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Print articleIndonesia’s New Company Law
November, 2008 -
After lengthy discussion, the Indonesian House of Representatives finally passed the Bill on Limited Liability Companies into law on the 23rd of July 2007 and it was then signed by the President on the 16th of August 2007 and enacted as Law No 40 of 2007 regarding Limited Liability Companies ("Law 40"). Law 40 revokes the previous limited liability companies law, ie Law No. 1 of 1995 regarding Limited Liability Companies ("Law 1"). In general, the Law is very similar to Law 1. However, Law 40 provides more details, makes some interesting changes and introduces certain new concepts, among other things, Business Plans, Corporate Social Responsibility, and Business Segregation.
The following are some of the areas where Law 40 differs from Law 1:
Establishment and Capital
As regulated under Law 1, establishing a limited liability company requires at least two shareholders except for state owned companies. Under Law 40, these other companies are exempt from this provision: a company managing the stock exchange; Clearing and Guarantee Institutions; Depository and Settlement Institutions; other institutions regulated in the Capital Market Law.
Under Law 40 there is an increase in the minimum authorized capital from Rp.20 million to Rp.50 million and more than Rp.50 million for certain business activities, such as banking, insurance and freight forwarding. Law 40 now regulates that all issued shares must be fully paid up by the time of the company's establishment with valid evidence of payment. Changes have also been made to filing/registration deadlines.
Electronic applications for legal entity status
Law 40 provides that applications to obtain legal entity status can be submitted by the founders electronically which will no longer require a notary's assistance, unless the founders delegate the task to a notary. The application must at least contain the name and domicile of the company; term of the company; aim and purposes of the company; amount of authorized, subscribed and paid up capital; and complete address of company.
To obtain approval from the Minister of Law and Human Rights ("MLHR"), an application must be submitted at the latest 60 days after the deed of establishment has been signed. The company will obtain its legal entity status as of the date of issuance of the MLHR’s Decree approving the legal entity, whereas under Law 1 it was as of the date the deed of establishment was approved by the MLHR.
Company Registry
Law 40 regulates the responsibility of the MLHR to organize the Company Registry and publication in the State Gazette. Under Law 1, registration and publication were the responsibilities of the Directors and the Company Registry was under the authority of the Minister of Trade. The Company Registry under Law No 3 of 1982 will still exist although Law 40 also regulates Company Registry.
Crossholdings
Law 40 prohibits a company from owning shares in another company which owns shares directly or indirectly in the first company. The exception is if the shares are gained by law, gift or will on condition that the shares are transferred to another party within one year. There are also changes to share buybacks.
Business Plan and Interim Dividends
One of the new concepts under Law 40 is the obligation of the Boad of Director (BOD) to prepare a Business Plan prior to commencement of the financial year. However, Law 40 does not regulate what the minimun content of the Business Plan is except that it must contain the company’s budget. If no Business Plan is prepared, the previous year's business plan will prevail.
Law 40 now recognizes interim dividends and allows a company to distribute interim dividends before the financial year end. If after the financial year end the company has suffered a loss, the interim dividend must be returned. If the company suffers a loss and the shareholders do not return the interim dividend, Directors and Commissioners are jointly and individually liable for the company’s loss. Law 40 does not provide a mechanism for returning the interim dividend.
Corporate Social and Environmental Responsibility (CSER)
A company doing business related to natural resources or whose business may affect the environment must perform CSER. This provision differs slightly from the previous draft which imposed the obligation on all companies without specifying particular business fields. The cost of implementing CSER programs must be included in the calculation of the costs of the Company.
General Meeting of Shareholders (GMS)
A major change is in the concept of the GMS. Law 40 does not place the GMS as the highest organ in the company; the new definition places the GMS at the same level as the BOD and Board of Commissioners (BOC).
One of the breakthroughs of Law 40 is that the GMS can be held through a teleconference, video-conference or other electronic media which enables all participants to see and hear directly and to participate in the meeting. The minutes still have to be agreed and signed by all GMS participants. Law 40 also provides for electronic evidence by accepting electronic signatures. However, it is not clear how an electronic signature would be executed nor how this fits in with civil procedural requirements.
BOD, BOC and their Liabilities
As also regulated in Law 1, every member of the BOD is liable for losses suffered by the Company. However, members of the BOD are not liable for company losses if they can prove that:
a. the losses were not caused by their negligence or fault;
b. they have managed the company in good faith and with due care;
c. they do not have a direct or indirect conflict of interest in its management thereby causing the losses;
d. they have taken precautionary measures and mitigated the losses.
