New Notification Requirement for Asset Transactions, Possible Expansion of Notification Requirement for Foreign-to Foreign Transactions and Extension to Transactions Between Affiliates
After fining numerous companies for late notification of mergers, consolidations and acquisitions in recent months, the new commissioners of the Indonesian Competition Commission (“KPPU”) that took office in May 2018 have once again shown their commitment to a more active enforcement of merger control rules by introducing KPPU Regulation No 3/2019 on the Assessment of Mergers and Consolidations of Undertakings or Acquisition of Shares in a Company that May Result in Monopolistic Practices and/or Unhealthy Competition (the “New Merger Control Guidelines”).
The New Merger Control Guidelines, which came into force on 3 October 2019 and became available to the public on 14 October 2019, replace the old ones that were contained in KPPU Regulation No 13 of 2010, as amended several times (the “Previous Merger Control Guidelines”), and introduce new consultation and notification forms to be used for submissions to the KPPU.
Additional Transactions May Need to Be Notified
The New Merger Control Guidelines create a basis for the KPPU to review asset deals as well as certain additional foreign-to-foreign transactions and transactions between affiliated companies that under the Previous Merger Control Guidelines did not need to be notified.
Under the New Merger Control Guidelines, the undertakings that are obliged to file a notification to the KPPU are:
- the surviving undertaking of a merger;
- an undertaking resulting from a consolidation;
- an undertaking that carries out an acquisition of shares; or
- an undertaking that acquires assets,
provided that all of the conditions below have been met.
Merger, Consolidation or Acquisition of Shares and/or Assets
As with the Previous Merger Control Guidelines, a notifiable transaction should constitute a merger, consolidation or acquisition of shares within the meaning of the Indonesian competition law. An acquisition of shares would involve a change of control, i.e., the acquiring party owning more than 50% of the shares and voting rights or holding factual control, i.e. the ability to influence or direct the company’s policy and/or management. While the law is unclear in this regard, one conservative interpretation is that there could also be a change of control if there is a change from sole to joint control.
The New Merger Control Guidelines add that a transfer of assets (with or without shares) is tantamount to an acquisition of shares and, accordingly, should be notified to the KPPU, provided that several other conditions have been met (as discussed below). A transfer of assets (with or without shares) is tantamount to an acquisition of shares if it:
- results in a transfer of management control and/or physical control over the assets;
- increases the ability of the undertaking acquiring the assets to control a relevant market.
Assets include all assets that are owned by an undertaking (the target), both tangible and intangible, that are valuable or have economic value.
It should be pointed out that the definition of “asset” in the New Merger Control Guidelines is very broad and gives rise to a number of questions, such as whether it covers non-core assets? Further, going by the letter of the New Merger Control Guidelines, large undertakings whose assets already exceed the current asset threshold of IDR 2.5 trillion would theoretically be required to file a notification for each asset acquisition going ahead. Consequently, further guidance will be required from the KPPU.
Thresholds of Sales and Assets
The thresholds that trigger the obligation for an undertaking to make a notification to the KPPU remain the same under the New Merger Control Guidelines, but now also apply to asset transactions.
A notifiable transaction should still meet the following thresholds:
- the combined asset value exceeds IDR2.5 trillion (approximately USD178 million at current exchange rate (IDR14,000/1 USD) (in the banking sector, the threshold is IDR20 trillion or approximately USD1.42 billion); and/or
- the combined sales value exceeds IDR5 trillion (approximately USD 357 million).
The New Merger Control Guidelines provide that relevant to the calculation are the assets and/or sales in Indonesia of:
- the target,
- the acquirer,
- all undertakings that directly or indirectly control or are controlled by an undertaking that carries out a Merger, Consolidation or Acquisition and/or Company’s assets.
Direct impact on Indonesian market
Unlike the Previous Merger Control Guidelines, which provide a more detailed explanation on foreign-to-foreign transactions, addressing several alternative scenarios, the New Merger Control Guidelines provide a more general observation that mergers, consolidation, or acquisitions of shares and/or assets that occur outside the territory of the Republic of Indonesia must be accompanied by a notification to the KPPU if one or more of the parties involved in the transaction is engaged in business activities in or sales to the territory of the Republic of Indonesia. This seems to create more flexibility for the KPPU to claim jurisdiction to review foreign-to-foreign transactions.
Conducted between non-affiliated companies
If the transaction is carried out between affiliates, the transaction is exempted (regardless of whether other criteria are met). According to the New Merger Control Guidelines, a company is an affiliate of another if:
- it either directly or indirectly controls or is controlled by that company,
- both it and the other company, directly or indirectly, are controlled by the same parent company, or
- there is a “main principal shareholder” relationship with the counterparty (pemegang saham utama). The main principal shareholder should be a controlling shareholder.
