New merger control guidelines in Indonesia provide that asset acquisitions are now transactions that need to comply with merger notification obligations, despite the Anti-Monopoly Law and government regulation clearly limiting the obligation to obtain merger control approval for share acquisitions only. Besides, new facts and elements will now need to be analysed and reporting parties will also need to submit any requested document within the deadline imposed, failing which their deals may be approved or not based on the authority’s assumptions or information in its possession.
On 2 October 2019 and amidst rumors that Law No. 5 of 1999 on the Prohibition of Monopolistic Practices and Unhealthy Business Competition (the Anti-Monopoly Law) will be overhauled within this year (partly because the draft anti-monopoly law (the Draft Law) has been in circulation for more than five years), the Indonesian competition authority, the Commissioners of the Business Competition Supervisory Committee (Komisi Pengawas Persaingan Usaha – the KPPU) issued Regulation No. 3 of 2019 on the Assessment of Mergers or Consolidations or Acquisition of Shares of a Company which Could Cause Monopolistic Practices and/or Unhealthy Business Competition (the Regulation).
The Regulation expands the scope of the merger control regime in Indonesia, which many had suspected would only have been addressed by the amendment to the Anti-Monopoly Law. The Regulation also revoked all other guidelines on merger control previously issued by the KPPU. Some key elements of the Regulation are set out below. The term merger includes a legal merger, a consolidation and an acquisition.
Transfer of assets is a subject of merger control
Despite the limited definition under the Anti-Monopoly Law of “acquisition”only referring to share acquisitions, the Regulation defines an acquisition (pengambilalihan) to also include any transfer of a company’s assets (be it tangible or intangible, as long as it carries an economic value), which is marked by a change of control of the relevant assets. Therefore, a company selling a business division or assets (eg land or machinery) will now need to take into account whether the notification threshold has been met in Indonesia, as is the case in many other jurisdictions.
The Regulation clarifies that an asset transfer is a notifiable transaction if: (i) it causes a change of control over the asset; and/or (ii) it increases the ability to control a certain market by the transferee. As is the case for any notifiable transaction in Indonesia, an asset transfer as defined by the Regulation needs to be notified to the KPPU by the transferee within 30 working days from the date of the asset sale and purchase agreement. It is not clear for an asset transfer whether the date refers to the signing date or closing date, or whether the word "agreement” actually refers to the transfer instrument or indeed the sale and purchase agreement (albeit conditionally). However if we compared it with the provisions for share transfers, the 30 working days should be calculated from the closing date.
Turnover of assets
Transactions must only be notified in Indonesia if the value of the combined assets of the target and those of the acquiring group reach the minimum notification thresholds of IDR 2.5 trillion (approx. USD176 million), or if the combined “turnover” of the target and that of the acquiring group reaches the minimum notification thresholds of IDR 5 trillion (approx. USD352 million).
While it is quite clear how the value of assets must be calculated and attributed to these assets, the Regulation remains silent about how the turnover of “assets” can be determined. It must however be noted that the assets to be acquired must “carry an economic value”, and by reference to international practice, it has to be assumed that parties will need to allocate somewhat artificially the turnover generated from the sales of products produced out of these assets to these and assess whether this turnover is sufficient to satisfy the turnover threshold in Indonesia.
Clarification vs. Assessment
The timing on the issuance of the KPPU’s decision to approve (or not) a transaction that has been notified to it has always been a concern. Despite the previous merger control guideline stating that its opinion must be issued within 90 working days, the timeline will only start when the KPPU deems that the information/documents are “complete”, as it is the case in some other jurisdictions, like China; however in Indonesia it can in practice take months after the initial filling is made.
The Regulation now sets a period of 60 working days following a notification filing for the KPPU to request for clarifications or additional information or documents. The Regulation also clarifies that if the relevant party does not complete the supporting information and documents as required by the KPPU within that 60 working day period, the KPPU has the right to carry out its assessment based on its own assumptions and data/documents in its possession. On the other hand, the Regulation also states that the KPPU will carry out its assessment only once the notification and its supporting documents are declared complete, which suggests that the KPPU may also decide not to proceed to the assessment stage until the information/documents are submitted as required. The Regulation confirms that the KPPU’s assessment is to be carried out within 90 working days.
