Get-to know legal process of merger, acquisition in Indonesia

Mergers and acquisitions are two legal actions for companies to create synergies, namely the overall value of the company after mergers and acquisitions is greater than the sum of the values of each company before mergers and acquisitions. In the implementation of mergers and acquisitions, there will be several processes that must be carried out with proper consideration and proper due diligence to avoid disputes arising. Therefore, through this article, we will explain the stages in conducting mergers and acquisitions as well as the risks from mergers and acquisitions that can be prevented.

Governing laws and regulation 

• Law No. 40/2007 concerning Limited Liability company as amended by Law No. 1/2020 concerning Job Creation
• Law No. 5/1999 concerning Prohibition of Monopoly and Unfair Business Competition
• Government Regulation (PP) No. 27/1998 concerning Merger, Consolidation and Acquisitions of Limited Liability Company
• Government Regulation (PP) No. 57/2010 concerning Merger or Consolidation of Business Entities and Taking Company Shares which Can Result in Monopolistic Practices and Unfair Business Competition
• Business Competition Supervisory Commission (KPPU) Regulation No. 3/2019 concerning the Assessment of Mergers and Consolidation of Undertakings or Acquisition of Shares in a Company which Can Result in Monopolistic Practices or Unhealthy Competition

Overview

Merger is a legal action taken by one or more companies to merge with another existing company which results in the assets and liabilities of the company that doing a merger (“Merging Company”) being transferred by law to the company that accepts the merger (“Surviving Company”) and subsequently the legal entity status of the Merging Company ends by law. Meanwhile, acquisitions is a legal action taken by a legal entity or individual to take over/acquire the shares of the company which results in the transfer of control over the company. Mergers and acquisitions must take into account the interests of the company, minority shareholders, employees of the company, creditors of the company, other business partners of the company, the public and fair competition in conducting business. 

Merger and acquisition cannot be carried out if it is detrimental to certain parties. This is confirmed in Article 126 paragraph (1) Law No. 40/2007, which consists of:

• The interests of the Company, minority shareholders, employees of the Company,
• The interests of creditors and other business partners of the Company, and
• Public interest and healthy competition in doing business.

The conditions stated above are “cumulative”, so that even one of them is violated, resulting in the Merger being unable to be carried out.

Merger

The merger results in the merging companies ending without being liquidated. The assets and liabilities of the merging companies will be transferred to the Surviving Company. Likewise, the shareholders of the Merging Company will become the shareholders of the Surviving Company. The merging companies are terminated by law as from the date the merger takes effect.  

Here are the steps to conduct Merger in Indonesia:

1. The Board of Directors (“BoDs”) of both parties will prepare a merger plan which contains at least:
   • name and domicile of each company that will carry out the merger;
   • reasons and explanations of the BoD of the Merging Company and the requirements for the merger;
   • procedures for evaluating and converting the shares of the Merging Company to the shares of the company that received the merger;
   • draft amendments to the articles of association (AoA) of the Surviving Company, if any;
   • financial statements covering the last 3 (three) financial years of each company that will conduct the merger;
   • plan for the continuation or termination of the business activities of the company that will carry out the merger;
   • pro forma balance sheet of the Surviving Company in accordance with generally accepted accounting principles in Indonesia;
   • how to settle the status, rights and obligations of members of the BoDs, board of commissioners, and employees of the company who will carry out the merger;
   • how to settle the rights and obligations of the company that will merge with third parties;
   • how to settle the rights of shareholders who do not agree with the merger of the company;
   • names of the members of the BoDs and the board of commissioners as well as the salaries, honorarium and allowances for the members of the BoDs and board of commissioners of the company who receive the merger;
   • estimated time period for the implementation of the merger;
   • reports on the conditions, developments, and results achieved from each company that will carry out the merger;
   • main activities of each company conducting the merger and changes that occur during the current financial year; and
   • details of problems that arise during the current financial year that affect the activities of the company that will carry out the merger

