Shareholder Rights in Indonesia: Share Transfers and Exit

SSEK Legal Consultants founding partner Ira A. Eddymurthy and Tengku Almira Adlinisa, an associate at the firm, have contributed the Indonesia chapter of the new Practical Law global guide to Shareholders' Rights in Private and Public Companies. SSEK Legal Consultants is one of the leading corporate and commercial law firms in Indonesia. It works with leading international and domestic companies on all aspects of their business in Indonesia. SSEK is widely experienced in the establishment of businesses in Indonesia and their ongoing operation.

The following is an excerpt from the Indonesia chapter of the Practical Law global guide to Shareholders' Rights in Private and Public Companies written by SSEK Legal Consultants.

Restrictions on Transfer of Shares

In principle, shareholders are allowed to transfer their shares. The procedure for transferring shares in a PT is subject to the PT's Articles of Association (AOA). To the extent that is provided for in the PT's AOA, a share transfer can be subject to:

• Prior approval from other shareholders (for example, a right of first refusal).
• Prior approval from the company√¢¬Ä¬ôs organs (for example, a shareholders' meeting, the Board of Directors (BOD) or the Board of Commissioners (BOC)).
• Prior approval of the authorized governmental institution.

Restrictions on the transfer of shares can be agreed by shareholders in a shareholders' agreement. Additionally, the transfer of shares in a PT PMA must consider foreign shareholding limitations. Certain types of businesses in Indonesia are subject to foreign ownership limitations, as governed by the Indonesian Negative Investment List (Daftar Negative Investasi (DNI)). The DNI lists the relevant sectors that are restricted or prohibited for foreign investment.

For the issuance of new shares, each shareholder has a pre-emptive right to subscribe to newly issued share capital in proportion to its shareholding for the equivalent class of shares. The new shares can be issued to a third party, provided the existing shareholders have waived their pre-emptive right to subscribe to the newly issued shares. The issuance of new shares in a PT Tbk is subject to rights issue requirements under OJK Regulation No. IX.D.1.

Minority Shareholders and a Company's Share Capital Structure

Minority shareholders cannot alter or restrict changes to a PT's share capital structure. However, to protect the interests of minority shareholders, the Articles of Association (AOA) of a PT can give shareholders the right of first refusal to purchase the shares of other shareholders.

In addition, each shareholder has the right to request the PT to repurchase its shares at a reasonable price if that shareholder does not approve the corporate actions of the PT, including merger, consolidation, acquisition or demerger.

Notification of Shareholding Changes to Regulatory Authority

Changes in a PT's shareholding composition must be notified by the PT, though a notary, to the Minister of Law and Human Rights (MOLHR) once the parties have executed the share transfer deed. An increase in the PT's authorized capital will require MOLHR approval, while an increase in issued and paid-up capital must be notified to the MOLHR once the new shareholder has injected additional funds for the subscription of new shares.

Specific regulatory approvals prior to the change of shareholders may be required subject to the PT's specific line of business. For example, a PT PMA will require the approval of the Indonesian Capital Investment Coordinating Board (Badan Koordinasi Penanaman Modal (BKPM)), and banks or non-bank financial institutions require approval from the Financial Services Authority (Otoritas Jasa Keuangan (OJK)) prior to the change of shareholders.

For PT Tbks, a disclosure obligation arises in relation to an interest in securities (including shares) when an investor reaches 5% of shareholding ownership in a PT Tbk. Once the 5% has been reached, any transfer of shares (as long as the ownership is still above 5%) must be reported to the OJK.

In addition, if a change of shareholder constitutes an acquisition under the Indonesian Company Law, the Indonesian Competition Law requires that a filing be made to the Competition Supervisory Board (Komisi Pengawas Persaingan Usaha) (KPPU) for mergers or consolidations of business entities and for acquisitions of shares if the resulting asset value and/or sales value exceeds certain thresholds. This filing must be made to the KPPU no later than 30 business days after the effective date of the merger, consolidation or acquisition. The acquiring company has the obligation to make the filing.

Share Buybacks

Under the Indonesian Company Law, PTs can buy back shares with the approval of the general meeting of shareholders (GMS), provided that:

• The buyback does not result in the PT's net assets falling below the issued shares and the PT's mandatory reserve.
• The total nominal value of shares that are bought back by the PT does not exceed 10% of the total issued shares, unless governed otherwise in capital market regulations.

PTs can only hold shares that are bought back for a maximum three years.

With regard to PT Tbk, in addition to the Indonesian Company Law there is a specific provision under OJK Regulation No.XI.B.2 on share buybacks that must be followed by PT Tbks.

Shareholder Exit from a Company

Typically, the exit mechanism is governed in the shareholders' agreement. Shareholders can agree that upon the occurrence of certain conditions that are considered as a default, the non-defaulting party can either:

• Require the default party to sell its shares to the non-defaulting party, or another party.
• Require the defaulting party to purchase the shares of the non-defaulting party.

The calculation of the purchase or selling price is also typically governed under the shareholders' agreement. Alternatively, shareholders can also require the PT to purchase their shares upon the occurrence of certain conditions.

This publication is intended for informational purposes only and does not constitute legal advice. Any reliance on the material contained herein is at the user\'s own risk. You should contact a lawyer in your jurisdiction if you require legal advice. All SSEK publications are copyrighted and may not be reproduced without the express written consent of SSEK.