies and their assets? What searches of such information might a buyer customarily carry out before entering into an agreement?
In Indonesia, there is no requirement for private companies to make their information publicly available. However, it is possible to obtain certain information about a company, such as:
- from the General Law Administration of the Ministry of Law and Human Rights: information on the:
- deed number of the company’s deed of establishment;
- deed number of the company’s articles of association;
- current shareholding structure and historical shareholding structure;
- shareholding composition; and
- board of directors and board of commissioners;
- from the Supreme Court website or the Registry of District Court: information regarding legal proceedings;
- from the Land Office: land registration certificate which includes the information on the registered name of the land owner, area of the land, land title, security over the land; and
- from the Directory of Intellectual Property Rights: information on the ownership and status of intellectual property.
A buyer will typically carry out, before entering into an agreement (as applicable), the search of information above as a cross-reference check against the information provided by the seller.Impact of deemed or actual knowledge
What impact might a buyer’s actual or deemed knowledge have on claims it may seek to bring against a seller relating to a transaction?
A buyer’s knowledge at the time of entering into an acquisition may preclude claims being brought against the seller in respect of relevant representations, warranties and covenants. Parties generally are free to modify this principle and set out the way in which actual or deemed knowledge of the buyer may or may not affect any claims afterwards.
Pricing, consideration and financingDeterming pricing
How is pricing customarily determined? Is the use of closing accounts or a locked-box structure more common?
Price adjustment is usually determined based on several considerations, such as:
- assumption on whether the price is net-debt basis or no-debt basis;
- working capital position; or
- balance sheet as of a specified cut-off date (ie, management account, audited financial statement or unaudited financial statement date).
Further, both closing accounts and locked-box structures are commonly used in private mergers and acquisitions transactions in Indonesia. Such mechanisms will be chosen based on the preference and negotiation of the parties in the transaction.Form of consideration
What form does consideration normally take? Is there any overriding obligation to pay multiple sellers the same consideration?
Cash is the most common form of consideration in private mergers and acquisitions transactions, although there are also cases whereby the consideration is payable in shares, securities or in other forms of consideration which are principally dependent on the tax position of the seller, among other reasons. There are no obligations to pay multiple sellers the same consideration in respect of an acquisition by way of a sale and purchase agreement.Earn-outs, deposits and escrows
Are earn-outs, deposits and escrows used?
In mergers and acquisitions transactions in Indonesia, deposits and escrow mechanisms are more commonly used compared with the earn-out mechanism. The deposit and escrow mechanisms essentially serve the purpose of demonstrating the buyer’s good faith.Financing
How are acquisitions financed? How is assurance provided that financing will be available?
The financing of an acquisition by a company would depend on the size of such acquisition. To the extent possible, a company may use its own funds to finance the acquisition. It is also common for an acquisition transaction to be financed by third parties, such as bank loans, shareholders’ loans, loans from private equity and other institutional financing. It is also possible for an acquisition to be financed by the issuance of debt instrument, such as bonds.Limitations on financing structure
Are there any limitations that impact the financing structure? Is a seller restricted from giving financial assistance to a buyer in connection with a transaction?
There is no restriction or limitation under the applicable laws in Indonesia on the seller giving financial assistance to a buyer. Nonetheless, in Indonesia, it will be unusual for a seller to provide financial assistance to a buyer.
Conditions, pre-closing covenants and termination rightsClosing conditions
Are transactions normally subject to closing conditions? Describe those closing conditions that are customarily acceptable to a seller and any other conditions a buyer may seek to include in the agreement.
In general, transactions are normally subject to closing conditions. However, parties may in the agreement agree to give discretion to the purchaser or seller to waive such conditions in any relevant circumstances or have those outstanding conditions fulfilled at the closing. Typically, the closing conditions that are customarily acceptable to a seller are, among others, with regard to:
- their capacity and authority;
- the obtainment of the relevant governmental authorisation, consents, or required permits;
- not doing anything that would have a material adverse change to the business, assets or its operations since entering into the transaction; and
- using its best effort to fulfil the conditions to closing.
