Indonesian Company Law

Soonpeel Edgar Chang

• Editore: Routledge
• Anno: 2018
• ISBN:
  9780429994395
• Edizione: 1
• Argomento: Diritto
• Categoria: Diritto societario

In modern countries, a company is commonly categorized as either public or privately-held, depending on whether securities are publicly traded on the open market, into a government-owned company or private company depending on government ownership, or a financial company or non-financial company depending on its main business, and so on. Of course, these categories are generally used in Indonesia as well. A unique aspect in Indonesia is that a well-settled legal practice mainly uses a dichotomy of company types that is rarely popular in foreign countries: a company with foreign direct investment (penanaman modal asing, or PMA) or company with 100% domestic direct investment (penanaman modal dalam negeri, or PMDN). Government plans concerning how to differently regulate these companies frequently becomes a national issue, as it is one of the main standards to evaluate how effectively and willingly the Indonesian government develops its economic policies. Laws, regulations, and actual legal practice also treat the two types of companies differently, based on whether a company has a foreign shareholder. Although many foreign countries are also equipped with similar regulations over companies with foreign direct investment, Indonesia distinctively applies this dichotomy for much wider uses for several reasons.

This book is designed to assist students, practitioners, and researchers with clear and comprehensive treatment of key concepts in Indonesian company law. Significant business, economic, and policy issues are highlighted together with a thorough analysis of the important statutory provisions and cases used in the study of Indonesian company law. The book includes the major theoretical approaches used in current company law literature and statutory issues are covered under both the 2007 Indonesian Company Act and the 2007 Indonesian Capital Investment Act. The book will be an essential reference for investors and businesses contemplating entering the Indonesian Market.

1
Introduction

1. A dichotomy of company types: PMA and PMDN

In the vast majority of modern countries, a company is commonly categorized as either a public company or privately held company, depending on whether its securities are publicly traded on the open market; a government-owned company or private company, depending on government ownership; or a financial company or non-financial company, depending on its main business; and so on. Of course, these categorizations are generally used in Indonesia as well.

Unique to Indonesia, however, is a well-settled legal practice which distinguishes between companies with foreign direct investment (penanaman modal asing, or PMA) or companies with 100 percent domestic direct investment (penanaman modal dalam negeri, or PMDN). Government proposals concerning how to differently regulate these companies frequently become a national issue, as they are one of the main standards to evaluate how effectively and willingly the Indonesian government develops its economic policies. Not only that, but laws, regulations, and actual legal practice also treat the two types of companies differently. Although many foreign countries are also equipped with similar regulations of companies with foreign direct investment, for several reasons, Indonesia distinctively applies this dichotomy in many more situations.

The first reason is because of the historical catastrophes affecting the national economy in 1997 and 1998, which saw massive withdrawals of foreign investment. Indonesia has the lowest foreign inbound investment among the Association of Southeast Asian Nations (ASEAN) countries after the Asian economic crisis of 1997–1998, collapsing from its previous rank of 5th.¹ This was the only net outflow among ASEAN countries.² Employees who did not receive their full retirement allowance from withdrawing foreign companies violently protested, and by cutting off work to Indonesian companies, foreign project holders triggered a series of harsh demonstrations by Indonesian laborers. The notorious May 1998 riots of Indonesia, known as the 1998 Tragedy, brought on the resignation of President Suharto and the fall of the New Order government. Under these circumstances, the government, legislature, and public workers bitterly perceived the need for encouraging foreign investment as a more stable source of foreign capital than regular short-term financial investment.³ Naturally, this scathing historical lesson resulted in a political climate that stressed foreign direct investment in the private sector. The 2007 Capital Investment Act (UU No.25 Tahun 2007 tentang Penanaman Modal) that defines and governs PMAs and PMDNs, directly mentions that its legal authority is the Decree of the People’s Consultative Assembly concerning Economic Policy in the Context of Economic Democracy, which was legislated in 1998 as a result of these events.