Although Directors will not be liable if they can prove the above, providing evidence to support their case will not be a simple task.
Every member of the BOC must fulfill his/her duty to supervise and provide advice to the BOD in good faith. As a consequence of failing to carry out his/her duties and thereby causing a loss to the company, the relevant member of the BOC is liable for the loss. However, if the member can prove that:
a. he/she has fulfilled his/her supervisory duties in good faith according to the aim and purposes of the company;
b. he/she does not have any personal interest either directly or indirectly in the actions of the BOD which caused the loss; and
c. he/she has provided advice to the BOD to prevent the loss,
then he/she will not be held liable for the loss.
The concept of independent commissioners for private companies has been introduced but is not mandatory. The BOC may establish committees.
Amendment to Articles of Association
Companies have until 16 August 2008 to amend their articles of association (AOA) to conform to Law 40. There will not be too many changes necessary but it will also be possible of course now to include provisions on holding a GMS by conference call and on interim dividends. Amended AOA will not now need to name the shareholders of the company in Article 4 nor are the names of directors and commissioners deemed to be part of the AOA of a company. Certain timing provisions for certain corporate actions may also need to be inserted into the revised AOA.
Acquisitions
Of practical importance are the revised provisions relating to 'acquisitions'. Law 40 now makes it mandatory in all acquisitions where there is a change of control for the Board of Directors of the company planning to make the acquisition to announce a summary of the acquisition plan in at least one newspaper and also announce it in writing to their employees not less than 30 days before the summons of the GMS. Creditors have 14 days from the announcement to object to the acquisition. By policy, we believe that an announcement will also need to be made to the employees of the target company.
Business Segregation
Law 40 now acknowledges the concept of business "segregation", being (a) pure segregation and (b) non-pure segregation. This will be further implemented by a Government Regulation.
Dissolution, Liquidation and Termination of Legal Entity Status
Under Law 1, a company could be dissolved by a shareholders’ resolution; because the expiry of the term of the Company as stipulated in the Articles of Association; or by a court decision. Under Law 40 there are three other ways a company can be dissolved: (i) the cancellation of bankruptcy status by a final ruling of the commercial court; (ii) due to the bankruptcy assets being insufficient to cover the cost of the bankruptcy; and (iii) the company’s insolvency causing the revocation of its business license. The dissolution of a company does not cause the company to lose its legal entity status until the liquidation process has been completed and the liquidator’s report has been approved by the GMS or court.
The following are some of the areas where Law 40 differs from Law 1:
Establishment and Capital
As regulated under Law 1, establishing a limited liability company requires at least two shareholders except for state owned companies. Under Law 40, these other companies are exempt from this provision: a company managing the stock exchange; Clearing and Guarantee Institutions; Depository and Settlement Institutions; other institutions regulated in the Capital Market Law.
Under Law 40 there is an increase in the minimum authorized capital from Rp.20 million to Rp.50 million and more than Rp.50 million for certain business activities, such as banking, insurance and freight forwarding. Law 40 now regulates that all issued shares must be fully paid up by the time of the company's establishment with valid evidence of payment. Changes have also been made to filing/registration deadlines.
Electronic applications for legal entity status
Law 40 provides that applications to obtain legal entity status can be submitted by the founders electronically which will no longer require a notary's assistance, unless the founders delegate the task to a notary. The application must at least contain the name and domicile of the company; term of the company; aim and purposes of the company; amount of authorized, subscribed and paid up capital; and complete address of company.
To obtain approval from the Minister of Law and Human Rights ("MLHR"), an application must be submitted at the latest 60 days after the deed of establishment has been signed. The company will obtain its legal entity status as of the date of issuance of the MLHR’s Decree approving the legal entity, whereas under Law 1 it was as of the date the deed of establishment was approved by the MLHR.
Company Registry
Law 40 regulates the responsibility of the MLHR to organize the Company Registry and publication in the State Gazette. Under Law 1, registration and publication were the responsibilities of the Directors and the Company Registry was under the authority of the Minister of Trade. The Company Registry under Law No 3 of 1982 will still exist although Law 40 also regulates Company Registry.
Crossholdings
Law 40 prohibits a company from owning shares in another company which owns shares directly or indirectly in the first company. The exception is if the shares are gained by law, gift or will on condition that the shares are transferred to another party within one year. There are also changes to share buybacks.
