All members of the board of directors of limited liability companies in Indonesia, whose primary duty is to carry out the day-to-day operations of the company and to represent the company, must perform their duties in good faith, for the best interest of the company and in accordance with the purposes and objectives of the company as specified in its constitutional documents.
The same also applies to the members of the company’s board of commissioners, whose primary duty is to supervise and monitor the directors. The board of directors and board of commissioners make up the two-board system that the Company Law requires, each has equal status despite their distinct functions. A general meeting of shareholders (GMS) appoints the members of both boards.
Special or Ad Hoc Committees
The board of directors can establish a special team or committees to assist it in overseeing the M&A process, including identifying a potential target, drafting transaction documents, coordinating with outside advisers, as well as negotiation. Typically, however, the directors themselves make all the final decisions.
The establishment of such special teams is not intended to tackle conflict of interest issues. The Company Law does not allow a director to represent the company, including in an M&A context, if the director has a conflicting interest with that of the company. In this case, other directors in the company must represent the company (if the company’s board of directors consists of more than one director). If all directors are conflicted, the board of commissioners can represent the company. If both boards are conflicted, the shareholders can appoint another party to represent the company.
Directors and commissioners of public companies and financing companies must further follow an additional set of rules under capital markets laws, which deal with conflict of interest. Public companies must disclose to the public any transactions by the company that have a conflict of interest element involving the interest of any party affiliated with the directors or commissioners of the company. The transaction must be approved first by disinterested shareholders if it transpires that the transaction is considered to be detrimental to the public company or if it is not in the best interest of the company.
Business Judgement Rule
The business judgement rule, though not formally recognized under Indonesian law as a legal term, describes a concept of immunity that is similar to that provided under the Company Law. Article 92 of the Company Law gives authority to the board of directors to manage the company according to its good judgement, within the parameters of the Company Law and its constitutional documents. Article 97 further states that a member of the board of directors will not be liable for the losses of the company if it is evident that:
- such losses are not the result of his or her fault or negligence;
- he or she has performed with due care in managing the company, with good faith and prudence for the interest of the company according to its purposes and objectives;
- there is no element of conflict of interest, either directly or indirectly, in the management of the corporate action that resulted in the loss; and
- he or she took precautionary measures to avoid the loss or the continuance of it.
While the above seems clear, ie, that all business judgements rendered according to law should provide protection to directors against all liabilities that may arise from any potential business risks, it may not be the case if there is an element of potential loss to the state. A recent case shows that a business decision made by a director of a state-owned enterprise that goes wrong may put the director at risk of being accused of a criminal act. The Attorney General would, of course, need to prove that there was an intention of wrongdoing before the court could convict the defendant. However, this at least shows that the courts may look beyond the judgement of the board of directors in cases that involve loss to state-owned enterprises.
Independent Outside Advice
It is almost always the case that the management of companies seeks outside counsel before entering into any definitive agreement for business combinations. Prospective acquirers seek legal counsel for the obvious reason that the transaction is legally feasible and to identify all rights and obligations that the acquirers will assume from the combination, including any legacy liabilities. A financial and tax consultant will also play an important role to help quantify any financial risks, and their findings during the due diligence will often complement those risks identified from the legal end.
In certain transactions involving targets engaged in the natural resources sector, it is also common and advisable to seek the advice of environmental consultants, since environmental issues are often a highly topical in Indonesia. The consultants will be useful in suggesting corrective measures to prevent the recurrence of legacy environmental issues, which, if not corrected, may lead to imprisonment.
Conflicts of Interest
Conflicts of interest of directors or shareholders have been the subject of corruption law enforcement, particularly where a potential loss to the state has been identified. The Indonesian Corruption Eradication Commission (KPK) is currently investigating a former District Head for allegedly receiving bribes from a company in connection with a regional infrastructure procurement project, in which he was also an indirect controlling shareholder of the company. The case is considered a corporate crime, and as of this writing, there has been only one company that has been found guilty of committing a crime of corruption.
The Supreme Court has issued a regulation that sets out procedures for handling corporate crimes. Since its issue there have been several instances where companies were investigated for possible corporate crimes. The KPK in particular appears to have used the regulation to investigate corporations in connection with corruption cases.
For more information, please contact:
Ira A. Eddymurthy, Partner
Fahrul S. Yusuf, Partner
This first appeared in the Chambers Corporate M&A 2020 global guide, published by Chambers and Partners. You can find the full chapter here.
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