Affiliation means a relationship of control that occurs due to share ownership of more than 50% (fifty percent), or less than 50% (fifty percent) but with the ability to influence or direct the company’s policy and/or management.
Notably, the exemption from the requirement to notify mergers, consolidations and acquisitions of shares and/or assets does not apply if the transaction involves the placement of Directors and/or Commissioners or employees of companies that take part in the transaction.
Deadline for Notification
The deadline for notification is still 30 business days after the transaction has become legally effective, which, if the target is an Indonesian limited liability company, is:
- In case of a merger, the date of approval of the Minister of Law and Human Rights of the amendment of the articles of association;
- In case of a consolidation, the date of approval of the Minister of Law and Human Rights of the deed of establishment;
- In case of an acquisition of shares, the date of notification of the Minister of Law and Human Rights of the amendment of the articles of association.
The New Merger Control Guidelines clarify that the legal effective date of a merger, consolidation or acquisition of shares and/or assets carried out by a public company involving a private company or by a private company involving a public company will be the date of the disclosure letter of the transaction to the Indonesian Financial Services Authority (OJK) or the last date of payment of the shares and/or equity securities in the exercise of a rights issue.
The legal effective date for an undertaking carrying out a merger or consolidation that is not a limited liability company is the date of the signing of the merger or consolidation agreement by the parties.
The legal effective date of a merger, consolidation or acquisition of shares and/or assets carried out beyond the territory of the Republic of Indonesia is the date of signing and/or closing of the agreement and/or approval by the government of the parties that carry out the merger, consolidation or acquisition of shares and/or assets. The wording of the New Merger Control Guidelines leaves some room for interpretation here, creating uncertainty for an undertaking carrying out a merger, consolidation or acquisition of shares and/or assets outside the territory of the Republic of Indonesia on when to submit a notification of the transaction to the KPPU.
The legal effective date for an undertaking acquiring assets is the date of the sale and purchase agreement of the asset. It appears that if the transfer of the relevant asset requires a separate instrument, such as in the case of land, where a deed of transfer of land is needed, the KPPU will deem the date of execution of such instrument irrelevant for the calculation of the deadline, even though the ownership of the asset will only be transferred on the date of execution of such instrument.
The KPPU will only accept a complete notification submitted during business hours, after which it will state the date of receipt and issue a letter of receipt. The authority can reject an incomplete notification upfront, which means it is now paramount not to make the submission shortly before the deadline.
Documents to be Submitted
Importantly, the New Merger Control Guidelines now list the minimum documents that should be submitted to the KPPU within the 30 business-day deadline. While under the Previous Merger Control Guidelines, it was common practice to submit the notification form and power of attorney where there was a risk that a notifying party would miss the deadline, the New Merger Control Guidelines now require the notifying party to submit at least the following documents before the 30 business-day deadline: (a) audited financial statements for the past 3 years, (b) a scheme of the group of undertakings before and after closing of the transaction, (c) the amendment of the articles of association before and after the closing of the transaction, (d) a profile of the company containing at least the shareholding structure, composition of the board of commissioners and board of directors, list of products that are produced by the company and clarification thereof, and product coverage, (e) a summary of the transaction containing at least the date on which the transaction became legally effective, the value of the transaction and agreements related to the transaction, (f) the business plan to be implemented by the parties after the closing of the transaction, and (g) a new requirement: an analysis of the impact of the transaction, which should at least address the estimated market shares of the parties, the market(s) that will be affected by the transaction, and the benefit of the transaction for the parties.
Fines for Late Notification
As with the Previous Merger Control Guidelines, the KPPU can impose a fine of IDR1 billion (approximately USD71,000 per day with a maximum of IDR25 billion (approximately USD1.78 million) for late notification. However, the days of delay in notification is now no longer calculated as of the date when the parties file a notification to the KPPU, but as of the date the KPPU initiates an investigation in respect of the late notification.
Deadline for Completion of Submission
Following submission of documents, which may now also be done electronically, the KPPU will now have 60 business days to seek clarification and carry out research on the information and supporting documents submitted. This time limit should lead to a speedier procedure, given that the Previous Merger Control Guidelines did not set a time limit for the KPPU to seek clarification and conduct research on the information and supporting documents submitted. In practice, this often resulted in many months of delay. The New Merger Control Guidelines set a strict obligation for a notifying party to meet the KPPU’s request for further information or documents within the 60 business-day deadline. If the undertaking fails to meet this obligation, the KPPU will make its assessment on the basis of assumptions, the supporting documents submitted and/or own data that the KPPU has or obtains.
