On 1 July 2020, through Rule No. 42 /POJK.04/2020 (“New Rule“), the Financial Services Authority (“Otoritas Jasa Keuangan or “OJK“)”) issued new provisions governing affiliated party and conflict of interest transactions. The New Rule sets for public companies and most of its provisions will come into force on 21 October 2020 replacing Bapepam-LK Rule No. IX.E.1 regarding the same subject.
Affiliated parties are a common characteristic of business in Indonesia as many public companies develop operational activities through their related parties. While the New Rule is meant to tighten reporting requirements that apply to transactions with affiliated parties such as directors, subsidiaries or sister companies, it also affects transactions with un-affiliated parties as discussed below.
What is an Affiliated Party Transaction?
The New Rule provides a different and wider definition of an affiliated party transaction. This new definition now includes any transaction: (i) with a controlling party when the direct/indirect control exists as illustrated in OJK Rule No. 9/POJK.04/2018 on Takeover of Public Companies; and (ii) for the interest of the affiliated parties of a public company or its director, commissioner, principal shareholder or controller (and accordingly, transactions, even if they are entered with un-affiliated parties, that could give certain advantages to the affiliated parties should be carefully considered by management). This will increase the standard test for assessing transactions with related entities of an ultimate controlling party or members of a company group.
The New Rule mentions a non-exhaustive list of transactions that can be deemed as affiliated party transactions. That non-exhaustive list shows some changes from Bapepam-LK Rule No. IX.E.1 (e.g. lease of assets, transfer of operating segments, and participation in companies, projects or business activities are now included in the New Rule).
OJK also explains some illustrations of the linkage between multiple transactions that will cause them to be considered as a series of the affiliated party transactions to trigger the disclosure obligations under the New Rule. These include, among others, the acquisition or transfer of securities by a company in stages resulting in a change of control.
A greater emphasis on the identification and assessment of affiliated party relationships and transactions emerged with the issuance of the New Rule. At the outset of any arrangement with affiliated parties, public companies will be required to establish and maintain an internal procedure to enable them to assess whether the arrangement can be concluded based on normal market terms and arms-length principle (compared with similar arrangement or transaction entered into with un-affiliated parties). Under the New Rule, the implementation of that procedure by the board of directors must also be stated as one of the key points in the public disclosure of affiliated party transactions.
Independent Shareholders’ Approval Requirements
Unlike the provisions under Bapepam-LK Rule No. IX.E.1., the New Rule will require public companies to obtain prior approval from a general meeting of independent shareholders if:
- the affiliated party transaction exceeds a certain materiality threshold under OJK Rule No. 17/POJK.04/2020 on Material Transactions and Change of Business Activities;
- the affiliated party transaction could disrupt their business continuity; or
- based on OJK’s discretion, such approval is required for entering the affiliated party transaction.
The explanation of point (ii) above can be found in the New Rule. Unfortunately, the New Rule is unhelpful in explaining OJK’s approach to implementing point (iii) while it is pretty safe to say that affiliated party transactions are not subject to the independent shareholders’ approval from the perspective of Bapepam-LK Rule No. IX.E.1. For a practical approach, having a prior consultation with OJK might help the public companies get clarity before commencing the transactions.
As regards point (ii), OJK now requires the public companies to obtain such approval when they, or their Controlled Company (defined as a company that directly or indirectly is controlled by the public companies), enter into any transaction with un-affiliated parties provided that the transaction could lead to disruption to the business continuity of the public companies. The elucidation in the New Rule provides broad examples for this situation, including, when the transaction reduces their operating revenue by at least 80% or causes losses for the current year based on a pro forma. Hence, theoretically speaking, there might be other situations that could arguably be subject to the requirement.
For a normal affiliated party transaction that does not require prior approval from the independent shareholders, the New Rule retains the requirements of public announcement and report submission to OJK within two working days after the date of the transaction. OJK now clarifies this date as the execution date of the final and binding agreement which contains the transaction and provides rights and obligations to the transacting parties. It is also mandatory to include, among others, a summary of the appointed independent appraiser report (including a fairness opinion) in that public announcement.
Exemptions in Affiliated Party Transaction
As to the exemption from making a public announcement and report to OJK and obtaining an appraisal report from an independent appraiser and approval from the independent shareholders, the New Rule introduces the new exempted transaction (i.e. Operational activities with affiliated parties that contribute revenues to, and are regularly conducted by, a public company). This removes the previous criteria under Bapepam-LK Rule No. IX.E.1 that refers to affiliated party transactions being or supporting the main business activity of the public company or its Controlled Company. Although the public company can enjoy such exemption, the New Rule still requires management to: (i) perform the internal procedure as discussed above and (ii) disclose the transactions in its annual report or financial statement. Caution should be exercised when amending the terms and conditions of the transactions in the future because the internal procedure by the management must be implemented again if that amendment leads to any potential losses.
OJK also retains in the New Rule that:
- a transaction the value of which does not exceed 0.5% of the paid-up capital of the public company or does not exceed IDR 5 billion;
- a transaction between the public company and its Controlled Company whose shares are at least 99% held by the public company, or between Controlled Companies whose shares are at least 99% held by the public company; and
- a transaction carried out by the public company as a result of the implementation of applicable regulations and court decisions,
are not required to be appraised by the independent appraiser, announced to the public and approved by the independent shareholders (and the public company only needs to submit a report to OJK at the latest two working days after the transaction date). In addition, the New Rule introduces the following examples in that typical exemption:
- a guarantee provided to a local/foreign bank, venture capital company, financing company or infrastructure financing company for any loan that is obtained directly by the public company or its Controlled Company;
- an increase or decrease of capital participation by the public company to maintain the percentage of its shares in its Controlled Company, provided that the term of the participation is at least one year;
- a transaction between the public company and its Controlled Company that engages in the provision of Shariah financial services for the development of the Controlled Company provided that the public company is a financial services institution; and
- a restructuring carried out by the public company whereas the government directly/indirectly controls the public company.
Businesses with Conflict of Interest
Under the New Rule, the concept of conflict of interest transaction is changed quite significantly because the transactions with un-affiliated parties having the potential lead to a conflict of interest situation are now included. The New Rule essentially defines a conflict of interest as the difference between the economic interest of the public company and the personal economic interest of its directors, commissioners, controllers or principal shareholders, which may cause losses to the public company.
Similar to the general provisions of Bapepam-LK Rule No. IX.E.1., the New Rule provides that a conflict of interest transaction cannot be entered into by the public company or its Controlled Company unless the transaction is approved by a general meeting of independent shareholders.
The requirement of having the independent shareholders’ approval and specific disclosure also applies to non-conflict of interest transactions entered into with un-affiliated parties that potentially disrupt the business continuity of the public company (e.g. the transaction reducing the public company’s operating revenue by 80% or more or affecting a net loss for the current year).
Hard on Public Companies?
There are quite significant changes introduced by the New Rule which makes it challenging for public companies to carry out transactions with their affiliated parties going forward, and they need to see if along the way there is some practical guidance from OJK.
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