Mergers and Acquisitions in Indonesia

Mergers and Acquisitions (M&A) are defined precisely under Law No. 40/2007 and Law No. 5/1999. This legislation outlines three critical actions: Mergers, Consolidations, and Acquisitions, each playing a significant role in shaping the market's structure.

Contributing Advisor

Hardy Salim

Manager, Business Advisory Services

Mergers and consolidations enable independent businesses to unite into a single or a collective group of entities. This union goes beyond just merging assets and liabilities; it strategically combines their market influence, capabilities, and resources. The central objective of this process is to centralize control. This centralization can alter the competitive landscape, boost competitive edges, and possibly lead to more resource-efficient operations.

Conversely, Acquisitions represent a distinct facet of M&A. This process involves shifting control from one independent business to another, marking a change that extends beyond mere ownership exchange. It's an important alteration in how control is distributed within the market. Acquisitions typically lead to concentrated control or increased market dominance, which can significantly affect market competition and consumer options.

Types of transactions

There are three different types of mergers, consolidations, or acquisitions that organizations can engage in.

Horizontal transaction.

This type occurs when companies operating within the same market decide to merge, consolidate, or acquire another. Essentially, it's a union of competitors or peers who are at the same stage of the production or sales process.

Vertical transaction.

This is different as it involves companies that are part of the same supply chain but not necessarily in the same market. For example, a manufacturer might merge with a supplier or a distributor. This strategic alignment aims to streamline operations and control more stages of the production and distribution process.

Conglomerate transaction.

This type is the most broad and diverse, encompassing mergers, consolidations, or acquisitions that don't fit into the horizontal or vertical categories. These transactions typically involve companies in entirely different industries or markets. The key motivation behind such transactions is often diversifying business interests and investments, spreading risk across different market sectors.

Acquisitions

Acquisitions are categorized into two main types: Share Acquisitions and Acquisitions of Share Equivalents. Each type encompasses a range of transaction methods, allowing for flexibility and strategic alignment with corporate objectives.

• Share Acquisition, divided into:
  • Direct Share Acquisition from Shareholders;
  • Share Acquisition of shares issued or will be issued by the company;
  • Share Acquisitions through Capital Markets; or
  • Share Acquisitions through Capital Increase.
• Acquisitions of Share Equivalents, divided into:
  • Transfer of Assets; and
  • Acquisition of Participating Interest (commonly in oil and gas sector).

Legal framework for mergers and acquisition in Indonesia

Regulation of mergers and acquisitions (M&A) in Indonesia is governed by a comprehensive legal framework designed to ensure transparency, fairness, and compliance with both domestic and international standards. The regulatory environment encompasses key legislation, complementary laws, sector-specific rules, and oversight by multiple government authorities.

Key legislation

The cornerstone of M&A regulation is Law No. 40 of 2007 on Limited Liability Companies, which has been notably amended by Government Regulation No. 2 of 2022 under the New Job Creation Law. This law provides the basic structure for corporate governance and M&A procedures.

Additionally, Government Regulation No. 27 of 1998 on Mergers, Consolidations, and Acquisitions lays down foundational principles, including:

• Statutory requirements for M&A transactions.
• Necessary documentation to be submitted.
• Specific timeframes within which these activities must be completed.

Complementary laws

Several other laws complement the primary legislation, providing more detailed guidance on specific aspects:

• Investment Law (Law No. 25 of 2007), which was also amended by the New Job Creation Law, regulates investment activities.
• Capital Market Law (Law No. 8 of 1995), recently amended by Law No. 4 of 2023 focused on Financial Sector Development, and, Strengthening, governs the capital markets involved in public transactions.

Regulations for public companies

For public companies, the Indonesian Financial Service Authority (OJK) issues specific regulations to ensure that M&A processes uphold transparency and fairness. These include:

• OJK Regulation No. 9/POJK.04/2018 on Acquisition of a Public Company.
• OJK Regulation No. 74/POJK.04/2016 on Merger or Consolidation of a Public Company.