Substantive Assessment of Notified Transactions
The New Merger Control Guidelines also introduce an additional framework for the KPPU to assess notified transactions. Under the Previous Merger Control Guidelines, the KPPU would carry out a market analysis, looking into restrictions to market access, risks of coordinated behavior, efficiency, and bankruptcy. Under the New Merger Control Guidelines, the KPPU may in addition take into consideration (a) policies to increase competitiveness and strengthen national industries, (b) development of technology and innovation, (c) protection of small and medium enterprises and (d) the effects on manpower, and/or (e) the implementation of prevailing laws and regulations. The KPPU will issue separately further details on the additional framework of assessment.
As with the Previous Merger Control Guidelines, the KPPU will have 90 business days to complete the substantive assessment. However, as with the consultation procedure under the Previous Merger Control Guidelines, the assessment in the framework of a notification is now divided into two stages: an initial assessment and a comprehensive assessment. The KPPU will only conduct a comprehensive assessment if it is established in the initial assessment that the notified transaction has an effect on competition in the relevant industry or market.
Opinions, Conditional Approval and Remedies
Just as before, the KPPU can issue an opinion that the transaction is (i) not deemed to result in monopolistic practices or unhealthy business competition or (b) deemed to result in monopolistic practices or unhealthy business competition. Alternatively, if the transaction is deemed to result in monopolistic practices or unhealthy business competition, the KPPU may issue a conditional approval in the form of a notification statement, which requires the undertaking to accept certain behavioral or structural remedies. The undertaking has 14 business days from receipt of the conditional approval, to accept or reject the conditional approval. If the undertaking accepts the conditional approval, the KPPU will start supervising the implementation of the remedies. If the undertaking does not respond or refuses to accept the conditional approval, the KPPU can initiate an investigation on the basis that the transaction violates Indonesian competition law.
Unlike the Previous Merger Control Guidelines, the New Merger Control Guidelines do not contain detailed provisions on voluntary, pre-merger consultations. The New Merger Control Guidelines do make clear that the KPPU may now consider voluntary, pre-merger consultations only in writing; verbal consultations are no longer allowed. A consultation must be accompanied with a plan of the transaction. The result of the consultation can be used in the assessment stage of the notification, provided that there is no change in data for a maximum of 2 years.
The New Merger Control Guidelines have been become immediately effective upon their issuance, i.e. 3 October 2019. Under the New Merger Control Guidelines’ transitional provisions, notifications that have been received by the KPPU before the issuance of the New Merger Control Guidelines will continue to be assessed using the Previous Merger Control Guidelines. Notifications that have been received by the KPPU before the issuance of the New Merger Control Guidelines will be assessed using the Previous Merger Control Guidelines.
The introduction of the New Merger Control Guidelines appears to be a deliberate effort by the new KPPU commission to expand the scope of merger control rules in Indonesia, following several recent asset transactions as well as transactions between affiliated companies involving the placement of senior management that raised the KPPU commission’s concern but could not be assessed due to the restrictive definition of the term “acquisition” under Law No 5 of 1999 (the “Indonesian Competition Law”) and Government Regulation No. 57 of 2010 on Mergers and Consolidations of Undertakings or Acquisition of Shares in a Company that May Result in Monopolistic Practices and/or Unhealthy Competition (“Indonesian Merger Control Regulation”), which only covers the acquisition of shares in a company.
The KPPU commission expected the Indonesian Parliament would enact a new competition law to replace the current Indonesian Competition Law before the end of its term on 30 September 2019. The bill that was under the Indonesian Parliament’s review introduces an expanded definition of “acquisition” to include an acquisition of assets. With the Parliament failing to enact the new competition law before the end of its term and a new Parliament assuming office on 1 October 2019, it is doubtful that the new competition law will be enacted anytime soon. This may have triggered the KPPU commission to issue the New Merger Control Guidelines, so that it can start assessing asset transactions pending the enactment of the new competition law.
The strategy of the KPPU commission is risky, as the Indonesian Competition Law and Indonesian Merger Control Regulation do not provide a clear legal basis for an expansion of the definition of acquisition. Article 29 of the Indonesian Competition Law prohibits an undertaking from “acquiring shares of another company if said action may result in monopolistic practices and/or unfair business competition” while the Merger Control Regulation defines acquisition as “the legal act of an undertaking to acquire shares in a business entity that may result in monopolistic practices and/or unfair business competition.” There is no reference whatsoever to an acquisition of assets in the Indonesian Competition Law or the Merger Control Regulation.
Interested parties may now file for a judicial review of the New Merger Control Guidelines with the Indonesian Supreme Court, which may result in the annulment of the New Merger Control Guidelines. However, a judicial review will in practice take several months, if not more than a year, and the outcome is uncertain. Therefore, despite the New Merger Control Guidelines’ weak legal basis, parties engaged in asset transactions should not refrain from submitting a notification to the KPPU, particularly as the KPPU has been very active in recent months in investigating past transactions and imposing fines for late notification of transactions that should have been notified to it.