The second reason is very ironic. As a world treasure trove of natural wildlife, Indonesia also has a history of ineffectively regulating foreign investment, bringing up substantial external diseconomies, particularly environmental exploitation, pollution, and negative impacts on indigenous people.⁴ Due to the geographic and physiographic setting of Indonesia, the importance of environmental protection, particularly against damage caused by alien or foreign capital, has become an issue that cannot be emphasized enough. The 2007 Capital Investment Act sets forth the principle of environmentally sound investment (Article 3 Paragraph 1 Subsection h) and requires corporate social responsibility from every direct investor (Article 15). Interestingly enough, even the 2007 Company Act explicitly mandates a company conducting business related to natural resources must implement social and environmental responsibility policies under Article 74. Although corporate self-regulation and guidance standards on social responsibility, such as ISO 26000, recently began mandating social responsibility for corporations, it is still not very common to see a modern Company Act explicitly and mandatorily require corporate social responsibility.⁵

Lastly, Indonesia is also very well aware that generous treatment in favor of PMA companies may have negative impacts on its own development. Since independence in 1945, policies towards the private sector have often been influenced by considerations to promote the development of indigenous (pribumi) Indonesian entrepreneurship. These policies involved affirmative policies to promote pribumi entrepreneurship by restricting, and occasionally even banning, the economic activities of ethnic Chinese.⁶ Even today, to upgrade its main economic engine from primary industry to secondary and tertiary industry, Indonesia still feels it needs to foster domestic business and guard its own small and middle-sized enterprises (SME) against foreign attempts to target the Indonesian market, or from “vulture capitalists” backed by giant funds. Article 13 of the 2007 Company Act also explicitly stipulates that the Government must establish business sectors that are reserved for SMEs, and guide and enhance its SMEs. This motive for industrial protectionism is directly contrary to the interests of encouraging the aforementioned foreign direct investment.

Yet this is not just a story of Indonesia. Professor Ha-joon Chang of Cambridge University indicates that all of today’s rich countries use tariffs, subsidies, licensing, regulation, and other policy measures to promote particular industries over others, with considerable degrees of success. And, in the second half of the twentieth century, the governments of countries such as France, Finland, Norway, and Austria shaped and directed industrial development with great success through protection, subsidies and investments by state-owned enterprises.⁷ Asian countries are no different. South Korea completely restricts foreign direct investment in more than 60 business fields, and it limits foreign direct investment from dozens more business fields through the Foreign Investment Promotion Act and its enforcement decree.⁸ Japan also maintains market entry barriers for protection of its own corporations.⁹ Given that even these developed countries, already armed with their own behemoth corporations, are taking advantage of industrial protectionism, Indonesia seems to have good reason to differentiate between PMA companies and PMDN companies.

The 2007 Capital Investment Act and its enforcement regulations reflected strong demands to attract foreign investment and deep concerns over its side effects. Here, capital investment does not mean financial investment in the capital market, but instead direct investment in a business entity, such as a cash contribution for share subscription. Indeed, this Act and its regulations directly govern the practice of establishment, operation, change and dissolution of a company.

With this background, the Indonesian regulatory system governing privately held companies is largely divided across the 2007 Company Act (and related regulations) and the 2007 Capital Investment Act (and its related regulations). While the latter also governs purely native PMDN companies,¹⁰ it has greater influence over PMA companies with foreign shareholders. Therefore, both academic discussion and legal practice regarding Indonesian companies require a thorough understanding of the 2007 Capital Investment Act. For these reasons, this book explains the Capital Investment Act in the wake of the Company Act.

2. A brief history of Indonesian company law

The origin of perseroan terbatas (PT) is a European company model that stems from the beginning of the nineteenth century. The sparse 20 articles (Articles 36–56) of the initial Indonesian Commercial Act of 1847,¹¹ better known as the Dutch East-Indies Commercial Code, introduced the initial company model with shareholder’s limited liability, naamloze vennootschap. The term naamloze vennootschap originates from the French term société anonyme, which literally means anonymous society.

Thus, Indonesian company law has roots in French law via Dutch law, as the initial Indonesian Commercial Act was simply an Indonesian version of the Netherlands’ Commercial Act of 1838, which itself had been developed from French Commercial Code of 1809, part of the Napoleonic Code. This initial company model, separating management from ownership, was innovative from a historical perspective, yet without a doubt was completely different from the corporate model widely used nowadays.¹²

After 1939, Indonesia began using the term joint stock company (maskapai andil) in the Ordinance of Indigenous Joint Stock Company.¹³ This type of company had a short lifespan, and had a restriction on its ability to own land. It was originally limited to Java and Madura, yet was little used in actual practice.¹⁴ Regardless, this dualism of having both the Commercial Code articles on the NV and joint stock companies continued until they were both superseded by the 1995 Company Act.

