28 August 2020
Indonesia

In conducting its corporate actions, Public Companies[1] in Indonesia are mainly subject to the material transaction regulation. In the last 10 years, the capital market industry in Indonesia as well as other jurisdictions outside Indonesia have experienced significant changes and development.  To accommodate such market changes and to align with international best practices, the Financial Services Authority (Otoritas Jasa Keuangan/”OJK”) has issued a new OJK Regulation No. 17/POJK.04/2020 concerning the same matters (“POJK 17/2020”) on 21 April 2020. POJK 17/2020 replaces the previous material transaction regulation issued by the Indonesian Capital Market and Financial Institutions Supervisory Board (“BAPEPAM-LK”) in 2011 that was usually referred to as BAPEPAM-LK Reg. IX.E.2. Bapepam-LK was the supervisory agency for Public Companies in Indonesia prior to the establishment of OJK in 2012.

Effective as of its issuance, POJK 17/2020 stipulates that BAPEPAM-LK Reg. IX.E.2 will be effectively revoked on 21 October 2020 or within six months from the issuance of POJK 17/2020.  This 6-months period leads to overlapping provisions for the Material Transaction and, inevitably, uncertainty on which regulations shall be applicable to the Public Companies prior to the revocation of BAPEPAM-LK Reg. IX.E.2. Currently there is no official clarification from OJK on this issue, however, based on verbal confirmation from OJK officials, it is noted that in practice the provisions under BAPEPAM-LK Reg. IX.E.2 will prevail in the meantime; whilst some provisions in the POJK 17/2020 which do not overlap with provisions under BAPEPAM-LK Reg. IX.E.2 will prevail as well.

Despite the overlapping issue, this article aims to highlight the notable changes under POJK 17/2020 against the previous regulation as well as summary of the requirements in carrying out a material transaction and change of business activity, which Public Companies should be aware of and comply in carrying out each of their corporate actions.

Notable changes under POJK 17/2020

1. Extensive definition of Material Transactions

The definition of “Material Transaction” under POJK 17/2020 has been significantly changed compared to the BAPEPAM-LK Reg. IX.E.2. POJK 17/2020 defines Material Transaction as every transaction carried out by Public Companies or controlled companies that meet certain material threshold as regulated under the POJK 17/2020. Any Public Company that carries out a Material Transaction in (i) one transaction, or (ii) series of transactions for certain purposes or activities must fulfill requirements under POJK 17/2020.

Previously, the definition of Material Transaction was limited to six types of transactions (or series of transactions). Such transactions include, among others, investment in other company, sale of assets, assets securitisation, and/or provision of corporate guarantee with a value of 20% or greater of the total equity of the Public Companies, in one or a series of transactions for certain purposes or activities .

The change of definition mentioned above has broadened the scope of transactions of Public Companies that are subject to the requirements under POJK 17/2020. Regardless of the type of transaction, any transaction carried out by Public Companies will be considered as a Material Transaction if it meets certain material thresholds as regulated under the POJK 17/2020 (please see section b below for further explanation on the material threshold).

In addition, POJK 17/2020 also provides further clarification and example on the conditions that constitute a series of transactions, as follows:

  • there is a dependency and/or continuity between the proposed transactions;
  • acquiring securities of another company in stages for the purpose of control or investment (for example, purchasing shares from a few shareholders of a company (PT X) indicates that the Public Company intends to acquire and control PT X);
  • disposing securities of a company in stages for the purpose of divestment which results in loss of control; and
  • acquiring or disposing a unit of assets separately (for example, selling a factory by selling each of its components to different parties).

2. Calculation of Material Threshold

In general, POJK 17/2020 applies a similar threshold for Material Transaction as previously regulated under BAPEPAM-LK Reg. IX.E.2, whereby the value of such transaction should amount up to 20% or more of the total equity of the Public Companies.

In addition, for the acquisition and disposal of a company or operational unit, POJK 17/2020 specifically regulates the following material thresholds as Material Transactions:

  • the transaction value equals to 20% or more of the total equity of the Public Company;
  • the ratio of total assets of the transaction object against the total assets of the Public Company is equal to 20% or more;
  • the ratio of net income of the transaction object against the net income of the Public Company is equal to 20% or more; or
  • the ratio of revenue of the transaction object against the revenue of the Public Company is equal to 20% or more.

The 20% material threshold mentioned above does not apply for Public Companies that have negative equity. In such a case, the applicable material threshold is 10% or more of the total assets of the Public Company.

The material threshold shall be calculated based on the most updated financial report of the Public Company which can be either (i) the audited annual financial report, (ii) the quarterly financial report that is entailed with the accountant’s report based on its review or audit, or (iii) any other audited interim financial report. Such financial reports must not be dated more than 12 months from the date of occurrence of the Material Transaction or the relevant General Meeting of Shareholders or “GMS” (for Material Transaction that requires GMS approval).

3. New conditions requiring GMS Approval (“Conditions Requiring GMS”)

As required under BAPEPAM-LK Reg. IX.E.2, POJK 17/2020 also requires a Public Company to obtain a GMS approval prior to conducting Material Transactions which value exceeds 50% of the total equity of the Public Company. Additionally, POJK 17/2020 requires a prior GMS approval for (i) Material Transactions to be carried out by Public Companies with negative equity which material threshold exceeds the ratio of 25%, and (ii) unfair/non-arm-length Material Transaction as declared by the appraiser.