Business Plan and Interim Dividends
One of the new concepts under Law 40 is the obligation of the Boad of Director (BOD) to prepare a Business Plan prior to commencement of the financial year. However, Law 40 does not regulate what the minimun content of the Business Plan is except that it must contain the company’s budget. If no Business Plan is prepared, the previous year's business plan will prevail.
Law 40 now recognizes interim dividends and allows a company to distribute interim dividends before the financial year end. If after the financial year end the company has suffered a loss, the interim dividend must be returned. If the company suffers a loss and the shareholders do not return the interim dividend, Directors and Commissioners are jointly and individually liable for the company’s loss. Law 40 does not provide a mechanism for returning the interim dividend.
Corporate Social and Environmental Responsibility (CSER)
A company doing business related to natural resources or whose business may affect the environment must perform CSER. This provision differs slightly from the previous draft which imposed the obligation on all companies without specifying particular business fields. The cost of implementing CSER programs must be included in the calculation of the costs of the Company.
General Meeting of Shareholders (GMS)
A major change is in the concept of the GMS. Law 40 does not place the GMS as the highest organ in the company; the new definition places the GMS at the same level as the BOD and Board of Commissioners (BOC).
One of the breakthroughs of Law 40 is that the GMS can be held through a teleconference, video-conference or other electronic media which enables all participants to see and hear directly and to participate in the meeting. The minutes still have to be agreed and signed by all GMS participants. Law 40 also provides for electronic evidence by accepting electronic signatures. However, it is not clear how an electronic signature would be executed nor how this fits in with civil procedural requirements.
BOD, BOC and their Liabilities
As also regulated in Law 1, every member of the BOD is liable for losses suffered by the Company. However, members of the BOD are not liable for company losses if they can prove that:
a. the losses were not caused by their negligence or fault;
b. they have managed the company in good faith and with due care;
c. they do not have a direct or indirect conflict of interest in its management thereby causing the losses;
d. they have taken precautionary measures and mitigated the losses.
Although Directors will not be liable if they can prove the above, providing evidence to support their case will not be a simple task.
Every member of the BOC must fulfill his/her duty to supervise and provide advice to the BOD in good faith. As a consequence of failing to carry out his/her duties and thereby causing a loss to the company, the relevant member of the BOC is liable for the loss. However, if the member can prove that:
a. he/she has fulfilled his/her supervisory duties in good faith according to the aim and purposes of the company;
b. he/she does not have any personal interest either directly or indirectly in the actions of the BOD which caused the loss; and
c. he/she has provided advice to the BOD to prevent the loss,
then he/she will not be held liable for the loss.
The concept of independent commissioners for private companies has been introduced but is not mandatory. The BOC may establish committees.
Amendment to Articles of Association
Companies have until 16 August 2008 to amend their articles of association (AOA) to conform to Law 40. There will not be too many changes necessary but it will also be possible of course now to include provisions on holding a GMS by conference call and on interim dividends. Amended AOA will not now need to name the shareholders of the company in Article 4 nor are the names of directors and commissioners deemed to be part of the AOA of a company. Certain timing provisions for certain corporate actions may also need to be inserted into the revised AOA.
Acquisitions
Of practical importance are the revised provisions relating to 'acquisitions'. Law 40 now makes it mandatory in all acquisitions where there is a change of control for the Board of Directors of the company planning to make the acquisition to announce a summary of the acquisition plan in at least one newspaper and also announce it in writing to their employees not less than 30 days before the summons of the GMS. Creditors have 14 days from the announcement to object to the acquisition. By policy, we believe that an announcement will also need to be made to the employees of the target company.
Business Segregation
Law 40 now acknowledges the concept of business "segregation", being (a) pure segregation and (b) non-pure segregation. This will be further implemented by a Government Regulation.
Dissolution, Liquidation and Termination of Legal Entity Status
Under Law 1, a company could be dissolved by a shareholders’ resolution; because the expiry of the term of the Company as stipulated in the Articles of Association; or by a court decision. Under Law 40 there are three other ways a company can be dissolved: (i) the cancellation of bankruptcy status by a final ruling of the commercial court; (ii) due to the bankruptcy assets being insufficient to cover the cost of the bankruptcy; and (iii) the company’s insolvency causing the revocation of its business license. The dissolution of a company does not cause the company to lose its legal entity status until the liquidation process has been completed and the liquidator’s report has been approved by the GMS or court.
