Shareholder Rights in Indonesia: Shareholders and Directors

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 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.

The appointment and removal of a director must be approved by the shareholders of the limited liability company (Perusahaan Terbatas (PT)). A general meeting of shareholders (GMS) must be held for such a purpose. The quorum and voting requirements must be in accordance with the PT's Articles of Association (AOA).

In the absence of specific voting and quorum requirements under the AOA, a GMS will be valid and entitled to make binding decisions if attended by shareholders representing more than 50% of total shares with valid voting rights. Any resolution to change the composition of the Board of Directors (BOD) or Board of Commissioners (BOC) will be adopted on the basis of mutual consensus, failing which the resolution can be adopted on the basis of an affirmative vote of more than 50% of the total votes legally cast at the GMS.

For a PT Tbk, a GMS to adopt resolutions on the resignation of a member of the BOD and/or the BOC must be convened no later than 90 days after receipt of the resignation letter from the relevant member of the BOD and/or the BOC.

The election or removal of a director will be effective as of the effective date stipulated in the resolution. A PT, through a notary, is required to notify the Minister of Law and Human Rights (MOLHR) of any changes in the composition of the BOD. The MOLHR will then issue an acknowledgement affirming its receipt and registration of the change in the BOD.

Main Duties of Directors to a Company and Its Shareholders

Under the Company Law, the Board of Directors (BOD) manages the company in the interests of the PT and in accordance with its purposes and objectives. In performing their management duties, BOD members are jointly and severally empowered to represent the PT in its external relations unless specifically restricted by the AOA in the event of a conflict of interest.

Subject to the terms of the AOA, the BOD can manage the PT's assets, bind the PT contractually and otherwise generally represent the PT. In Indonesia, directors can delegate duties and functions to other employees, but they remain legally responsible for all actions taken on behalf of the PT.

Each member of the BOD can be liable to shareholders and creditors for acts that are ultra vires, negligent or in bad faith in the discharge of their responsibilities. The Company Law specifies several circumstances that can result in members of the BOD being held personally and/or jointly liable for the acts of the PT, as follows:

• Legal actions taken on behalf of the PT before it becomes a legal entity (that is, before its AOA have been approved by the MOLHR) can only be undertaken by all members of the BOD together with all of the founders and members of the BOC of the PT, and they will be held jointly responsible for those legal actions.
• If a PT either directly or indirectly repurchases its shares in violation of the provisions of the Company Law, and the purchasing shareholders acting in good faith suffer losses, then the members of the BOD will be jointly responsible for such losses.
• In the event that the PT's financial statement proves to be incorrect and/or misleading, then the members of the BOD and the BOC will be jointly responsible to parties suffering losses.
• The BOD and the BOC will be jointly responsible for losses incurred by the PT if the shareholders are unable to return the interim dividends.
• Legal actions conducted for and on behalf of the PT by a member of the BOD after the cancellation of his or her appointment as a director will be void and will become the responsibility of the individual member of the BOD concerned.
• Each member of the BOD will be fully responsible personally for losses suffered by the PT if the concerned member is at fault and has been negligent in carrying out his or her duties.
• Members of the BOD who fail to comply with the obligation to report to the PT on their and/or their family members'ownership of shares in the PT and in other companies√¢¬Ä¬®to be recorded in the special list, and who cause losses to the PT, will be personally responsible for such losses.
• In the event a bankruptcy is caused by the fault or negligence of the BOD and the PT's bankruptcy assets are insufficient to settle all of the PT's liabilities caused by that bankruptcy, then each member of the BOD will be jointly responsible for all outstanding liabilities of those bankruptcy assets.
• If the PT performs legal actions other than to settle all of the PT's matters in the framework of a liquidation, then the members of the BOD and BOC and the PT will be jointly responsible.
• If the BOD as liquidator has neglected to notify creditors and the MOLHR within 30 days after the date the PT is dissolved, then the BOD of the PT will be jointly responsible for losses suffered by third parties.

Conflict of Interest and Directors

There are no specific rules on conflicts of interest for private PTs. The Company Law provides that if members of the BOD have a conflict of interest with the interests of the PT, those members are not authorized to represent the PT.

In general, if the conflict of interest between a BOD member and the PT results in evident losses to the PT or shareholders due to the fault or negligence of the director, one or more shareholders who jointly represent one-tenth of total voting rights can file a claim with the relevant District Court against the BOD member.

For PT Tbk, there are specific rules on conflicts of interest under OJK Regulation No. IX. E.1. A conflict of interest transaction is one in which there is a difference between
the economic interests of the PT Tbk and the personal economic interests of a director, commissioner or major shareholder of the PT Tbk in a transaction in which the PT Tbk may incur losses. OJK Regulation No. IX.E.1 provides that any conflict of interest transaction must first be submitted to, and approved by, a majority vote of independent shareholders at a general meeting of shareholders.

Non-Executive, Supervisory and Independent Directors

The Company Law recognizes and requires a two-board system consisting of a BOD and a BOC. The BOD constitutes the PT's management. Members of the BOD are the day-to-day operating officers of PTs. By contrast, the BOC serves a supervisory function.

Directors' Remuneration

The salary and remuneration of directors is typically determined by shareholders through a general meeting of shareholders, but such determination can be delegated to the BOC. In the event that the authority of the GMS is delegated to the BOC, the salary and remuneration of directors must be stipulated based on a resolution adopted at a BOC meeting. Information regarding salaries, allowances and honorariums of BOD members must be disclosed in the annual report of the PT.

For a PT Tbk, the BOC can form a Nomination and Remuneration Committee to help the BOC in proposing BOD and BOC candidates and determining remuneration for directors and commissioners. The committee must consist of a minimum of three members, including one independent commissioner as the chairman of the committee.

There is no specific disclosure requirement for the entering into of a service contract between directors and PTs.

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.