What typical obligations are placed on a buyer or a seller to satisfy closing conditions? Does the strength of these obligations customarily vary depending on the subject matter of the condition?
To ensure the satisfaction of closing conditions, the parties will at least be expected to use reasonable efforts. A ‘best efforts’ standard may also be agreed, which is a more difficult standard and may require the expenditure of money, although it is not an outright commitment to accomplish the predetermined result.Pre-closing covenants
Are pre-closing covenants normally agreed by parties? If so, what is the usual scope of those covenants and the remedy for any breach?
It is common for pre-closing covenants to be agreed by the parties, as long as such covenants are still in the ordinary course of business consistent with past practice of the company. The commonly agreed pre-closing covenants include:
- not to alter the share capital or make distributions to shareholders;
- not to acquire or dispose of assets, incur liabilities, enter into material agreements or commit to capital expenditure in excess of a specified value;
- not to create encumbrances;
- to maintain, without alteration, insurance policies;
- not to commence litigation or waive any claims;
- to conduct the ordinary course of business in accordance with the applicable laws; and
- to grant access to the target company’s books, records and premises.
In addition, the parties also typically undertake not to solicit senior employees, to maintain the confidentiality of the transaction and to make a public announcement regarding the transaction only with the other party’s consent.Termination rights
Can the parties typically terminate the transaction after signing? If so, in what circumstances?
The termination of an agreement by the parties is subject to the termination clause under the relevant agreement. Usually termination by a party can happen only after it passes the long-stop date, except in the event that there are specific conditions as set out under the relevant agreement that cannot be fulfilled by one of the parties to the agreement.
Are break-up fees and reverse break-up fees common in your jurisdiction? If so, what are the typical terms? Are there any applicable restrictions on paying break-up fees?
The existence of break-up fees and reverse break-up fees depends on the agreement between the parties and there is no specific term or applicable restriction on paying break-up fees. It is customarily based on the agreement of the parties.
Representations, warranties, indemnities and post-closing covenantsScope of representations, warranties and indemnities
Does a seller typically give representations, warranties and indemnities to a buyer? If so, what is the usual scope of those representations, warranties and indemnities? Are there legal distinctions between representations, warranties and indemnities?
A seller will typically provide representations, warranties and, in some cases, indemnities. The scope of these representations, warranties and indemnities will vary depending on the type of transaction being carried out and are subject to the negotiation between the parties, as well as the findings of any due diligence exercise. Typical representations and warranties provided by the seller include:
- the legal capacity and authority of the seller to enter into, exercise its rights and perform its obligations under the agreement;
- the relevant agreement constitutes valid and legally binding obligations, enforceable against it in accordance with its terms;
- all information provided and contained in the agreement is true, complete and accurate and not misleading in all material respects;
- all applicable governmental, statutory, regulatory or other consents, licences, waivers or exemptions required to empower it to enter into and to perform its obligations under the agreement have been obtained;
- the establishment of the seller;
- operational aspects of the business relating to employees, commercial contracts, litigation, compliance with law, intellectual property and information technology (if applicable); and
- with respect to acquisition of a company, the shareholding of such company and the condition of the assets to be acquired.
What are the customary limitations on a seller’s liability under a sale and purchase agreement?
A seller’s aggregate liability under a sale and purchase agreement is customarily capped at an amount equal to the purchase price. Other limitations on a seller’s liability under a sale and purchase agreement may be agreed upon by the parties in the agreement. Typically parties would also agree that liabilities for the breach of fundamental warranties and tax warranties will be capped at a higher amount than other warranties.Transaction insurance
Is transaction insurance in respect of representation, warranty and indemnity claims common in your jurisdiction? If so, does a buyer or a seller customarily put the insurance in place and what are the customary terms?
