Indonesia - OJK Issues Revised Rules On Affiliated Party And Conflict Of Interest Transactions By Public Companies.

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Indonesia - OJK Issues Revised Rules On Affiliated Party And Conflict Of Interest Transactions By Public Companies.

 

7 September 2020

 

Asia Pacific Legal Updates
 

A new OJK regulation broadens the definition of transactions that may be captured under affiliated party or conflict of interest requirements, introduces new requirements for internal procedures for affiliated party transactions, and broadens the scope of transactions that require independent shareholder approval.
 

Following the revised regulation on Material Transactions issued in April 2020 (Material Transaction Regulation), Indonesia’s financial services authority (Otoritas Jasa Keuangan or OJK) has issued a long-awaited revision to its regulation on affiliated party conflict of interest transactions – OJK Rule No. 42/POJK.04/2020 on Affiliated Party Transactions and Conflict of Interest Transactions (Regulation 42). The new regulation, which came into effect on 2 July 2020, replaces the 2009 Bapepam-LK Rule No. IX.E.I on the same subject (Rule IX.E.1). 
 

The key changes under Regulation 42, and their potential impact on public companies, are discussed below. These changes generally come into force on 21 October 2020.

 

AFFILIATED PARTY TRANSACTIONS
 

Broader Definition of Affiliated Party Transaction
 

Regulation 42 broadens the definition of affiliated party transaction to include activities and transactions conducted by a public company or controlled company (ie, a company directly or indirectly controlled by a public company) for the interest of any affiliates of the public company, members of its board of directors or board of commissioners, its substantial shareholder or controlling shareholder. 
 

In practice, these types of transactions (eg, a guarantee provided by the company to secure an obligation of its subsidiary), have been treated by OJK as affiliated party transactions even though Rule IX.E.1 was originally intended to only cover transactions conducted by a public company (or its controlled company) with an affiliated party. OJK’s broader interpretation has now been formalised in the new regulation.
 

Regulation 42 also includes a broader non-exhaustive list of transactions that can now be categorised as affiliated party transactions. This means that any transaction by a public company, even if not mentioned in Regulation 42, could be subject to this regulation if it involves an affiliated party. In contrast, Rule IX.E.1 had restricted the types of transactions that could be deemed affiliated party transactions. 
 

The new examples of affiliated party transactions introduced by Regulation 42 include:
 

  • participating in business entities, projects and certain business activities

  • assigning the lending or borrowing of funds 

  • obtaining, disposing of or utilising services

  • leasing assets

  • securing assets of the public company or its controlled company in relation to loan obtained from other parties

  • providing corporate guarantee

  • purchasing, selling, transferring utilising or exchanging assets or operating segment (business division).
     

Both Regulation 42 and Rule IX.E.1 define an “Affiliated Party Transaction” as one transaction or a series of transactions involving an affiliated party. Regulation 42 includes examples of the linkage between transactions that will cause them to be considered as a series of transactions. These include (i) a situation where one transaction is conditional upon the other transaction, and (ii) acquiring or disposing of securities of a company in stages (resulting in a change of control in the company). In practice, these types of transactions have typically been treated by OJK as a linked series, but this has now been legally formalised in the new regulation.
 

When an Affiliated Party Transaction is being proposed, the general requirements under Regulation 42 that apply are as follows:
 

  • internal procedures for Affiliated Party Transactions

  • independent appraiser to determine fair value of transaction object and/or fairness of the transaction

  • public disclosure

  • submission of supporting documents to OJK

  • prior approval from independent shareholders (for certain transactions specified in Regulation 42. 
     

Internal Procedure 
 

Regulation 42 introduces a new requirement for public companies to establish sufficient internal procedures to ensure that the proposed Affiliated Party Transaction is in line with generally applicable business practice. This internal procedure should include, among other things, a comparison of the terms and conditions of the affiliated transaction with similar transactions conducted with non-affiliated parties. Regulation 42 clarifies that “in line with generally applicable business practice” refers to transactions fulfilling the arms-length principle. It does not provide any further guidance on the internal procedure requirements. 
 