2. After obtaining approval from the board of commissioners of each company, the BoDs of the company that will carry out the merger must announce the summary of the merger plan in at least 1 (one) newspaper and announce in writing to the employees of the company that will carry out the merger within a period of no later than 30 (thirty) days before the summons for the general meeting of shareholders (GMS). Through this announcement, interested parties such as creditors, business partners and others can obtain the merger plan at the company’s office as of the announcement date until the GMS is held. Creditors may file an objection to the company within a period of no later than 14 days after the announcement regarding the merger. If within that period the creditors do not file an objection, the creditors are deemed to have agreed to the merger. If up to the date of the GMS, the creditor’s objection cannot be resolved by the BoDs, the objection must be submitted to the GMS for resolution. As long as the creditor settlement has not been reached, the merger cannot be carried out.

3. The merger plan is submitted to GMS of each party for approval: GMS decisions are taken based on deliberation for consensus. GMS may be held if at the meeting at least 3/4 (three quarters) of the total shares with voting rights are present or represented at GMS. Decisions are valid if approved by at least 3/4 of the total votes cast, unless the AoA specifies otherwise. In the event that the quorum of attendance is not reached, a second GMS may be held. Shareholders who do not agree with the decision of the GMS regarding the merger have the right to request the company to purchase its shares at a reasonable price. If the shares requested to be purchased by the Company exceed the limit of the provisions for the repurchase of shares by the Company, the Company is obliged to ensure that the remaining shares are purchased by a third party. Those provisions shall also apply to a Public company as long as it is not regulated otherwise in the laws and regulations in the capital market sector.  

4. The Surviving Company may jointly submit a pre-merger consultation to the Business Competition Supervisory Commission (KPPU) before doing the merger. A consultation must be accompanied with a merger plan. The result of the consultation can be used in the assessment stage of the notification, if there is no change in data for a maximum of two years.

5. Make a merger deed in front of a notary in Indonesian language.
6. The Surviving Company must submit a copy of the merger deed and the deed of AoA amendment (if any) to the Minister of Law and Human Rights (MoLH). If the merger of the companies is not accompanied by amendments to the AoA, a copy of merger deed must be submitted to MoLH to be recorded in the register of companies.

7. The BoDs of the Surviving Company must announce the results of the merger in 1 (one) or more newspapers within a period of no later than 30 (thirty) days from the effective date of the merger. If the merger is accompanied by the amendments of AoA, the effective date of the merger is from the date of MoLH approval, the later date stipulated in the approval of the MoLH, the date on which the notification of amendments to the articles of association is received by the MoLH or on a later date stipulated in the deed of Merger. If the merger is not accompanied by the amendments of AoA, the effective date is when the merger notification is received by the MoLH. 

8. For certain companies, it is necessary to obtain prior approval from relevant agencies in accordance with the provisions of the legislation. For public companies, they are required to submit a business merger statement containing the merger plan along with its supporting documents to the Financial Services Authority (OJK). It is further regulated in OJK Regulation No. 74/ POJK.04/2016 on Merger or Consolidation of Public Company. For banking companies, it is necessary to obtain approval from the Bank Indonesia agency.

9. The company resulting from the merger is required to send notification of the merger to KPPU no later than 30 (thirty) days from the date the merger is legally effective. This notification is made to analyze the potential for monopolistic practices or unfair competition as a result of the merger. The notification is required if the transaction meets the following thresholds:
   • the value of assets of the combined businesses in Indonesia exceeds: 
   • IDR 2.5 trillion; or 
   • IDR 20 trillion for banks (or IDR 2.5 trillion, if only one of the parties is in banking sector); or 
   • the sales turnover of the combined businesses in Indonesia exceeds IDR 5 trillion.

Acquisition

Acquisition is a legal action taken by a legal entity or individual to acquire either all or most of the company’s shares which may result in the transfer of company’s control. The acquisition is carried out by taking over/acquiring the shares that have been issued and/or to be issued by the company. Parties that can carry out acquisition can be in the form of corporate legal entities, non-company legal entities such as cooperatives or foundations, and individuals. 