Insurance in respect of representation, warranty and indemnity claims is not common in Indonesia. A policy does not typically provide the policyholder with protection regarding specific indemnities that may emerge as a result of due diligence by the buyer or disclosure by the seller. Notwithstanding this, it may be conceivable to arrange insurance for known and particular unforeseen risks.Post-closing covenants
Do parties typically agree to post-closing covenants? If so, what is the usual scope of such covenants?
In some transactions, parties may agree to post-closing covenants. One common example of such a covenant is the covenant not to compete. However, these post-closing covenants are usually limited to a certain period of time.
Are transfer taxes payable on the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
Any transfer will be subject to tax, but different rates apply for different transactions, and the tax will typically be borne by the transferor. For example, the transfer of shares listed on the Indonesian stock exchange is subject to a tax rate of 0.1 per cent of the transaction value. However, the sale or transfer of assets such as land or buildings is generally subject to a tax rate of 2.5 per cent on the sales proceeds, while the sale or transfer of low-cost houses or apartments by a real estate company will be subject to a 1 per cent tax rate and a transfer of assets to the government that is in the public interest is not taxable.Corporate and other taxes
Are corporate taxes or other taxes payable on transactions involving the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
For transfers of shares in general, the difference between the acquisition of shares and the selling price of shares will be subject to capital gains tax at a rate of 25 per cent (flat rate) if the seller is a corporate taxpayer in Indonesia. If the seller of the shares is a non-Indonesian taxpayer, then the capital gains tax from the selling of the shares will be regulated based on the applicable tax treaty between the seller’s country of domicile and Indonesia. Such tax is usually borne by the transferor.
There are different rates for transfer of assets. For example, the tax for land and buildings is subject to final income tax of 1 per cent, while for assets other than land and buildings, the tax rate varies.
Further, transfers of assets are subject to value added tax (VAT) at a rate of 10 per cent of the market value. VAT should be imposed by the transferor on the delivery of assets. However, if the asset acquisition is in the form of buildings, machinery or goods that are not purposed to be traded, it will be exempted from VAT. For the transfer of assets in connection with a merger and acquisition, such transaction can be exempted from VAT provided that the transferor and transferee are tax subjects.
Employees, pensions and benefitsTransfer of employees
Are the employees of a target company automatically transferred when a buyer acquires the shares in the target company? Is the same true when a buyer acquires a business or assets from the target company?
The acquisition of shares of an Indonesian company does not alter the employment relations the acquired company has with its employees. However, it may provide an employee with the option to terminate his or her employment with the company and an option to the company to terminate the employment of an employee, subject to the payment of certain termination benefits.Notification and consultation of employees
Are there obligations to notify or consult with employees or employee representatives in connection with an acquisition of shares in a company, a business or assets?
Pursuant to the Company Law, in the event of an acquisition, there is a requirement for the directors of the selling company to announce the acquisition plan in writing to its employees 30 days before the meeting of shareholders convened to approve such acquisition.Transfer of pensions and benefits
Do pensions and other benefits automatically transfer with the employees of a target company? Must filings be made or consent obtained relating to employee benefits where there is the acquisition of a company or business?
Pension and other employee benefit obligations remain the responsibility of the target company. There are no filings or consents that need to be obtained in relation to this.
Update and trendsKey developments
What are the most significant legal, regulatory and market practice developments and trends in private M&A transactions during the past 12 months in your jurisdiction?Key developments36 What are the most significant legal, regulatory and market practice developments and trends in private M&A transactions during the past 12 months in your jurisdiction?
Indonesia recently concluded a series of presidential and parliamentary elections in June 2019. Following the peaceful outcome of the elections, investors and the general business community are expected to re-ignite or accelerate business negotiations and deals. The President, Joko Widodo ,has secured the extension of his leadership for another five-year term, and is expected to continue his economic reform packages, focusing on deregulation and the simplification of the licensing system.