Although not expressly stated in Regulation 42, public companies must generally comply with the internal procedure before undertaking an Affiliated Party Transaction, subject to certain exemptions discussed below.  
 

Independent Shareholders’ Approval
 

The new regulation requires public companies to obtain prior approval from a general meeting of independent shareholders (GMIS) for any of the following Affiliated Party Transactions:
 

  1. an Affiliated Party Transaction whose value meets the materiality threshold for a transaction that requires prior GMS approval under the revised Material Transaction Regulation issued in April 2020;

  2. an Affiliated Party Transaction with the potential to disrupt business continuity. Although there is no specific criteria for assessing this condition, Regulation 42 illustrates this by referring  to any transaction that may cause (i) a reduction of at least 80% in the operating revenue of the company, or (ii) the company to experience losses on a proforma basis; and

  3. an Affiliated Party Transaction that OJK considers to be a transaction requiring approval from a GMIS. Regulation 42 does not include any guidance on how to determine whether an Affiliated Party Transaction requires approval from a GMIS.
     

These new requirements, particularly point 3, raise the question of whether public companies will need to first consult with OJK to confirm whether GMIS approval is required for any future Affiliated Party Transaction. Based on the timing of submission of documents to the OJK (see Disclosure Requirements below), OJK’s assessment on the GMIS requirement could be made after completion of the Affiliated Party Transaction. It is unclear how OJK will respond if the company fails to secure such GMIS approval after an Affiliated Party Transaction has completed.
 

Rule IX.E.1 generally did not require GMIS approval for an Affiliated Party Transaction.
 

Under Regulation 42, “independent shareholders” are defined as shareholders who:
 

  1. do not have a personal economic interest in certain transactions;

  2. are not members of the board of directors or board of commissioners, substantial shareholders or controlling shareholders of the public company; and

  3. are not affiliates of any person mentioned in point 2.
     

Disclosure Requirements
 

For an Affiliated Party Transaction that does not require prior GMIS approval, Regulation 42 now requires information about the transaction to be disclosed within two business days after the date of the Affiliated Party Transaction (see discussion below). Under Rule IX.E.1, this disclosure was required after completion of the Affiliated Party Transaction. 
 

Regulation 42 defines the “date of the Affiliated Party Transaction” as the date on which an agreement is executed which (i) is final and binding, and (ii) gives rise to rights and obligations for the transacting parties. From the examples provided in Regulation 42, it appears that OJK means that the “date of the Affiliated Party Transaction” should be the date on which the transaction documents become unconditional – in other words, upon fulfilment of the conditions precedent in a conditional agreement. 
 

It is unclear how OJK will interpret this definition, particularly for agreements where the conditions precedent include the absence of adverse material changes. 
 

Unlike Rule IX.E.1, Regulation 42 expressly requires the following additional information to be included in the disclosure:
 

  • for transactions with the potential to disrupt business continuity, the impact of the transaction on the financial condition of the company (proforma basis);  

  • statement from the BOD that the Affiliated Party Transaction complies with the internal procedure discussed above; and

  • statement from the BOC that (i) the Affiliated Party Transaction does not contain any conflict of interest, and (ii) all material information has been disclosed and is not misleading.  
     

Exemptions 
 

The new regulation applies exemptions to some of the requirements for certain types of Affiliated Party Transactions, as set out in the accompanying table.
 

EXEMPTION

KEY POINTS

Exemption from: 

• internal procedures;
 

• independent appraisal;
 

• public disclosure and submission of supporting documents; 
 

• GMIS approval; and
 

• submission of report to the OJK.
 

Certain COI Transactions can rely on this exemption. These are generally the same as provided under Rule IX.E.1. 
 

However, Regulation 42 removes the Rule IX.E.1 exemption for an Affiliated Party Transaction that supports the main business activities of the public company or controlled company.
 

