How-to understand corporate law in Indonesia

Corporate law is the law that regulates all matters regarding the company and its business activities. It is important for business actors to study company laws in order to regulate and protect businesses from various risks that may occur in the future. It is important to know the form of business, the responsibilities of the Board of Directors and the Board of Commissioners, the rights of shareholders, who is responsible for the company’s losses, and others.

Governing law and regulation 

• Indonesian Civil Code (KUHPer)
• Indonesian Commercial Code (KUHD)
• Law No. 40/2007 concerning Limited Liability Companies as lastly amended by Law No. 11/2020 concerning Job Creation (Company Law)
• Law No. 25/2007 on Capital Investment
• Law No. 5/1999 concerning Prohibition of Monopolistic Practices and Unfair Business Competition
• Law No. 37/2004 concerning Bankruptcy and Suspension of Payments
• Law No. 8/1995 on Capital Market
• Government Regulation (PP) No. 27/1998 on Mergers, Consolidations, and Acquisitions of Limited Liability Companies
• Government Regulation (PP) No. 47 of 2012 concerning Corporate Social Responsibility
• Minister of Law and Human Rights Regulation (Permenkumham) No. 21/2021 concerning Requirements and Procedures for the Registration, Establishment, Changes, and Dissolution of Limited Liability Company Legal Entities

Introduction

Indonesia has several types of business entities. Some business entities are legal entities, while others are not. Legal Entities consist of Cooperatives (Koperasi), Foundations (Yayasan), Limited Liability Companies (Perseroan Terbatas/PT). Article 2 paragraph (1) Permenkumham No. 21/2021 mentions other legal entities which are Capital Alliance PT and Sole Proprietorship PT. Otherwise, Non-Legal Entities consist of Individuals, Partnerships (Firma), Limited Partnerships (CV), etc. In this article we will mainly explain about regular Limited Liability Company/PT. The establishment and management of specific types of PT are also subject to laws and regulations in the capital market (for PT TBK), banking and financial sector (PT as a Bank or Financial Institution, Insurance Company), and regulations governing PT with the status of BUMD or BUMN, etc.

Limited Liability Company

Limited Liability Company (“Company“) means a legal entity which constitutes an alliance of capital established pursuant to a contract in order to carry on business activities with an authorized capital all of which is divided into shares and which fulfills the requirements stipulated in this Act and its implementing regulations. Since the issuance of Job Creation Law, Limited Liability Company is also a sole proprietorship legal entity that meets the criteria for Micro and Small Enterprises as regulated in the legislation concerning Micro and Small Enterprises as described in Article 109 No. 1 Job Creation Law.

One of the factors that makes PT unique or different from other forms of business is the separation of capital. As mentioned in Article 3 paragraph (1) Law No. 40/2007, the Companies’ shareholders are not personally liable for legal relationships entered into on behalf of the Company and are not liable for the Company’s losses in excess of the shares they own. The character of a Company is that the shareholders are only liable for the amount paid up on all of the shares they own and it does not cover their personal assets.

However, based on Article paragraph (2) of Law No. 40/2007 the provisions contemplated above do not apply if: 

1. the requirements for the Company to be a legal entity have not been or are not fulfilled;
2. the shareholder concerned directly or indirectly exploits the Company in bad faith in his/her personal interest;
3. the shareholder concerned is involved in illegal acts committed by the Company; or
4. the shareholder concerned directly or indirectly illegally uses the Company’s assets with the result that the Company’s assets become insufficient to pay off the Company’s debts.

In certain circumstances it is not impossible for limited liability to be eliminated if it is proved that the matters stated in this paragraph have occurred. It is possible for shareholders’ liability in the amount of all the shares they own to be eliminated if it is proven that, among others, there has been a mixing of the shareholder’s personal assets and the Company’s assets so that the Company was established purely as a tool to be used by the shareholder to reach his personal aims as contemplated in subparagraphs b and d.

Important Legal Documents

There are some important legal documents for Company, which are:

1. Articles of Associations (Mandatory)
2. Standard Operating Procedure (SOP)/Internal Governance Regulations. It is like special regulations for certain PT, such as State-owned Enterprise (BUMN)
3. Shareholders Agreement (Joint Venture Agreement). It is not mandatory. But for Joint Venture companies it is required because in Articles of Associations the format is quite standard and cannot cover all agreements so there are details that are not disclosed
4. Relevant Applicable Laws and Regulations (Mandatory: Law No. 40/2007)
5. Third Party Agreements. It is necessary if for example there is a banker for credit, and other third parties. The Company must pay attention to the Articles of Associations, SOP, shareholder agreement, and many relevant regulations that must be observed. For BUMN, it not only refers to Law 40/2007, but the BUMN Law, the State Finance Law, and the Anti-Corruption Law.

