Anatomy of M&A transactions from an Indonesian law perspective

July 2024  |  SPECIAL REPORT: MERGERS & ACQUISITIONS

Financier Worldwide Magazine

July 2024 Issue

This article will discuss general issues for an M&A transaction roadmap in Indonesia, including: (i) managing transactional risk; (ii) due diligence; (iii) tax-efficient planning; (iv) financing options; and (v) merger filings and notifications to the Indonesian Competition Authority (KPPU).

Managing transactional risk

Navigating M&A transactions which are normally not a risk-free exercise requires considerable preparation. The risks companies can face include price volatility of the listed shares, a dispute arising out of a collapsed deal, defaulting sellers, an unexpected tax burden upon exit, or post-closing intervention from a third party or mandatory general offer.

To manage such risks, investors should not only ensure a proper deal structure is put in place, but also decide upon the necessary investment vehicles and the nature of target combination (i.e. assets, debt, equity or a combination). In addition, they should hold courtesy discussions with the relevant authorities and industry associations. Also important is putting in place adequate mechanisms to manage uncertainties in the future, such as the precise timing of public disclosure, a locked box mechanism, an earn out mechanism and locking the ultimate beneficial owner (UBO) of the seller and the key target’s personnel.

Due diligence as a defensive and negotiation strategy

Due diligence will help acquirers to determine whether the target is worth acquiring. It will involve financial, tax, technical and legal aspects. It will identify any issues that may arise but will also present potential mitigation options which can be reflected in the transaction documents such as undertaking, negative covenants, conditions precedent and indemnities.

Purchasers may also consider structuring a payment mechanism in the form of an earn out payment arrangement or escrow account or guarantees. If any major issues are discovered during the due diligence process, investors are likely to pull out of the transaction.

Tax-efficient planning

Prior to entering a transaction, an investor should determine the most efficient tax plan for receiving the dividend payment or for when they exit the investment. A key structure is to choose the jurisdiction of the investee and the beneficial owner wisely for the lowest corporate tax rate according to the applicable tax treaty. Structures typically favoured by investors are a combination of new shares and existing shares, hybrid instrument disposal, indirect transfer, technical listings and carve outs. Indonesia also has regulations regarding the utilisation of book value for carrying out internal restructurings, such as demergers, mergers, spin offs and so on, and exemption to local taxpayers’ dividends if the dividend is reinvested in Indonesia.

Financing options

In general, there is no restriction on funding an M&A transaction in Indonesia with loans, unless the target company is involved in certain industries. Therefore, it is quite common for investors to enter into an acquisition financing agreement with lenders to finance the cost of the transaction. In this case, the investor would pledge its shares to the lender as security under the loan. If the target’s shares are listed, the investor may also consider a repurchase option transaction.

In addition to financing options from a third party, the UBO of the acquirer may also play a role by putting a cash deposit in the bank lending to the acquirer or the ultimate financier signing sub-participation arrangement documentations with the lender.

It is also quite common to offer the seller the new shares to be issued by the acquirer as part of the payment. The acquirer may also participate in the seller’s carve-out process by merging the transferred assets with the acquirer’s company or special purpose vehicle.

Regulatory issues

When carrying out an M&A transaction in Indonesia, investors must consider specific laws and regulations set out by the Indonesian government, including the ‘positive list’ regulations, merger filing requirements and other post-closing obligations.

Positive list. In the past, Indonesia relied on the ‘negative list’ to stipulate around 345 lines of business that are either closed or conditionally open to foreign investment. In line with the spirit of the Omnibus Law, the government changed this list into a positive list in 2021, which contains considerably fewer lines of business declared closed to foreign investment. The positive list also regulates certain prioritised lines of business benefitting from fiscal incentives in the form of tax holidays, tax allowances, investment allowances and customs incentives, as well as non-fiscal incentives in the form of relaxed licensing procedures, support for infrastructure procurement, as well as immigration and manpower matters. Checking the positive list is the most important step for foreign investors before deciding on an M&A transaction in Indonesia, to ensure there are no obstacles to the investment.

Merger filings. Notification to the KPPU of an M&A transaction is only mandatory when the transaction is not conducted between affiliated companies and the value of assets or the sales value of the companies involved exceeds a certain amount – for instance, if the combined worldwide assets of the parties to the transaction exceed approximately $172m, or if the combined national turnover (revenue) of the parties to the transaction exceeds approximately $343m, or if the combined worldwide assets exceed approximately $1.3bn and the parties are banking institutions. If the abovementioned thresholds are met, then the transaction must be reported to KPPU within 30 days of its effective date. The merger control guidelines state that the entities obliged to file the merger notification are: (i) the surviving undertaking of a merger; (ii) an undertaking resulting from consolidation; (iii) an undertaking that acquires shares; or (iv) an undertaking that acquires assets. Failing to comply with this requirement may result in a minimum fine of approximately $70,000, which will be considered the base amount of the sanction.

Other post-closing obligations. There are certain typical obligations which must be fulfilled after an acquirer has taken over the target. Those include a general offer by the new controlling shareholder in a publicly listed company acquisition, repayment of tax and customs facilities for certain asset acquisitions, payment of severances to certain employees, checks on new key personnel by certain authorities, and making notifications to certain third parties.

 

Freddy Karyadi is a partner at Protemus Capital. He can be contacted on +62 818 103 949 or by email freddy.karyadi@protemus.id.

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Freddy Karyadi

Protemus Capital

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