In doing an acquisition, such parties can acquire through 2 ways which are:

1. Acquisition through the company’s BoDs.

If the acquisition is made through the BoDs, the party who will acquire (“Acquiring Company”) must convey his intention to make the acquisition to the BoDs of the company that is being acquired (“Target Company”). After that, the directors of both parties, with the approval of the respective Board of Commissioners, prepare an acquisition plan which contains at least:

• the name and domicile of the Acquiring Company and the Target Company;
• reasons and explanations from the BoDs of the Acquiring Company that will perform the acquisition and the BoDs of the Target Company;
• the financial report as referred to in Article 66 paragraph (2) letter a Law No. 24/2007 for the last financial year of the Target Company and the Acquiring Company;
• procedures of shares evaluation and conversion from the Target Company over its replacing shares, if the payment of Acquisition is conducted with in the form of shares;
• the number of shares to be acquired;
• preparedness of funding;
• the pro forma consolidated balance sheet of the Acquiring Company after the acquisition which is prepared in accordance with generally accepted accounting principles in Indonesia;
• how to settle the rights of shareholders who do not agree with the acquisition;
• how to settle the status, rights and obligations of members of the BoDs, Board of Commissioners, and employees of the Target Company;
• the estimated time frame for the implementation of the acquisition, including the period for granting the power of attorney to transfer shares from the shareholders to the BoDs of the Company;
• draft amendments to the AoA of the Company resulting from the acquisition, if any.

After that, if the acquirer is a legal entity in the form of company/Acquiring Company, the Acquiring Company and the Target Company should obtain approval of the acquisition plan from their board of commissioners. The BoDs of the Acquiring Company then must announce the summary of the acquisition plan in at least 1 (one) newspaper and announce in writing to the employees of the Acquiring Company within a period of no later than 30 (thirty) days before the summons for the GMS. The provisions in the merger steps in point 2 and 3 above also apply to this type of acquisition. 

Next, the acquisition plan that has been approved by the GMS is stated in the deed of acquisition made before a notary in Indonesian. After that, a copy of the deed of acquisition of the company must be attached to the submission of notification to MoLH regarding amendments to the articles of association (if any). 

2. Acquisition directly from shareholders

In carrying out a direct acquisition through shareholders, the parties do not need to prepare an acquisition plan as mentioned above. It is carried out directly through negotiations and agreements by the party who will acquire with the shareholders. However, the acquisition of shares must pay attention to the provisions of the AoA of the Target Company regarding the transfer of rights to shares and agreements made by the Target Company with other parties. 

If the acquisition is carried out by a legal entity in the form of a company, the BoDs must first obtain the approval of the GMS before conducting negotiations and an agreement to purchase shares directly from the shareholders. Before that, the BoDs of the Acquiring Company must announce the acquisition agreement in at least 1 (one) newspaper and announce in writing to the employees of the Acquiring Company within a period of no later than 30 (thirty) days before the summons for the GMS. The provisions in the merger steps in point 2 and 3 above also apply to this type of acquisition.

Furthermore, the acquisition agreement is stated in the form of a share acquisition deed which is stated by a notarial deed in Indonesian language. This deed of acquisition through shareholders is also known as the deed of transfer of rights to shares. Then a copy of the deed must be attached to the submission of notification to the MoLH regarding the change in the composition of shareholders. It is important to know that the provisions regarding the procedure for transferring rights to shares traded in the capital market have a different procedure that are regulated in the laws and regulations in the capital market sector.

As same as the merger, in acquisition the Target Company has to comply with the fair competition provision in business. The Target Company may jointly submit a pre-acquisition consultation to the KPPU before doing the acquisition. A consultation must be accompanied with an acquisition plan. The result of the consultation can be used in the assessment stage of the notification, if there is no change in data for a maximum of two years. 

After all steps above are complete, the Target Company is required to send notification of the merger to KPPU no later than 30 (thirty) days from the date the acquisition is legally effective. The notification is required if the transaction meets the following thresholds: 

• the value of assets of the combined businesses in Indonesia exceeds: 

• IDR 2.5 trillion; or 
• IDR 20 trillion for banks (or IDR 2.5 trillion, if only one of the parties is in banking sector); or 
• the sales turnover of the combined businesses in Indonesia exceeds IDR 5 trillion.