Company’s Organ

Company’s Organ consists of: 

1. Direksi or Board of Directors (“BoDs”). BoDs is the Company Organ that is authorized and fully responsible for the management of the Company for the interests of the Company, in accordance with the purposes and objectives of the Company, and represents the Company both in and out of the court in accordance with provisions of the articles of association. It is impossible for BoDs to run all the affairs on his own so he can form a team like an organization and can authorize other members of the BoDs. Other members of the BoDs are members of the BoDs other than those whose appointments are void and are authorized to represent the BoDs in accordance with the articles of association. The BoDs may also grant a power of attorney in writing to 1 (one) or more Company employees or to other people to perform certain legal acts specified in the power of attorney for and on behalf of the Company. BoDs is personally responsible in the event the BoDs is guilty or negligent in carrying out the management of the Company. Otherwise Joint Responsibilities of the BoDs occur in the event the BoDs consists of 2 (two) members of the BoDs, or more, the responsibility applies jointly to each member of the BoDs. Members of the BoDs cannot be held responsible for the Company’s losses if it is proven:
   • The loss is not due to error or negligence.
   • The BOD has managed in good faith and prudence for the interest of and in accordance with the purposes and objectives of the Company.
   • The BOD does not have a conflict of interest, either directly or indirectly, in the management actions that resulted in losses.
   • The BOD has taken action to prevent such losses from arising or continuing. 

2. Dewan Komisaris or Board of Commissioners (“BOC”). BOC is the Company Organ in charge of carrying out oversight in general and/or in particular pursuant to the articles of association, and providing advice to the Board of Directors. The difference between BoDs and BOC authorities are:

BOC is personally responsible for Company Losses in the event the BOC is guilty or negligent in carrying out supervision. Otherwise Joint Responsibilities of the BOC occur in the event the BOC consists of 2 (two) members of the BOC or more, the responsibility applies jointly to each member of the BOC. Members of the BOC cannot be held responsible for the Company’s losses if it is proven:

• The BOC has supervised in good faith and prudence for the interest of and in accordance with the purposes and objectives of the Company.
• The BOC does not have a conflict of interest, either directly or indirectly, over management actions that result in losses.
• The BOC has taken action to prevent such losses from arising or continuing

3. General Meeting of Shareholders (“GMS”). GMS is the Company Organ which has the authorities not vested in the Board of Directors or the Board of Commissioners, within the limits set out under this Law and/or the articles of association.  There are two types of GMS which are Annual GMS and Extraordinary GMS. The GMS has authorities to:
   • Amend the AOA;
   • Appointment and dismissal of the BOD and BOC
   • Approval of annual report;
   • Approval of Work Plan and Budget (RKAP); and
   • Others depend on the necessities and the company’s AoA (approval of transfer of shares and other corporate actions).

Fiduciary Duties

The BoDs, when representing the company, must adhere to the 2 principles above (duty of care and duty of loyalty). So he does everything according to the fiduciary (trust). One important concept of a corporation is the separation of ownership from the right to control assets. Shareholders own the shares in the corporation. But, control and management are vested in the BOD. Investors expect to receive a return in an increased value. Therefore, investors rely on the board who runs the corporation and also trust that the board will use the funds to achieve the purpose of their investment in the corporation. Management must be carried out by each member of the Board of Directors in good faith and full responsibility. If the directors adhere to the Duty of Care principle, the directors will carry out their duties with full responsibility and carry out their duties according to the principle of prudence. The BOD runs the management of the Company for the benefit of the Company and in accordance with the purposes and objectives of the Company. The Directors must carry out their duties and obligations to manage the Company for the benefit of the Company.

Ultra Vires

The ultra vires doctrine is a shareholder protection device. Corporate management are prevented from investing in potentially risky projects that are not covered by the objects clause and that, therefore, the shareholders could not have envisaged when they acquired their shares. This comes at the expense of contractual counterparties who arguably could have protected themselves by inspecting the register and realizing that the envisaged transaction was ultra vires (Carsten Gerner-Beuerle, Michael Anderson Schillig, Comparative Company Law). The BoDs carries out the management of the Company for the interests of the Company in accordance with the purposes and objectives of the Company. The BoDs is authorized to carry out the management in accordance with the policies deemed appropriate within the limits set out under Company Law and/or the articles of association. Every member of the BoDs shall be fully and personally responsible for the losses of the Company if the person concerned is at fault or negligent in carrying out his/her duties in accordance with the provisions Shareholders are entitled to file a lawsuit against the Company if the Shareholders suffer losses caused by the Company’s actions that are considered unreasonable and unfair

Piercing the Corporate Veils (“PCV”)

PCV refers to a situation in which courts put aside limited liability and hold a corporation’s shareholders or directors personally liable for the corporation’s actions or debts. (Cornell Law School). PCV means the judicial act of imposing personal liability on otherwise immune corporate officers, directors, and shareholders for the corporation’s wrongful acts.” (Blacks Law Dictionary). PCV is an exception from the separate legal responsibility principle. 

The Separate Liability Principle is excluded when:

1. the requirements for the Company to become a legal entity are not or have not yet been fulfilled;
2. the shareholders concerned, either directly or indirectly, exploited the Company for personal gain in bad faith;
3. the shareholders concerned are involved in unlawful acts committed by the Company; or
4. the shareholders concerned, either directly or indirectly, used the assets of the Company in an unlawful manner which resulted in the assets of the Company becoming insufficient to settle the liabilities of the Company.