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M&A in Indonesia – Procedures & Opportunities

By Mohamed Idwan Ganie
Posted: 26th June 2013 08:45
Indonesia’s substantial population, whose prosperity is steadily increasing, and ample natural resources have proven to be an attractive business environment for investment.  At a time of turmoil in more developed markets Indonesia presents a potentially more appealing proposition than some of its peers – an economy driven by growing domestic demand rather than exports, with a domestic resource base, and a market that is growing organically rather than due to government policies.
Combined with substantial market opportunities presented by a wide range of sectors that have yet to be developed, including even basics such as agriculture, there is ample room for continued business growth in the years and decades to come.
Legislative M&A Framework
Indonesia’s principal legislative framework applicable to M&A activities consists of the Company Law, the Investment Law, the Capital Market Law for public companies, and the Antitrust Law.  The Company Law provides well-defined procedures for conducting an M&A deal that have to be followed from before the transaction takes place, and is further implemented by a series of Government Regulations, some of them sector specific, as in the case for banks.  The Investment Law is principally of note for M&A deals involving foreign parties, and is further implemented by Presidential and other regulations that set out certain foreign ownership limits and procedures that have to be followed.  The Capital Market Law, and a wide range of regulations issued by the capital market regulatory body, set out a range of rules and procedures that apply to M&A of public companies.  Finally, the Anti-Trust Law, and its implementing regulations that are issued by the specialised regulatory body (KPPU), apply to M&A deals above certain thresholds, requiring notification and prohibiting certain deals from taking place.
Furthermore, certain sectors, such as banks and other financial service businesses, are typically regulated in relation to M&A by specific laws and their respective regulatory bodies, with certain industry-specific procedures and requirements that have to be followed in the course of any deal.  It should also be noted that Indonesia’s uniquely labour-friendly legislative regime should be considered in relation to any existing employment and labour union relationships before executing an M&A transaction.
Of particular note at this time is a recent legislative change that attempted to subject public companies to foreign ownership restrictions that have previously only been applied to non-public companies.  This is a very recent change from early 2013, and as such there remains a level of uncertainty that should be carefully evaluated, and consulted with the authorities, prior to structuring any M&A transaction that may be subject to its applicability.
M&A Challenges & Opportunities
As in any business venture in Indonesia, it is important to be mindful, and adequately plan for, at times opaque legislation and an excessive bureaucracy that operates much slower than regulated and often acts in an arbitrary manner.  The transactions should also be structured with a view of ensuring enforcement, and having a workable plan for dispute resolution.  Particularly in view of certain aspects of corruption that affect private sector relationships, due to the increased uncertainty caused by being unable to rely on the judiciary to be competent and impartial in the settlement of disputes.
In light of such challenges, one of our firm’s unique selling points is the combination of our long-standing commercial law practice and our premier litigation department that has extensive experience in dealing with commercial disputes in the context of arbitration and alternative dispute resolution as well as litigation in the Indonesian courts.  This allows our corporate transaction departments to benefit from such litigation experience, and from their own compliance work, to ensure that any transactions handled by our firm are carried out with a view to the potential for future disputes and any existing risks.
Due diligence is critical in any Indonesian commercial transaction, and particularly so in M&A deals.  It is important to thoroughly verify the company paperwork, ownership, and particularly licenses, and to become comfortable with the selling parties, any remaining investors, and any existing business partners of the target entity.
In dealing with the Indonesian bureaucracy it is important to note that corrupt practices have adapted and transformed in recent times, with a shift to rent-seeking behavior rather than payment for obtaining an advantage.  Which in turn makes business operations more susceptible to disruption unless the bureaucracy is navigated with a view of potential risks and a realistic view of timelines.  This requires companies, particularly those who are subject to extraterritorial anti-corruption legislation, to take a much longer-term strategic view rather than merely having a reactive approach.
Nonetheless, there are very lucrative M&A opportunities that span the full range on Indonesian business sectors.  Not least due to a professionalisation of Indonesian businesses in general, and particularly due to a trend of previously individual or family-owned businesses undergoing transformations as they and the surrounding market grow and change.
Specifically, the natural resources sector presents certain opportunities, having become a common target of populist legislative policies.  And combined with the effects of varying world demand for commodities, companies in the sector often come under pressure as the surrounding conditions undergo at times dramatic change.  A number of such recent policy changes, with the foreign ownership restrictions and the domestic processing obligations for minerals, have raised operational and financial issues for a number of companies, but at the same time have also presented certain opportunities in the market.
Similarly, in the financial services sector there have been a number of policy changes, a trend that is expected to continue with new Banking and Insurance laws currently being drafted.  A number of such recent policy changes, including ownership restrictions and new financial health regulations, should therefore be carefully monitored, particularly since further policy changes can be expected around the time of the 2014 election.  As a result there will be a certain amount of consolidation of the smaller players, as the more stringent financial health requirements begin to come into force.
Other sectors that have seen changes due to new and revised legislation include franchises, importers, and a wide range of producers (due to the issuance of a large number of Indonesian National Standards (SNI) that have to be complied with).  While challenging for certain businesses, such legislative change also spurs on previously content businesses to become more active and seek new business partners, acquirers, or other business arrangements in order to survive in the highly dynamic, both in terms of legislation and market development, Indonesian business environment.
Mohamed Idwan (‘Kiki’) Ganie is the Managing Partner of Lubis Ganie Surowidjojo (LGS).  He graduated from the Faculty of Law of the University of Indonesia and holds a PhD in Law from the University of Hamburg, Germany.  Dr. Ganie has more than 30 years of legal experience, and specialises in commercial transactions and commercial litigation, including alternative dispute resolution and has acted as an expert in a number court and arbitration proceedings.  His expertise covers general corporate/company law, banking law, finance, bankruptcy and restructuring, mining, investment, acquisitions, infrastructure projects/project finance, antitrust, and shipping/aviation, with a particular focus on corporate governance and compliance.
Mr. Ganie can be contacted via phone on +62 21 831 5005 or alternatively via email at

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