The devaluation of the Indonesian Rupiah has created a U.S. dollar debt repayment crisis for corporate Indonesia. It has also created opportunities for bargain hunting foreign investors to acquire Indonesian assets at prices which, in some cases, represent a genuine and significant discount to the assets' replacement value.
However, "buyer beware" still applies to these transactions. Vendors who are willing to sell at discount prices usually need immediate cashflow, and often request up-front payments to meet impending debt repayment obligations. Foreign purchasers are keen to secure the opportunity quickly, lest the exchange rate moves against them, or simply to avoid the vendor losing interest and finding another deal. With both parties rushing to sign a contract, however, some essential procedures which are pre-requisites to completion can be overlooked. Foreign purchasers who do not ensure that these pre-requisites are fulfilled may find out too late that the vendor has spent the up-front payment and is unable to give an effective transfer on the agreed completion date.
Vendor Shareholder Approval
In many cases, a corporate vendor will be required to obtain the approval of its shareholders to enter into a sale of assets. Foreign investors need to ensure, not only that the vendor promises to obtain such approval, but that the approvals are duly and properly obtained.
In addition to shareholder approvals which are required by law, the purchaser should obtain a copy of the vendor's articles of association to ensure that any approval procedures contained in the articles are followed.
Shareholder approval for a disposition of majority of assets
The board of an Indonesian company is required to obtain a special shareholder approval for the disposition of "the entire or a majority of" the assets of the company. The "majority" test appears to be based on gross assets. The approval required involves a shareholders meeting with a quorum of 75% of voting shares and the resolution for approval must be passed by 75% of the votes in attendance.
Dispositions of a majority of assets must be published in two daily newspapers (including a national newspaper) within 30 days from the date of the transaction.
Shareholder approval for listed vendor in share sales
A listed vendor company is required to obtain majority shareholder approval for dispositions of shares in other companies where the aggregate purchase price is equal to or greater than (i) 5% of the vendor's gross income in the immediately preceding fiscal year or (ii) 10% of the total issued share capital of the vendor at the time of the transaction.
Although the regulation which contains this requirement refers only to share acquisitions by listed companies, it is understood that the Indonesian Capital Markets Supervisory Board (BAPEPAM) interprets the regulation as applying also to dispositions of shares in other companies.
As part of the shareholder approval procedure, the listed vendor must appoint an appraisal company acceptable to BAPEPAM to provide an opinion on the fairness of the proposed purchase price. This fairness opinion, together with audited accounts of the target company, must be provided to shareholders with the notice of meeting for the approval vote.
Details of the acquisition must also be published in two daily newspapers, which must include "relevant" information regarding the structure of the transaction and the target company.
Target Company Shareholder Approvals
Where the asset constitutes a shareholding in an Indonesian company, the vendor's ability to complete the transaction may be subject to transfer restrictions contained in the articles of association or any shareholders agreement to which the vendor is a party. Prospective purchasers need to examine all such documents. In addition, prospective purchasers need to be aware of the statutory provisions requiring the shareholders in the target company to approve the transaction.
Change in Control
A disposition of shares in an Indonesian company may effect a change in control of the company. In these circumstances, Indonesian law requires the directors of both the purchaser and the target company to prepare an acquisition plan which sets out the reasons and explanations of the directors for the terms and procedure of the acquisition. The acquisition plan must be filed with the Ministry of Justice (although this is not an approval requirement) and published in two daily newspapers. The plan must then be approved at a general shareholders meeting with a quorum of 75% of voting shares on a resolution passed by 75% of votes in attendance. Finally, the result of the acquisition must also be published in two daily newspapers.
It is understood that, where the purchaser is a foreign company, the above approval procedure only needs to be followed by the Indonesian target company.
There is significant uncertainty regarding the application of the above procedure. Indonesian law does not define the concept of "change in control". It is unclear whether there are circumstances in which an interest of 50% or less could convey control for the purposes of the relevant legislation.
Moreover, a provision of the Indonesian Company Act states that the procedure shall not "restrict legal entities or individuals from acquiring the shares of other companies direct from the shareholders". This may mean that an acquisition plan is not required for a friendly acquisition supported by all shareholders of the target.
Listed Companies
An acquisition of shares by or in an Indonesian listed company pursuant to which a conflict of interest arises between the target company and a controlling shareholder must be approved by a majority of independent shareholders (that is, shareholders who have no conflict of interest in connection with the transaction). While situations involving conflicts of interest are relatively well-defined in the context of acquisitions by a listed company (for example, where the listed company acquires shares in a third company from the controlling shareholder), it is less clear what would constitute a conflict where shares in the listed company are acquired. Securities regulation policy would suggest that transactions which significantly disadvantage minority shareholders may fall within this category.
A fairness opinion must be prepared by an independent consultant acceptable to BAPEPAM and supplied to shareholders with the notice of meeting. Notice must also be given to BAPEPAM, although approval from BAPEPAM is not required, except in the case that the required quorum of 50% of shareholders is not reached on two successive occasions, in which case the approval of BAPEPAM is required to call a third meeting.
Creditor objections
In some cases, particularly where a vendor is facing bankruptcy, a vendor's ability to provide an effective transfer of assets may be put into question by the rights of creditors.
Indonesian law also provides that a sale of a majority of assets must not be "to the detriment of third parties acting in good faith". The extent to which creditors of the vendor can use this provision to impugn a transaction is unclear.
However, for all sales by Indonesian companies facing bankruptcy, there is a risk that, after the sale, a receiver will be appointed to the bankrupt vendor pursuant to the current Bankruptcy Code (which was recently amended), and that the receiver will seek to invalidate the sale as a voidable transaction.
The Bankruptcy Code provides for the invalidation of all prior transactions which the relevant parties knew or should have known would cause damage to the company's creditors. This provision is likely to be of limited use because of the difficulties in establishing what the knowledge of the parties to each transaction was or should have been.
However, the Code deems knowledge in relation to certain classes of transactions within the 12 month period prior to the Court declaration of bankruptcy. Any transactions with related parties fall within the proscribed class. For this purpose, "related parties" of a company include directors and their families and majority-owned companies, majority shareholders and their families, group companies, and other companies with shared directors and managers.
In addition, the proscribed class of transactions includes payments for, or giving of security for, debts which are not yet due and payable and also contracts "in which the obligations of the debtor considerably exceed the obligations of the party with whom the contract is made".
It is unclear whether a sale of assets by a company facing insolvency on otherwise arm's length terms, but at a price which is well below the replacement value of the assets, could be considered to "considerably exceed" the obligations of the vendor. It may even be necessary for purchasers to consider requiring the vendor to obtain consents from its creditors in these circumstances.
Michael S. Horn is a partner of Coudert Brothers and is resident at CB Indonesia in Jakarta and Richard G. York is an associate in the Coudert Brothers' Singapore office.