Regulation of anticompetitive mergers, consolidations and acquisitions in Indonesia
Indonesia's Prohibition of Monopolistic Practices and Unfair Business Competition Law (the Antimonopoly Law) came into force in 1999. Although the Antimonopoly Law contains a number of basic provisions prohibiting anticompetitive mergers, consolidations and acquisitions, there has been a long lingering absence of implementing regulations determining what mergers, consolidations and acquisitions should, prima facie, be notified to the Indonesian antitrust watchdog, the Business Competition Supervisory Commission or Komisi Pengawas Persaingan Usaha (KPPU) for review. Antitrust merger control is seldom encountered in Indonesia because of the lack of these implementing rules. This void may soon be filled as the Indonesian government is considering introducing measures aimed at fleshing out its antitrust merger control regime. Once passed into law, these implementing regulations should give the KPPU more teeth to review potentially anticompetitive transactions as well as provide more certainty to parties pursuing a substantial or sensitive transaction involving entities established and domiciled in Indonesia or conducting business activities in Indonesia.
The Antimonopoly Law applies to any individual or business entity (incorporated or unincorporated) established and domiciled or conducting activities within the jurisdiction of Indonesia, either independently or jointly based on agreement. The Antimonopoly Law encompasses both private and public companies.
Article 28(1) of the Antimonopoly Law contains a general prohibition against mergers and consolidations resulting in monopolistic practices or unfair business competition. Acquisitions, on the other hand, are prohibited under article 28(2) if such action may result in monopolistic practices or unfair business competition. The wording of these provisions indicates a subtle differentiation between mergers and acquisitions. It appears that acquisitions will be prohibited if they have the potential to or may have anticompetitive effects, whereas mergers will be prohibited if they will result in monopolistic practices or unfair business competition. The rationale behind this distinction is not altogether clear given that mergers generally occur between entities operating in the same market, which would seem more likely to give rise to a greater risk of anticompetitive conduct.
The Antimonopoly Law defines the terms 'monopolistic practices' and 'unfair business competition'. Monopolistic practices are defined as 'the centralisation of economic power by one or more business actors, resulting in the control of the production or the marketing of certain goods or services thus resulting in unfair business competition and potentially harmful to the interests of the public'. The term 'centralisation of economic power' is defined as meaning the 'actual control of a market by one or more business actors, enabling that business actor or those business actors to determine the prices of goods and services', while 'unfair business competition' is defined to mean competition among business actors in conducting activities for the production or marketing of goods or services in an unfair or unlawful or anticompetitive manner.
As a result, a merger or acquisition may breach the Antimonopoly Law if it fails one of two tests. The first is whether there is a resulting or potentially resulting 'monopolistic practice'. That is, if a transaction passes actual control of a particular market segment (being the production or marketing of certain goods or services) to the merged entity or acquirer, and the merged entity or business actors involved are able to determine the prices of goods or services in that market (ie, pricing power), then the transaction will be considered to result in unfair business competition and be potentially harmful to the public interest, hence constituting a monopolistic practice. As a result, a 'monopolistic practice' is deemed under the law to be 'unfair business competition'.
The second test is whether 'unfair business competition' results or may result from the transaction. As described above, 'unfair business competition' is a very general concept and subject to interpretation. The terms 'unfair', 'unlawful' and 'anticompetitive' are arguably references to the prohibited conduct stipulated in the
Antimonopoly Law; however, as the definition does not refer back to the legislation, there remains scope for these terms to be determined on a case-by-case basis.
Threshold notification tests
Article 29(1) of the Antimonopoly Law states that the KPPU must be notified within 30 days of mergers, consolidations or acquisitions (of the type referred to in article 28) with an asset value or sales value (or both) exceeding a certain amount. Article 29(2) states that provisions regarding the determination of the asset value and the selling price along with the procedure for giving notice will be specified in government regulations. For 10 years no such regulations have been forthcoming, although it now appears that lawmakers are endeavoring to formulate these thresholds and notification procedures.
Based on media reports in December 2008, the thresholds currently being proposed are:
- 1 trillion rupiah (US$100 million based on an exchange rate of US$1: 10,000 rupiah) with respect to the asset value of the merged entity or acquired entity and its acquirer; and
- 2.5 trillion rupiah (US$250 million) with respect to the sales value of the target.