Whilst it seems that the Regulation is aimed to give clarity on how long the opinion is expected to be issued after a filing is made, the way it is drafted does not make it sufficiently clear. Another potential issue is whether the KPPU will set a minimum threshold of documents/information to merit a filing to avoid a party simply filing very little documents/information to meet the notification deadline without any intention to complete them preventing the KPPU from making its proper assessment.
Additional elements to be reviewed
The Regulation also confirms the KPPU’s existing practice that the assessment must be done in two stages, ie. a preliminary and a comprehensive assessment stage, but the Regulation is not really clear as to why the KPPU would move to a comprehensive assessment.
Under the previous merger guidelines, the KPPU was expected to carry out its assessment in the preliminary stage on the basis of whether or not the relevant market was highly concentrated by reference to the use of the Hirschman-Herfindahl Index (HHI). It was only when it was ruled that the market would be highly concentrated and the merger would result in a substantial increase of market concentration based on the HHI calculation that the KPPU proceeded to the comprehensive assessment stage. Until further notice, this practice is likely to remain in force.
Under the previous merger guidelines, the KPPU was expected to conduct its assessment by reference to the following elements when the market was deemed to be highly concentrated: (i) the barriers to entry, (ii) the potential negative conduct by the parties as a result of the merger, (iii) efficiency achieved by the merger and (iv) whether the merger was conducted to avoid the liquidation of the target. The previous merger guidelines also gave further explanation and examples on how each item had to be analysed.
The Regulation now adds additional elements which are: (i) policies to increase competitiveness and strengthen national industries, (ii) development of technology and innovation, (iii) protection of micro, small and medium enterprises, (iv) impact on labor and/or (v) implementation of laws and regulations. Even if the Regulation does not give further detail on how each elements will be evaluated, international practice shows that arguments based on these elements are often raised to demonstrate that the potential negative effect of a transaction are outweighed by its positive effects in the market.
Exemption for affiliated parties clarified
The Regulation confirmed the positions under the existing rules and regulations, that a merger between affiliated parties is exempt from the notification requirement, but also clarified that the “affiliation” covers: (i) a relationship between companies (one of) which directly or indirectly controls or is controlled (by the other); (ii) a relationship between 2 companies directly or indirectly controlled by the same company; or (iii) a relationship between a company and its primary shareholder (pemegang saham utama).
There is no clear explanation in the Regulation on what constitutes a primary shareholder, but one should note that under the Indonesian capital market regulation, a primary shareholder is defined as a party that, directly or indirectly, owns at least 20% of the voting shares.
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Because the Regulation revoked the existing merger guidelines, we believe this will likely be the beginning of a round of regulations to be issued by the KPPU. The level of detail for it to be a standalone guideline is simply not sufficient to cover what was previously covered under the previous merger guidelines, especially how the KPPU’s analysis must be conducted. The Regulation, for instance, raises the prospect that the KPPU may issue regulations to cover items contained in the Draft Law, including the establishments of joint ventures in the scope of the Indonesian merger control rules, as it is the case in many other jurisdictions. These items might carry even more complications in the implementation.
One might also argue that the notifiability of asset transfers as provided for by the Regulation is contrary to the Anti-Monopoly Law and the government regulation as both specifically limit the acquisition that falls under the merger control regime to share acquisition, but the KPPU seems to have taken the clear view that companies now need to consider whether their assets transaction reaches the notification threshold in Indonesia.
The notifications of asset transfers are also likely to increase the volume of filings that the KPPU carries out. This begs the question as to whether the KPPU has sufficient resources to process them on a timely basis, given the fact that some players believe that currently the process already takes some time to complete and they might not be prepared for a further delay. When joint venture will also be caught by the Indonesian regime it is likely that the KPPU will be even more overwhelmed.
Lastly, one might think that the KPPU anticipates that the Indonesian House of Parliament will not vote on the Draft Law anytime soon and that the Regulation might be a shortcut by the authority to overcome the delay of amending the existing Anti-Monopoly Law. This is unsurprising in what is already seen as a bold move in anticipation of a new anti-monopoly law. For the time being the KPPU seems to have focused on the low hanging fruit in the Draft Law. It remains to be seen if the adoption of the Regulation was the most appropriate way to do so.