Following a tightening of Indonesia’s regulations on takeovers of public companies, new investors can no longer obtain exemptions to the two-year sell-down deadline following a mandatory tender offer (“MTO”). We summarise here the key features of Indonesia’s new takeover rule.
New takeover regulation
On 25 July 2018, Indonesia’s Financial Services Authority (Otoritas Jasa Keuangan or “OJK”) issued Regulation No. 9/POJK.04/2018 on Takeovers of Public Companies (“New Takeover Rule”). The New Takeover Rule came into effect on 27 July and replaces the previous takeover rule1.
As with the old rule, the New Takeover Rule aims to protect the interests of public shareholders upon the takeover of a public company (or issuer) by requiring any new Controller2 to comply with various requirements, including the requirement to conduct an MTO for the remaining shares held by public shareholders.
The New Takeover Rule restates most provisions in the previous takeover regulation and confirms certain practices in line with unwritten policies of OJK. It also introduces some notable changes by both limiting the scope for using a rights issue to take over a public company without an MTO and setting a hard deadline of two years for the new Controller to comply with the sell-down obligation.
The key changes under the New Takeover Rule are described below.
1. Control by a Controller owning 50% or less of the shares in a public company
The New Takeover Rule confirms that “control” over a public company can be achieved when a Controller owns 50% or less of the company’s shares yet is able to determine, either directly or indirectly and by any means whatsoever, the management or policy of the company. The New Takeover Rule clarifies that such control can be evidenced by documentation or information which demonstrates that (among others) the Controller:
- has an agreement with other shareholders to the effect that it holds more than 50% of the voting rights;
- can determine the financial and operational policy of the company based on its articles of association or an agreement;
- can appoint or replace the majority of the members of the board of directors (BOD) and board of commissioners (BOC), with the effect that it may control the company through the BOD and BOC;or
- can control the majority of the votes in meetings of the BOD and BOC whereby it can control the company.
Whereas these tests were already generally applied in practice, it is helpful that the New Takeover Rule expressly declares them to be the rules.
2. Criteria for Controller of public company
Where the rules in some business sectors3 provide different criteria for determining a “controller” and “control” than under the New Takeover Rule, the criteria under the New Takeover Rule shall prevail.
3. Ability of new Controller to appoint another party to conduct an MTO
A new Controller subject to the MTO obligation may now appoint a related party to, on its behalf, make an MTO triggered by a takeover acquisition, provided the new Controller owns more than 50% of the shares in the party appointed. The text requires that the Controller owns “more than 50% of the shares” of the appointed substitute entity, but does not refer to relationships constituted by other forms of “control”.
4. Proof of funds
Where an MTO is triggered, the New Takeover Rule clarifies that a new Controller must submit a statement letter confirming the sufficiency (and source) of the funds the new Controller will use to finance the MTO. In past practice, OJK also required that such statement letter be supported by third party confirmations (eg, the bank where the new Controller has funds deposited). It remains to be seen how this requirement will play out in practice.
5. More clarification regarding MTO pricing
The New Takeover Rule provides more clarity on how the MTO price should be determined, particularly with respect to calculating the average of all of the highest daily trading prices over the 90-day period before the disclosure is made. In light of the narrowed scope of the MTO exemptions in relation to rights issues and primary placements (see points 7a and b below), the New Takeover Rule now also regulates the MTO price for takeovers resulting from a rights issue or primary placement.
6. Post-MTO obligation to sell down to the “Public”
If the new Controller holds more than 80% of a public company following an MTO, it then has two years to sell down part of its stake so that the “Public”4 owns at least 20% of the company’s paid-up capital.
If the stake acquired by the new Controller before (and which triggered) the MTO was itself over 80%, then the new Controller has two years within which to sell-down part of its stake so that the “Public” owns at least the same percentage of shares that the new Controller acquired through the MTO. In other words, the new Controller’s stake must be reduced to the pre-MTO level.
Under the previous takeover regulation, the two-year sell-down period could be extended multiple times with OJK approval (for example, if the market price stayed below the MTO price). The New Takeover Rule precludes OJK from granting such an extension.
It remains to be seen how OJK will enforce this sell-down requirement, and what sanctions OJK may impose on a new Controller (or the public company, as the case may be) where the new Controller fails to comply within the prescribed timeframe.
7. Exemptions from MTO obligation
- Rights Issue. The New Takeover Rule narrows the scope for relying on the commonly used MTO exemption for a takeover resulting from a rights issue so that now it is only available for a change of Controller which occurs via a rights issue arising from a new share subscription by a shareholder exercising pre-emptive rights in proportion to its current shareholding. Accordingly, a subscription for new shares as a result of the exercise of new share rights obtained from a transfer of rights during a rights issue is no longer exempted.
- Primary Placement. The New Takeover Rule also narrows the scope of the MTO exemption for a takeover resulting from a non-pre-emptive offering (or primary placement) by a public company so that now it only applies in respect of a change in Controller arising from a primary placement conducted to improve the public company’s financial position, such as for a debt restructuring.
- Previously disclosed change of Controller transaction. An important new exemption applies to a change of Controller transaction that has been disclosed in the public company’s prospectus for a public offering of equity securities. In those circumstances, this type of transaction will no longer trigger an MTO if it occurs within one year after the effective date of the registration statement.
We hope this summary of the key rule changes affecting public company takeovers is helpful. Please reach out to your usual contact if you have any questions.
1 Rule IX.H.1 (Decree of the Chairman of Bapepam-LK (now OJK) No. Kep-264/BL/2011 on Takeovers of Public Companies)
2 “Controller” means a party that directly or indirectly (a) owns more than 50% of the shares with valid voting rights in the public company or (ii) is able to determine the management or policy of the public company by any means.
3 For example, the definition of “controlling shareholder” in the banking, insurance and multi-finance sectors has a much lower shareholding threshold of 25% for constituting control of a company regulated in those sectors.
4 “Public” in this context means a party that is not an “affiliated party” of the new Controller in accordance with the definition of “affiliation” under Law No. 8 of 1995 on Capital Markets, other than employees of the new Controller.