Article 29(1) requires notification of a merger, consolidation or acquisition to KPPU if:
- one or both of the thresholds is exceeded; and
- the transaction is of the type 'intended' by articles 28(1) or (2).
As a result:
- transactions that fall below the stipulated thresholds will not need notifying even though they may still fall foul of the general prohibition; and
- notification to the KPPU will not be required simply because the thresholds (once confirmed) are met; rather the transaction must also result in or have the potential to result in a monopolistic practice or unfair business competition.
Although the KPPU has a duty (under article 35©) to evaluate the existence or non-existence of the misuse of a dominant position that may result in monopolistic practices or unfair business competition as specified in article 28, it currently has no authority to carry out an advance review of any mergers or acquisitions, nor does it need to be notified of mergers or acquisitions until such time as the implementing regulations confirming the thresholds are passed. The inability of the KPPU to undertake an advance review of transactions that may give rise to antitrust issues is a significant weakness. Not only is the KPPU only required to be informed after the consummation of the transaction, no clear guidance is given as to how long the KPPU has to consider the transaction and determine whether it approves it or wishes to modify or retroactively cancel it.
Based on media reports, the KPPU has proposed an advance notification procedure for transactions falling within article 29, which would be a considerable improvement on the current notification framework.
Investors should also pay close attention to the restriction on industry cross-ownership contained in article 27 of the Antimonopoly Law. This provision prevents business actors from owning majority shares in several similar companies conducting business activities in the same market or establishing several companies with the same business activities in the same market if such ownership causes:
- one business actor or a group of business actors to control over 50 per cent of the market of a certain type of good or service; or
- two or three business actors or a group of business actors to control over 75 per cent of the market of a certain type of good or service.
Article 27 appears as a far more potent antitrust provision than the specific antitrust merger control provisions contained in articles 28 and 29, primarily because its prohibition is based on a strict objective market share test without being subject to the monopolistic practice or unfair business competition pre-requisites that apply to mergers and acquisitions under articles 28 and 29.
There is little practical guidance on the application of the antitrust merger control provisions (primarily, as discussed above, because of the absence of implementing rules). The prohibitions were, however, enforced by the KPPU in 2007 when it took action over Temasek's indirect acquisition of a 41.9 per cent stake in PT Indosat, Tbk (Indosat). Temasek already held a 35 per cent stake in PT Telekomunikasi Selular, Tbk (Telkomsel), another of Indonesia's large mobile telecommunications providers. Temasek's stakes were held indirectly through subsidiaries, with shares in Indosat held by its 100 per cent subsidiary Singapore Technologies Telemedia (ST Telemedia) and shares in Telkomsel held by Singapore Telecommunication Ltd (Sing Tel) 54 per cent owned by Temasek. The KPPU took the view that Temasek's indirect shareholdings, along with its ability to facilitate the appointment of directors and commissioners to each company, was sufficient to establish that Temasek had control over both companies and, therefore, the power to influence and direct the strategies and business policies of Indosat and Telkomsel. Its acquisition of substantial (majority) stakes in both Indosat and Telkomsel, and at the same time obtaining control over each of them, meant that Temasek controlled over 88 per cent of the Indonesian mobile telecommunications market, thereby exceeding the 50 per cent threshold specified in article 27(a). Further, by acquiring more than 80 per cent of the market share, Temasek's acquisition was considered to be a monopolistic practice as it passed to Temasek actual control of the mobile telecommunications market and with it the ability to determine prices. Temasek's appeals to the Central Jakarta district court and the Indonesian Supreme Court were both dismissed.