Requirements to conduct Material Transactions by Public Companies under POJK 17/2020

The requirements set out under POJK 17/2020 can be categorised into the following conditions:

Material Transaction

The general requirements under POJK 17/2020 are similar with the requirements under BAPEPAM-LK Reg. IX.E.2, which oblige Public Companies to (“General Requirements”):

  • engage an independent appraiser to determine the reasonable value of Material Transaction’s object and fairness of such transaction;
  • disclose information of any Material Transaction to the public within two business days after the occurrence date of the Material Transaction or at the same date with announcement of GMS (as applicable);
  • submit disclosure information mentioned above and its supporting documents to OJK within two business days after the occurrence date of the Material Transaction or at the same date with announcement of GMS (as applicable);
  • obtain a prior GMS approval subject to the Conditions Requiring GMS (as set out under point c above); and
  • disclose the implementation of such Material Transaction in the Public Company’s annual report.

Compared to the previous BAPEPAM-LK Reg. IX.E.2, the requirements mentioned above are the new conditions provided by OJK. The submission of information and supporting documents relevant to the material transactions must be submitted to OJK on the same day as the GMS announcement.

Material Transaction that is also classified as affiliated transaction

If the Material Transaction is also classified as affiliated transaction, which definition is as regulated under the relevant OJK regulation No. 42/POJK.04.2020 regarding affiliated transaction and conflict of interest, such Public Company must have adequate procedure to ensure that the affiliated transaction is carried out in accordance with the common business practice.

Material Transaction (which required GMS approval) that contains affiliated transaction, contains conflict of interest, and/or potentially disrupt the Public Company’s business.

For this type of Material Transaction, the Public Company must obtain prior approval from its independent shareholders in addition to fulfilling the requirement under General Requirements.

Exemptions from General Requirements to conduct Material Transactions by Public Companies

Below are main types of exemptions provided under POJK 17/2020 and its corresponding conditions:

Exemptions from obtaining Fairness Opinion and GMS approval to conduct Material Transactions

  • transactions with a Controlled Company which shares are owned for at least 99% of the paid-up capital of such Controlled Company or transactions conducted between the Controlled Companies which shares are owned for at least 99% of the paid-up capital by the said Public Companies;
  • transactions related to financing received directly from banks, venture capital companies, financing companies, or infrastructure financing companies, whether offshore or onshore;
  • transactions related to the provision of guarantees to banks, venture capital companies, financing companies, or infrastructure financing companies, whether offshore or onshore, to secure the financing received directly by the Public Companies or Controlled Companies;
  • transactions related to investment (whether increasing or reducing capital participation) to maintain certain ownership percentage in a company which has been in place for at least one year;
  • transaction as a result of court ruling or decision;
  • transactions conducted through an auction, where the Public Companies is acting as an auction participant;
  • transactions carried out by a non-bank Public Company which has a negative net working capital and equity;
  • transactions between Public Companies which engage as financial services institutions and Controlled Companies which engage as sharia financial services institutions in respect of the development of such sharia financial services institution;
  • transactions carried out by Public Companies pursuant to the requirements under the laws and regulations; and/or
  • transactions related to the restructuring of a Public Companies which are controlled either directly or indirectly by the government.

Exemptions from General Requirement

POJK 17/2020 also sets out exemptions from the General Requirement specifically for the Material Transactions that are:

  • carried out by Public Companies that engage as financial services companies. This exemption will be applied if the relevant Public Companies satisfy a certain condition as determined by the OJK. Such financial services company would only be required to disclose information no later than two working days after the date of the relevant Material Transaction to OJK.
  • carried out by the Public Companies which is deemed as routine, repetitive, and continuing Business Activities in order to gain revenue. This exemption was available in the previous regulation and was arguably used by most Public Companies to exempt themselves from fulfilling requirements on Material Transaction as BAPEPAM-LK Reg. IX.E.2 does not provide a clear explanation or an example on which transaction would be deemed as Business Activities.

Therefore OJK, in the elucidation of POJK 17/2020, sets out further clarification on which Material Transaction would be deemed as Business Activities.  This includes any transaction which will be conducted continuously in relation to its new business activities which will generate revenue and has obtained GMS approval on change of Business Activities. The elucidation also provides examples of transactions both for Material Transactions which are deemed as Business Activities and which are not.

Change of business activities of Public Companies

Similar with BAPEPAM-LK Reg. IX.E.2, POJK 17/2020 does not only regulate on the provisions of Material Transaction but also provisions on change of business activities of Public Companies.

Under POJK 17/202, Business Activities is defined as business activities specified in a Public Company’s articles of association and has been carried out by such Public Company. This definition was not available in the previous regulation. Further, the elucidation of POJK 17/2020 sets out examples of actions that will be deemed as changes in business activity, which among others includes (i) adding Business Activities which were previously not listed in the articles of association; (ii) planning to implement Business Activities which are listed in the articles of association but has not been carried out since the establishment of such Public Company; and (iii) reducing Business Activities that are currently listed in the articles of association.

To change its Business Activities, a Public Company must obtain prior GMS approval and fulfill other requirements set out under Article 22 of POJK 17/2020.

Conclusion

Despite the uncertainty during the transition period of the previous and new regulations, OJK’s attempt to provide clearer provisions on Material Transaction for the Public Companies under POJK 17/2020 must be appreciated. For example, OJK has changed its focus in determining a Material Transaction not by types of transactions but from the material threshold applicable for the relevant transaction. It simplifies the requirements for the Public Companies to determine whether the proposed corporate actions is considered as a Material Transaction.

If you have any questions or require any additional information, please contact Sandro Mieda Panjaitan, Grace Novia and Rahmatika Rasyiqa of Roosdiono & Partners (a member of ZICO Law).

This alert is for general information only and is not a substitute for legal advice.

[1] Under the Law No. 8 of 1995 on Capital Market (“Capital Market Law”), Public Companies defined as a company which has at least 300 shareholders and a paid-up capital of at least IDR3 billion.