The 101 of M&A transactions in Indonesia

July 2022  |  SPECIAL REPORT: MERGERS & ACQUISITIONS

Financier Worldwide Magazine

July 2022 Issue

M&A is one of the most common means for investors to invest in a company. This article will discuss general issues for an M&A transaction roadmap in Indonesia, including: (i) the importance of due diligence; (ii) tax-efficient planning; (iii) financing options; and (iv) merger filings and notifications to the Indonesian Competition Authority (KPPU).

Importance of due diligence

Due diligence usually involves the legal, finance and tax matters of the target company, although some technical due diligence may also be required. The purpose of due diligence includes determining a suitable price for the target and if there are any potential issues with the proposed transaction, such as hidden defects or outstanding or contingent liabilities (which eventually relate to the value of the target).

In terms of legal due diligence in Indonesian M&A transactions, an investor usually requires full-blown due diligence covering corporate documents, licences, manpower, material agreements, assets, insurances, environmental compliance, litigation and court searches.

The result of due diligence provides not only a list of issues but also mitigation options which should be reflected in transaction documents, such as undertakings, conditions precedents and indemnities. For uncertainties which may cause downside or give unclear upside, the purchaser may consider structuring a payment mechanism in the form of earn out payment arrangement or escrow account. If anything major is discovered during the due diligence process, investors are likely to pull out of the transaction.

Efficient tax planning

A key consideration for investors before entering into an M&A transaction is to determine their tax exposure when they exit from the investment and when the return from the investee is repatriated. Investors would normally be concerned about the tax treatment for the dividend, interest and royalty payment, and the exit scheme. Investors should also consider the maximum tax treaty benefit that they will receive so that they can exit the investment with the lowest tax exposure. In between the investment and the exit, they should carefully choose the jurisdiction of the investee and the beneficial owner, so that they can get the lowest corporate tax rate according to the tax treaty.

In terms of tax treaty shopping, it should be noted that the Indonesian government has set the following rules to minimise tax treaty abuse. First, there must be economic substance in the establishment of an entity or carrying out a transaction. Second, there must be the same legal form and economic substance in the establishment of the entity carrying out a transaction. Finally, there needs to be evidence of sufficient assets, employees and active business aside from receiving dividends, interest or royalties from Indonesia.

It should also be noted that after the issuance of the Omnibus Law, the government provides an opportunity for dividends earned by local taxpayers to be non-taxable as long as they are reinvested in Indonesia. The government has also lowered the interest tax tariff to 10 percent – in line with the tax treaty’s rate for bond interest received by non-permanent foreign tax subjects.

From the selling side, the seller will also have capital gains tax concerns. Thus, it may consider various structures, including a combination of new shares and existing shares, hybrid instrument disposal, indirect transfers, technical listings or carve outs. There is also a regulation on using book value for internal restructuring (e.g., demerger, merger, spin-off, etc.) which may be available to the seller to do proper tax planning.

Financing options

Except for specific industries, there is no restriction for investors to fund the investment from a debt financing perspective. Thus, it is quite common for investors to fund the investment through debt finance. Common practice would then require the shares of the investors in the target company to be pledged to the lender.

In this case, the name of the lender must be recorded in the shareholder register of the company to perfect the pledge. If the target’s shares are listed, the repurchase option transaction may also be considered in certain transactions. The loan would then be transferred by the acquirer to the target company – thus the target company repays the loan.

The ultimate beneficial owner of the acquirer may also have a large role in the financing options by acting as: (i) a party putting a cash deposit in the bank that is the lender to the acquirer; and (ii) an ultimate financier signing sub-participation arrangement documentations with the lender.

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

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 value of sales of the companies involved in the transaction exceeds a certain amount, such as if the combined worldwide assets of the parties to the transaction exceeds IDR2.5 trillion (approximately $172m) or IDR20 trillion (approximately $1.3bn) for banking institutions, or, if the combined national turnover (revenue) of the parties exceeds IDR5 trillion (approximately $343m).

If the above thresholds are met, then the M&A transaction must be reported to the KPPU within 30 days of its effective date. Merger control guidelines state that undertakings that are obliged to file the merger notification are: (i) the surviving undertaking of a merger; (ii) an undertaking resulting from a consolidation; (iii) an undertaking that carries out an acquisition of shares; or (iv) an undertaking that acquires assets.

Failing to comply with this requirement may result in a minimum fine of IDR1bn (approximately $70,000) which will be considered as the base amount of the sanction. Furthermore, the maximum fines that can be imposed on violators are based on profit and revenue calculations, as outlined below.

First, a maximum of 50 percent of net profit earned by an undertaking in the relevant market during the period of the violation. Net profits are the amount earned by an undertaking after deducting taxes and levies as well as operating costs, as evidenced by a financial statement and some other supporting documents of the undertaking.

Second, a maximum of 10 percent of total revenues from the relevant market during the period of the violation. Revenues are the amount earned by an undertaking before deducting taxes and levies that are directly related to sales of goods and services in the relevant market. Regulation provides guidance that revenues will be calculated from, among others, financial statements, bank statements, sales volumes, market value, offer value and other supporting documents.

In determining sanctions, the KPPU will consider: (i) the negative impact caused by the violation; (ii) the duration of the violation; (iii) mitigating factors; (iv) aggravating factors; and (v) the ability of the undertaking to pay the fine in corelation with its ability to continue its business operation. If the undertaking does not plan to file an objection to the KPPU’s decision, it must pay the fine within 30 business days from when the undertaking receives notification of the decision from the KPPU.

Notwithstanding this, the KPPU may provide leniency to the undertaking on the payment, if requested by the convicted undertaking. This may involve a phased payment of the fine or an agreement to allow the undertaking to pay within a certain period, up to a maximum of 36 months.

The KPPU also provides an opportunity for M&A dealmakers to conduct a pre-consultation should the transaction prove to be complex, so that they will have time to evaluate the transaction and provide remedies to the KPPU if the KPPU if it believes that the transaction may potentially result in a monopoly or unfair business competition.

After reviewing submitted documents, the KPPU can issue an opinion that the transaction is not deemed to result in monopolistic practices or unhealthy business competition, or the contrary. Alternatively, if the transaction is deemed to result in monopolistic practices or unhealthy business competition, the KPPU may issue a conditional approval in the form of a notification statement, which requires the undertaking to accept certain behavioural or structural remedies.

Parties have 14 business days from receipt to accept or reject the conditional approval. If the conditional approval is accepted, the KPPU will begin supervising the implementation of remedies. If parties do not respond or refuse to accept the conditional approval, the KPPU can initiate an investigation on the basis that the transaction violates Indonesian competition law.

 

Freddy Karyadi is a partner and Anastasia Irawati is a senior associate at Ali Budiardjo Nugroho Reksodiputro (ABNR). Mr Karyadi can be contacted on +62 81 810 3949 or by email: fkaryadi@abnrlaw.com. Ms Irawati can be contacted on +62 21 250 5125 or by email: airawati@abnrlaw.com.

© Financier Worldwide

BY

Freddy Karyadi and Anastasia Irawati

Ali Budiardjo Nugroho Reksodiputro (ABNR)

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