Compensation (including salaries, pension fund contributions and other special benefits) for directors, commissioners and substantial shareholders no longer has to be reported to the OJK. 

Exemption from: 
 

• internal procedures;
 

• independent appraisal;
 

• public disclosure and submission of supporting documents; and
 

• GMIS approval,

but the company must still report the COI Transaction to OJK within two business days after the transaction.

Certain COI Transactions can rely on this exemption, and will only need to be reported to the OJK. These are generally the same as under Rule IX.E.1. 
 

However, Regulation 42 removes the old exemption for a transaction between a public company and its subsidiary where: (i) the subsidiary is not 99% owned by the public company, (ii) none of the outstanding shares of the subsidiary are owned by directors, commissioners, or substantial shareholders of the public company or their respective affiliates, and (iii) the financial statement of the subsidiary is consolidated with the public company.   
 

Regulation 42 exempts the following types of Affiliated Party Transaction:
 

(a) transaction between controlled company and its 99% owned subsidiary;
 

(b) loan received directly from foreign or domestic banks, venture capital companies, financing companies or infrastructure financing companies;
 

(c) provision of guarantee in favour of foreign or domestic banks, venture capital companies, financing companies or infrastructure financing companies in relation to loans directly received by the public company or controlled company;
 

(d) addition or reduction of share participation to maintain the shareholding percentage of the public company, provided such share participation has been in place for at least one year;
 

(e) a transaction between a public financial institution and its subsidiary engaging in sharia financial services in order to develop the subsidiary’s business;
 

(f) internal restructuring by a public company directly or indirectly owned by the government.

Public Financial Institutions
 

Regulation 42 exempts public financial institutions from the Affiliated Party Transaction requirements under certain conditions determined by OJK. However, the new regulation contains no guidance on what these conditions might be, or how OJK will apply them.
 

Exemption from:
 

• independent appraisal;
 

• public disclosure and submission of supporting documents; and
 

• GMIS approval. 
 

Business Activities
 

An Affiliated Party Transaction which constitutes “business activities” can rely on this exemption. Regulation 42 defines “affiliated party transaction which constitutes business activities” as business activities conducted to generate revenues, regularly, repeatedly or continuously. An example would be incurring normal operational costs, such as for the purchase of raw materials.
 

If any change to the terms and conditions of the exempted transactions could potentially cause losses to the company, then the company must re-implement the internal procedure.
 

These exempted transactions only need to be disclosed in the annual report or financial statement.
 


The new regulation also confirms that if the Affiliated Party Transaction is a public offering, the company need only fulfil the public offering requirements.

 

CONFLICT OF INTEREST TRANSACTIONS
 

Similar to Rule IX.E.1, Regulation 42 defines conflict of interest (COI) as a difference between the economic interest of a public company and the personal economic interest of its directors, commissioners, substantial shareholders or controlling shareholders, which may cause losses to the company. 
 

Regulation 42 clarifies that a COI Transaction includes any transactions involving COI between a public company or controlled company and any parties, including transactions conducted with unaffiliated third parties. 
 

When a COI transaction is proposed, the general requirements are as follows:
 

  • independent appraiser to determine fair value of the transaction object and/or fairness of the transaction

  • public disclosure

  • submission of supporting documents to OJK

  • prior approval from the independent shareholders. 
     

Exemptions 
 

There are exemptions to some of the requirements for certain types of COI Transactions, as set out in the accompanying table. 
 

EXEMPTION 

KEY POINTS

Exemption from: 
 

• independent appraisal;
 

• public disclosure and submission of supporting documents;
 

• GMIS approval; and
 

• submission of report to OJK
 

Certain COI Transactions can rely on this exemption, as they could under Rule IX.E.1.

Exemption from:
 

• independent appraisal;
 

• public disclosure and submission of supporting documents; and
 

• GMIS approval.
 

However, the company still needs to report the relevant COI Transaction to OJK at the latest on the second business after the date of the COI Transaction.