The decisions of the KPPU and the Indonesian courts have been the subject of much public comment. The merits and reasoning of the decisions have been challenged by Temasek (which is considering taking the matter to international arbitration) and academics on a number of grounds. Several of the key objections are as follows:
- the KPPU determined that the Temasek Business Group was the 'business actor' for the purposes of article 27. According to the KPPU, the Temasek Business Group comprises Temasek and its subsidiaries, which form a single economic entity owning shares in Telkomsel and Indosat. Temasek argued that there is no such thing as the Temasek Business Group, Temasek's subsidiaries operate independently from Temasek and were in no way controlled by Temasek, and as a result the singular 'Temasek Business Group' entity was a flawed concept;
- the Indonesian government had previously acknowledged in a 2003 white paper that ST Telemedia's stake in Indosat and SingTel's stake in Telkomsel were not more than 50 per cent and, therefore, not majority shares. The KPPU, however, took the view that the term 'majority shares' under article 27 meant 'control' over the relevant operator. Based on that definition, the KPPU alleged that Temasek (through its subsidiaries) had control over Indosat and Telkomsel, and therefore owned 'majority shares' in the two companies, reasoning that deviates significantly from the wording of the legislation;
- it was questionable whether Temasek had 'control' over either or both of Indosat or Telkomsel to the extent that it could be said to control 50 per cent of the mobile telecommunications market. In terms of share ownership, the Indonesian government, through 51 per cent-owned PT Telkom, held a 65 per cent stake in Telkomsel along with a 14.3 per cent interest in Indosat (which included special shareholder powers including veto rights). In terms of control at board level, the boards of Indosat and Telkomsel included representatives of the Indonesian government and many prominent Indonesian businessmen. Temasek's view was that control over the two operators (in particular, Telkomsel) was more likely held by the Indonesian government which, in addition to its shareholdings, could appoint the majority of Indosat's directors, including the president director, and nominate the majority of Telkomsel's directors and commissioners; and
- Temasek asserted that there was no evidence of any control of the mobile telecommunications market causing any anticompetitive conduct among market operators.
Powers of the KPPU
The Antimonopoly Law gives the KPPU a wide-ranging authority to investigate anticompetitive conduct and to impose sanctions on parties breaching the Antimonopoly Law. Those most relevant in a mergers and acquisitions context are the ability to:
- research the possible existence of business activities or actions that may result in monopolistic practices or unfair business competition;
- conduct investigations and hearings on allegations of cases of monopolistic practices and unfair business competition reported by the public or by business actors or discovered by the KPPU as part of its research;
- make conclusions regarding the results of its investigations or hearings as to the existence of monopolistic practices or unfair business competition;
- summon business actors suspected of having breached the law as well as witnesses and expert witnesses;
- make and announce decisions to business actors suspected of having engaged in monopolistic practices or unfair business competition; and
- impose administrative sanctions, which in the context of mergers and acquisitions may involve:
- issuing orders to business actors to stop activities proven to have been causing monopolistic practices, unfair business competition or being harmful to society;
- ordering the cancellation of mergers, consolidations or acquisitions that breach article 28; and
- imposing administrative fines of a minimum of 1 billion rupiah up to a maximum of 25 billion rupiah (although criminal sanctions may be as high as 100 billion rupiah).
Other relevant laws
All mergers must be documented in a deed of merger made before a notary in the Indonesian language. Depending on the extent of changes to the continuing company's articles of association, the Law Concerning Limited Liability Companies (No. 40 of 2007) (the Company Law) requires the articles of association of such merging or consolidating entities to be either notified to or approved by the minister of law and human rights (the minister). Ministerial approval is required if the changes involve:
- the company's name or domicile;
- the company's purpose and objective and business activities;
- the company's period of incorporation;
- the amount of authorised capital;
- a reduction in the subscribed and paid up capital; or
- a change in the company's status from private to public or vice versa.
Acquisitions subject to the Company Law are only those which cause the 'control' of the company to pass to the acquirer. As the Company Law does not define what constitutes control, its meaning needs to be looked at in context. In a capital markets context, control is considered to occur once the acquirer's interest exceeds 50 per cent. More generally, 'control' is regarded as either the direct or indirect ability to control the composition of the company's board of directors and board of commissioners or to be able to amend the company's articles of association.
Acquisitions of shares directly from shareholders must be documented in a deed of acquisition made before a notary in the Indonesian language. As with mergers, ministerial approval will apply if the acquired company's articles of association involve amendments to any of the matters described above.
The minister is not authorised to approve or reject a merger, consolidation or acquisition. Instead, the minister's authority extends solely to approving or rejecting alterations to the merged or acquired company's articles of association and the minister does not have the right to 'reject' a proposed merger, consolidation or acquisition unless:
- the amendment to the articles of association does not comply with procedural rules concerning the method in which articles of association are amended;
- the merged or acquired company's articles of association violate applicable laws, public order or morality; or
- the amendment is objected to by the creditors on the basis of a general meeting of shareholders' decision to reduce the company's capital.
