New Regulation On Indonesian Bank M&A And Foreign Bank Branch Corporatisation.
Legal News & Analysis - Asia Pacific - Indonesia - Corporate/M&A - Banking & Finance
14 January, 2020
On 23 December 2019, Indonesia’s Financial Services Authority (Otoritas Jasa Keuangan or “OJK”) issued Regulation No. 41/POJK.03/2019 on the Merger, Consolidation, Acquisition, Integration and Conversion of Commercial Banks (“New Bank Merger Rules”). The New Bank Merger Rules came into effect on 26 December 2019 and revoke the previous merger rules issued by Bank Indonesia, which had been in place since 1999.1
The New Bank Merger Rules’ key objective is to strengthen the banking industry by encouraging further consolidation in the Indonesian banking sector. The rules have introduced new concepts on the integration and conversion of foreign bank branches into full-fledged Indonesian banks and changed certain requirements to ensure consistency with applicable laws and regulations – including the Indonesian company law.
The key changes under the New Bank Merger Rules follow.
The New Bank Merger Rules introduce two new concepts:
Integration involves the legal transfer of assets and liabilities of the Foreign Bank Branch to the Indonesian bank. Conversion involves the conversion of the Foreign Bank Branch’s business licence to an Indonesian bank business licence. Both Integration and Conversion will ultimately require revocation of the business licence of the Foreign Bank Branch within two years after the Integration or Conversion.
A merger, consolidation, acquisition triggering a change of control (“Acquisition”), Integration or Conversion may be undertaken either at the initiative of the relevant Indonesian bank or Foreign Bank Branch, or following a request from OJK in its supervisory role. Consistent with the previous regime, approvals from OJK and the general meeting of shareholders of the target bank are required for a bank merger, consolidation, Acquisition, Integration or Conversion.
The new procedures encompass greater involvement of OJK, which will need to be consulted from the outset in preparation of the plan for the proposed merger, consolidation, Acquisition or Integration.
In the context of a proposed Acquisition, the target bank will need to inform OJK of the development of the proposed acquisition plan and both the purchaser and the target bank will need to submit preparatory documents to OJK, namely the acquisition plan approved by the board of commissioners of the purchaser and the target bank, the draft acquisition deed and the fit and proper test administrative documents of the purchaser as the prospective controlling shareholder. As part of this process, OJK will review the submitted documents and inspect the source of funds for the acquisition.
The announcement of the summary of the acquisition plan can only be made following OJK’s initial approval.
In the context of a proposed merger or consolidation, the target bank will need to submit certain documents on the day of announcement of the summary of the merger or consolidation plan, namely, the merger or consolidation plan approved by the board of commissioners of the banks, the draft merger or consolidation deed and the fit and proper test administrative documents of the main parties of the resulting bank.
Under the New Bank Merger Rules, an “Acquisition” is defined as a legal action carried out by a legal entity or individual to take over the shares in a bank, causing a change of control of the bank.
The New Bank Merger Rules set out new criteria for a change of control: (a) the purchaser becomes the largest shareholder in the target bank; or (b) the purchaser does not become the largest shareholder in the target bank but can determine (either directly or indirectly) the management and/or policy of the target bank.
This is a significant addition to the Previous Bank Merger Rules, which only stated that the bank acquisition requirements would be triggered when one party held at least 25% of the shares of the target bank, or held less than 25% but was able to determine the bank’s management and/or policies (either directly or indirectly).
Although the New Bank Merger Rules do not clearly describe the interrelationship between the two concepts, it appears that the “single largest shareholder” criteria will become an alternative test for determining whether control of a bank has been acquired, in addition to the existing percentage threshold tests (i.e., 25% shareholding or ability to determine the management and/or policy of the target bank).
In other words, a party will be deemed to become a bank controller merely by becoming the bank’s single largest shareholder, and the procedures under the New Bank Merger Rules will apply even if it has a shareholding below 25% and is not able to determine the bank’s management and/or policy.
The New Bank Merger Rules also state that any party acquiring shares in a bank resulting in a shareholding of at least 25% will be required to undertake a fit and proper test in accordance with the fit and proper test rules2 whether or not a change of control as described above has occurred.
The New Bank Merger Rules clarify the mechanism to protect minority shareholders in a merger, consolidation, Acquisition, Integration or Consolidation. Any minority shareholders that disagree with the proposed corporate action can exercise their right to require the company to buy back their shares at a fair price. The exercise of such rights will not, however, halt implementation of the relevant corporate action.
This mechanism is in line with the protection granted to minority shareholders under Indonesia’s company law. Under the company law, minority shareholders that disagree with a proposed merger, consolidation, acquisition or spin-off can request the company to buy back their shares at a fair price. If the amount of shares to be bought back by the company exceeds the maximum 10% limit under the share buy-back rules, then the company must find a third party to acquire the remaining shares of the objecting minority shareholders.
In contrast, under the Previous Bank Merger Rules, a proposed merger, consolidation or acquisition causing a change of control could not proceed if creditor and minority shareholder issues were not first resolved.
With respect to shares in listed banks, as a practical matter, OJK does not typically require listed companies to buy back shares in the context of a buy-out of the rights of minority shareholders. The usual approach is for the incoming controlling shareholder to acquire the shares of the minority shareholders through the mandatory tender offer mechanism.
Creditors can raise objections to a proposed merger, consolidation, Acquisition, Integration, or Conversion within 14 calendar days after the newspaper announcement of the relevant corporate action.3
If no objections are raised in this time frame, the creditors are deemed to have approved the proposed corporate action. If any creditor objects during this period, and if such objection has not been resolved before the general meeting of shareholders, it must be raised at the general meeting of shareholders for settlement purposes.
A proposed merger, consolidation, Acquisition or Integration cannot proceed until the creditors’ issues are resolved. These provisions on the rights of creditors are consistent with those under the company law.
In relation to a proposed Conversion, a creditor’s objection does not stop implementation of the conversion. If not resolved before the issuance of the bank’s business licence, the objection must be resolved by the converted bank.
The issuance of the New Bank Merger Rules is a welcome development to promote consolidation of Indonesia’s banking sector by broadening the options available to parties controlling more than one bank, and to foreign banks with branch offices in Indonesia.
For further information, please contact:
David Dawborn, Partner, Herbert Smith Freehills
1 Decision of the Board of Directors of Bank Indonesia No. 32/50/KEP/DIR on Requirements and Procedures to Purchase Shares in Banks, and Decision of the Board of Directors of Bank Indonesia No. 32/51/KEP/DIR on Requirements and Procedures for Bank Merger, Consolidation and Acquisition, both stipulated in May 1999 (“Previous Bank Merger Rules”)
2 OJK Regulation No. 27/POJK.03/2016 on Fit and Proper Test for the Principal Party of a Financial Services Institution and OJK Circular Letter No. 39/SEOJK.03/2016 on Fit and Proper Test for Candidate Controlling Shareholders, Directors and Commissioners of Banks.