Certain COI Transaction can rely on this exemption and only need to be reported to OJK. Again, these are generally the same as under Rule IX.E.1. 
 

The following types of COI Transactions are now exempt:
 

(a) transaction between a controlled company and its 99% owned subsidiary
 

(b) transaction between a public financial institution and its subsidiary engaging in sharia financial services in order to develop the subsidiary’s business
 

(c) internal restructuring by a public company that is directly or indirectly owned by the government.
 

However, certain transactions now have to be reported to OJK, which may not have been the case under Rule IX.E.1:
 

(a) transaction with a value not exceeding Rp.5 billion or 0.5% of the company’s paid-up capital, whichever is lower
 

(b) transaction conducted to implement regulations or a court decision
 

(c) transaction between a public company and its 99% owned controlled company
 

(d) transaction between two controlled companies 99% of whose shares are owned by a public company
 

Public Financial Institutions
 

There are new exemptions from the COI Transaction requirements for public financial institutions under certain conditions determined by OJK. However, the new regulation does not clarify what these conditions might be, or how OJK will apply them.

 

OTHER KEY CHANGES 
 

Other Transactions may be subject to Regulation 42
 

Regulation 42 includes a general provision stating that any transactions (ie other than Affiliated Party Transactions and COI Transactions) that have the potential to disrupt business continuity shall be subject to the COI Transaction procedures (ie, independent appraiser, public disclosure, submission of supporting documents, and GMIS approval).
 

Although there is no specific guidance for assessing this condition, Regulation 42 contains two examples to illustrate the point: (i) any transaction which may cause a reduction of at least 80% in the operating revenue of the public company, and (ii) any transaction which may cause the public company to experience losses for the current year.
 

Affiliation Relationship between Public Companies and Shareholder in the form of Investment Manager 
 

Any transaction between a public company and an investment manager holding at least 20% shares in the public company must comply with the Affiliated Party Transaction/COI Transaction requirements under Regulation 42. 
 

Disclosure in Annual Reports and GMS Discussion 
 

Public companies must now include the following information in their annual reports: 
 

(a) implementation of Affiliated Party Transactions and COI Transactions;
 

(b) Affiliated Party Transactions and COI Transactions already approved by a GMIS but not conducted within 12 months after the GMIS approval. 
 

In addition, public companies must include a specific agenda item to discuss point (b) at the next GMS. This was not required under Rule IX.E.1.
 

Media Used for Announcements
 

Regulation 42 no longer requires that a Material Transaction by a publicly listed company be announced in a newspaper with national circulation. The announcement can now be made on the company’s website and on the stock exchange (IDX) website. 
 

Administrative Sanctions
 

OJK may impose various administrative sanctions for violations of certain provisions of Regulation 42. These range from a written warning to a fine, restriction of business activities, revocation of business licence, and cancellation of approval and registration. Rule IX.E.1 only stated that OJK could impose sanctions, but did not specify the type.

 

TRANSITIONAL PROVISIONS
 

Regulation 42 comes into effect on 21 October 2020, except for the exemptions for public financial institutions under certain conditions, as determined by OJK, which came into effect immediately.
 

Rule IX.E.1 will continue to apply to Affiliated Party Transactions and COI Transactions until 21 October 2020, when it will be replaced by Regulation 42.

 

CONCLUSION
 

Regulation 42 contains more stringent and nuanced requirements for public companies intending to conduct Affiliated Party Transactions and COI Transactions. It also covers various developments in Indonesian practice during the 11 years since Rule IX.E.1 was introduced. 
 

Several practical questions will arise once Regulation 42 comes into force for Affiliated Party Transaction and COI Transactions. The broader definitions, key changes and new concepts found in Regulation 42 could change the determination on whether a proposed transaction falls under the Affiliated Party Transaction and COI Transaction requirements.
 

 

For further information, please contact:

 

David Dawborn, Partner, Herbert Smith Freehills

david.dawborn@hbtlaw.com