These regulations safeguard shareholders and ensure equitable treatment during transactions.

Broader economic and social Laws

M&A activities are also subject to broader economic policies and social safeguards:

• The Law on Prohibition of Monopolistic Practices and Unfair Business Competition (Law No. 5 of 1999), amended by the New Job Creation Law, requires notification to the Business Competition Supervisory Commission (KPPU) to prevent monopolies.
• The Manpower Law (Law No. 13 of 2003) protects employee rights during mergers, acquisitions, and other corporate restructurings.
• The Presidential Regulation on Investment Business Fields (Positive List) outlines investment requirements and limitations, especially affecting foreign investors.

Sector-specific rules

Certain industries, such as banking and financial services, are subject to additional regulatory scrutiny. These include:

• Regulations by the OJK and Bank Indonesia.
• Restrictions on foreign investment.
• Fit and proper tests for key personnel to ensure sound management and operations.

Government authorities overseeing M&A

Several key government bodies oversee the M&A process in Indonesia:

• The Ministry of Law manages changes in share ownership.
• The Ministry of Finance (Directorate General of Taxes) to oversee tax compliance.
• The Indonesian Capital Investment Board’s Online Single Submission system handles business licensing.
• The OJK supervises public companies, banks, and financial services firms.  
• Business Competition Supervisory Commission (KPPU) to monitors M&A activities for potential anti-competitive practices.
• Indonesia Stock Exchange (IDX) to oversee corporate action of public listed company.

Process and timeline of mergers and acquisitions in Indonesia

Required documentation

General M&A procedures

Step 1: Legal, tax, and financial due diligence

A thorough legal, tax, and financial due diligence investigation is carried out, scrutinizing the target's legal, tax, and financial status to identify risks and support informed decision-making.

Step 2: Preparation and announcement

Once the due diligence process is completed, the M&A process starts with the preparation of a merger or acquisition proposal by both the acquirer and the target company. This proposal must be publicly announced in newspapers and communicated to employees, initiating a mandatory 30-day pre-M&A announcement period to ensure transparency with stakeholders. In parallel, both parties will prepare the relevant transaction documents to stipulate the condition precedent and condition subsequent for the transaction (either merger or acquisition transaction) based on the findings within the due diligence exercise, for example conditional shares sales and purchase agreement.

Step 3: Extraordinary General Meeting of Shareholders (EGMS) approval

After the announcement and completion of condition precedent, an extraordinary general meeting of shareholders (EGMS) is held to approve the M&A transaction. This meeting requires at least 75 percent attendance and typically takes about 2 days for both the approval and notarization of the new shareholders involved in the transaction.

Step 4: Signing of share transfer or subscription agreement

Following these approvals, a final transaction agreement (for example, shares sale and purchase agreement) is signed in the presence of a notary, a process that usually occurs within 1 day. This formalizes the legal transfer of shares between parties.

Step 5: Submission to the Ministry of Law

The next critical step is the submission of all related notarial deeds to the Ministry of Law. The ministry reviews the documents and issues an approval or acknowledgment letter, which typically takes 3 days.

Step 6: Post-M&A announcement

After receiving official approval, the company is required to publish a post-M&A announcement in newspapers, which usually takes 1 day to complete.

Throughout this process, other steps include:

• Fulfilment of conditions subsequent – if any,
• Obtaining creditors' approval to safeguard creditors’ interests,
• Conducting a share valuation to determine fair market value and establish the share conversion formula,
• Securing third-party approvals as required by law or agreements, and
• Gaining approvals from regulatory bodies such as BKPM, OJK, Ministry of Law, and relevant industry regulators depending on the business sector.

From a regulatory perspective, an M&A transaction typically requires at least 30 days to complete. However, timelines may vary based on negotiation complexity, the scope of due diligence, and the specific circumstances of each case.