Independent Shareholders resolutions likely to re-emerge as regular feature of transactions involving Indonesia listed companies
The Indonesian Capital Markets and Financial Institutions Supervisory Agency ("Bapepam-LK") issued new regulations on Material Transactions ("Material Transactions Rules") on 25 November 2009 and on Affiliated Transactions and Conflict of Interest (the "COI Rules") on 29 November 2009. These regulations replace and tighten the previous versions of the rules, and expand the circumstances under which an independent shareholder resolution is required.
COI Rules
Conflict of interest provisions have a long history as part of Indonesian corporate governance regulations and are intended to safeguard minority shareholders in an environment where the vast majority of public companies are dominated by a single shareholder. These regulations have traditionally required an independent valuation and a resolution of independent shareholders to approve transactions in which the controlling shareholder has an economic interest. While controlling shareholders have rarely been defeated on conflict of interest resolutions, this regulation has generally given minority shareholders an opportunity to provide informed feedback on related party transactions. Independent shareholder resolutions are therefore a common feature of Indonesian transactions involving listed companies.
The new COI Rules come as a welcome revision to previous regulations published just last year. The previous regulations had been criticized for giving companies too much flexibility in interpretation, particularly that the transaction must involve 'unfair pricing' before triggering a requirement for an independent shareholders resolution. This led to many public companies relying solely on the independent valuation to show there was no 'unfair pricing'. On the other hand, cautious issuers felt the need (or were required by cautious third party financiers) to obtain independent shareholder resolutions and independent valuations with respect to many transactions that were of no obvious detriment to the company, such as transactions between a company and its wholly owned subsidiaries.
The new COI Rules apply broadly to transactions involving loans, acquisition and disposition of assets, and transactions involving shares in the public company or subsidiaries. As with the previous regulations, they distinguish between "Affiliated Transactions" - which simply require reporting, and "Conflict of Interest Transactions" - which involve a difference of economic interests and which could cause loss to the listed company. The requirement for 'unfair pricing' has now been removed, and now most significant transactions with related parties are potentially Conflict of Interest transactions and will require an independent valuation.
The new COI Rules maintain exceptions for director and officer compensation and transactions of minor value (5 billion Rupiah or 0.5% of paid-up capital). There is also an exception for transactions with wholly owned (or 99%) subsidiaries - transactions with subsidiaries that have more than 1% minority shareholding will still need an independent shareholders resolution and an independent valuation.
Material Transaction Rules
The new Material Transaction Rules are an update of the previous rules published in 2001. Under the 2001 rules, a transaction was considered material if its value exceeded 10% of such company's revenues or 20% of its paid-up capital. The revenue test has been removed under the new rules, leaving the 20% paid-up capital test as the sole determining factor of a material transaction. The scope of the new rules has also been tightened to include the values of leases, encumbrance of assets, loans and corporate guarantees, and series of related transactions, in addition to the previously covered acquisitions, disposals and joint ventures. This leaves far less flexibility for public companies to structure around the materiality thresholds.
Under the new rules, material transactions with a value exceeding 20% but less than 50% of paid-up capital require public disclosure and an independent valuation. Material transactions with a value exceeding 50% of paid-up capital additionally require an independent shareholders resolution to proceed. Exceptions apply for transactions with wholly owned (or 99%) subsidiaries - but material transactions with subsidiaries of less than 99% ownership would still be subject to the Material Transaction Rules.
Any material transaction that also involves a conflict of interest will be subject to the COI Rules as well.
Generally, the new Material Transaction Rules and COI Rules are significantly tighter than the previous versions. Independent shareholder resolutions are likely to again become a regular feature of significant transactions involving Indonesian listed companies.
O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.
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