Although the Indonesian Commercial Code has been amended often since the country’s independence in 1945, it originally merely restated Dutch law and lacked substantial elements of contemporary corporation law including merger and acquisitions, liquidation, protection of minority shareholders, management responsibilities, etc. Naturally, the gaps between law and actual practice became substantial as time went by. Finally, Indonesia legislated a new superseding law, the preface of which declares:

The previous regulations regarding Limited Liability Companies, Wetboek van Koophandel, Statute 1847: 23, is no longer relevant to the development of economy and business area rapidly developing in an national and international level.

The term perseroan terbatas then began to be used. The new law was much more comprehensive than the old version and covered many of the conventions of modern corporate law, including rules on capital increase and decrease, and minority shareholder protections. Clearly, it was substantially influenced by the U.S. law, with aspects including mergers and acquisition, piercing the corporate veil, directors’ duties and business judgment rules, etc.¹⁵ Finally, by introducing new company laws in 2007 (the 2007 Company Act), Indonesia filled in some details missing from the previous law, adding laws regarding special shareholders’ meetings, creditor opposition against acquisition, additional director liabilities, the board of commissioner’s authority to temporarily dismiss a director, and others. Some unique features distinctive from company law in other countries were also introduced in the Shariah Supervisory Board (Dewan Pengawas Syariah) as an additional board for all Islamic businesses governed by shariah, and a mandatory corporate social responsibility requirement for companies engaged in natural resource exploitation. In the end, this new law is appraised as additionally adopting a rough sketch of contemporary corporation laws.

In sum, Indonesia transplanted the Dutch company model from the nineteenth century and finally adopted the modern civil law corporation model, with substantial influence from the U.S. law. Although some Dutch heritage may still be found, such as the use of the Board of Commissioners in Dutch style,¹⁶ the current PT is undeniably a corporation.

The Indonesian legal practice of translating PT as “limited liability company” often misleads foreigners from common law countries. In English legal terminology, Indonesia’s limited liability company is simply a corporation. A limited liability company in the United States normally means a private limited company that combines pass-through taxation of a partnership or sole proprietorship with limited liability, although it may have some variations depending on the state. Also, because PT literally means limited (terbatas) company (perseroan), and a literal translation of both the Korean yuhan huesa and Japanese yuugen kaisha also means limited company, PT also often misleads legal minds from South Korea or Japan.

Today’s PT is simply a corporation. To be more specific, it is a type of C-corporation since Indonesia does not recognize S-corporations. Nonetheless, this book mainly calls a PT a company, since actual Indonesian practice has already used the term limited liability company for more than two decades. For the same reason, PT Terbuka (or PT Tbk) is also called a public company.

As this book mainly analyzes and studies the 2007 Company Act, the articles and paragraphs referred to without mentioning specific laws are from the 2007 Company Act.

Notes

1 Indonesia recorded US$2.985 billion of inflow in annual averages from 1991 to 1996 and US$1.296 billion outflow from 1998 to 2002. The latter is the only case of withdrawals of investment outweighing inflow of inbound investment among ASEAN countries. For details, see United Nations Conference on Trade and Development, World Investment Report, New York and Geneva, 2003, p. 251.

2 The contrast between on the one hand, Indonesia, and on the other Thailand and South Korea, the two other East Asian countries most severely affected by the Asian economic crisis, is evident. The latter two countries never experienced net foreign direct investment outflows in any one year after the crisis. Hence, Indonesia endured the worst experiences of any large country in the East Asian region during the post-Asian economic crisis period. Thee Kian Wie, Policies for Private Sector Development in Indonesia, ADB Institute Discussion Paper No. 46, March 2006, p. 21.

3 After this sharp history lesson, Indonesia declared 2003 as the “Indonesia Inve...

Indice dei contenuti

• Cover
• Title
• Copyright
• Contents
• List of figures and tables
• Preface
• Acknowledgements
• 1 Introduction
• 2 Establishment of a company
• 3 PMA specifics
• 4 Shares
• 5 Shareholders’ meeting
• 6 Board of directors and board of commissioners
• 7 Operation of the company
• 8 Material changes of company
• 9 Capital Investment Act
• Index