Mergers, consolidations and acquisitions which result in a change in control must be published in at least one daily, nationally circulated Indonesian newspaper, and announced to the target company's employees, at least 30 days before the general meeting of shareholders of the target company to approve the merger, consolidation or acquisition is held.
Foreign investment restrictions
While Indonesia operates a relatively liberal foreign investment regime, there remain industries that are either closed to foreign investment or subject to foreign ownership restrictions as referred to in Indonesia's Investment Law (No. 25 of 2007) (the Investment Law) and specified in detail in the Regulation of the President of Indonesia Concerning the List of Closed and Restricted Businesses in the Investment Sector (No. 111 of 2007) (the Negative List). For a foreign investor contemplating a direct equity acquisition in Indonesia, the first step should be to determine whether or not the target company operates in an industry on the Negative List.
If the merger or acquisition involves a foreign investor or a foreign investment company as the acquirer, then the approval of the transaction by the Capital Investment Coordinating Board (Badan Koordinasi Penanaman Modal (BKPM)) is required to convert the acquired or merged company into a foreign invested company (penanaman modal asing (PMA)). Additional government approvals may also be required depending on the industry involved. For example, a merger, consolidation or acquisition of an Indonesian bank requires the prior approval of the Bank of Indonesia.
Capital markets regulations
If the target is a company listed on the Indonesia stock exchange, then Indonesia's capital market laws and regulations will apply to any takeover of a public company.
In June 2008, Indonesia's capital market laws regarding takeovers were revised to limit acquisitions of publicly listed companies to 80 per cent of the listed company's paid up capital, irrespective of whether the industry in which that company operates permits a foreign investor to acquire an interest in excess of 80 per cent. If the free float of a listed firm falls below 20 per cent after a tender (takeover) offer, the buyer must sell shares to ensure that there is at least a 20 per cent market float within two years. According to Bapepam (Indonesia's capital market regulator) the rationale for not permitting listed firms to privatise is to ensure quality companies remain listed on Indonesia's stock exchange.
An investor that reaches a 50 per cent shareholding (prior to 30 June 2008 this threshold was 25 per cent) in a listed company must make a takeover offer for the remaining shares in the target company subject to any industry specific approvals and the 80 per cent shareholding cap.
A frequently debated issue in Indonesia is whether the Investment Law applies to foreign acquisitions of publicly listed companies, especially those listed companies which hold direct interests in domestic companies operating in areas closed or restricted to foreign investors. The doubt arises because it is generally understood that Indonesian law treats listed companies as domestic Indonesian companies and not PMAs. This is the case irrespective of the level of foreign ownership. As a result, listed companies investing in closed or restricted foreign investment industries are not considered to be subject to the Investment Law, thereby enabling foreign investors to take stakes in listed companies as a means of circumventing the 'direct' foreign investment restrictions contained in the Investment Law. Nevertheless, adopting this approach carries substantial risk. In 2008, considerable doubt was cast on the validity of taking this approach when Qatar Telecom (Qtel), intending to acquire a 85.7 per cent stake in the listed PT Indosat, Tbk, ended up with 65 per cent despite Qtel's view that the Investment Law should not apply as it was investing in a listed company. The BKPM rejected Qtel's argument and applied the Investment Law to the acquisition, although it did ultimately allow Qtel to take a 65 per cent stake in a dual fixed line and mobile telecommunications operator despite foreign investment in fixed line telecommunications companies being limited to 49 per cent (foreign investment in mobile phone operators is limited to 65 per cent). The BKPM chose on this occasion not to follow the general rule of the Investment Law, which is that if a company engages in two lines of business that have differing foreign ownership limitations, the applicable foreign ownership limit is to be the lower of the two.
While containing similar principles, restrictions and prohibitions regarding anticompetitive conduct as exist in other jurisdictions, Indonesia's antitrust merger control regime could be improved. In particular, it could:
- permit the KPPU to play a greater role;
- impose clearly defined thresholds for transactions requiring KPPU notification; and
- prescribe a comprehensive pre-merger notification process.
It is hoped that future regulations will incorporate these improvements, which should result in an appropriate level of regulatory supervision and more visibility and certainty for parties proceeding with mergers, consolidations and acquisitions in Indonesia.