Client Alert March 2011

Lawyers

 

Draft Rule on Material Transactions and Changes in Core Business: Way out for USD Bond Issuers?

On 24 February 2011, BAPEPAM-LK published an amended version (“Draft Rule”) of BAPEPAM-LK Rule No. IX.E.2 on Material Transactions and Changes in Core Business (“Rule IX.E.2”). BAPEPAM-LK is now accepting submissions on this Draft Rule from capital market practitioners until 2 March 2011. There is as yet no information available as to when the amendments are expected to be adopted and put into effect. One of the key reasons for the framing of the Draft Rule appears to be the provisions of Rule IX.E.2 that restrict the issuance of debt securities by an Indonesian issuer or public company (“issuer”) in offshore markets, usually in reliance on foreign securities regulations (“securities regulations”).

Under Rule IX.E.2, the definition of material transaction includes lending and borrowing transactions with a value of 20% or more of the issuer’s equity. Exemptions to Rule IX.E.2 only apply to the issuance of debt securities through a domestic public offering. Therefore, any offshore issuance of debt securities, whether through a public offering or private placement, is subject to Rule IX.E.2. In such case, if the value of the securities is more than 50% of the issuer’s equity, it must obtain the approval of its General Meeting of Shareholders (“GMS”) and consequently must announce the details of the transaction, such as price amount and a summary of the appraisal report, 30 days before the GMS. This requirement may give rise to a conflict with the securities regulations in the place where the debt securities are to be listed or marketed, such as the U.S. Securities Act.

In the case of an offering conducted in reliance on securities regulations such as the U.S. Regulation S/Rule 144A, the issuer is normally prohibited from delivering any press release or any other disclosure during the period commencing with the start of the offering process up until the pricing is fully completed (blackout period). In addition, pre-announcing the details of the issuance, e.g., price range, at a very early stage of the offering may adversely affect its success.

We will now discuss a number of material points of the Draft Rule and analyze the relevant legal issues:

  1. Issuance of Material Offshore Debt Securities: A Possibility
  2. Under Rule IX.E.2, any material transaction with a value exceeding 50% of the issuer’s equity must first be approved by the GMS. This includes the issuance of debt securities in offshore markets, whether through public offering or private placement. The issuer is also required to announce information on the proposed material transaction in the newspapers well before the GMS. In addition to violating the blackout restriction under the securities regulations, such an announcement prior to the GMS may be considered premature since at that time the pricing and amount of the debt securities have yet to be determined. Consequently the appraiser cannot prepare its report for inclusion in the announcement.

    Under the Draft Rule, BAPEPAM-LK has made the following exemptions to the information that must be disclosed:

    1. the particulars of the subscribers or purchasers of the debt securities;
    2. the total proceeds from the issuance of the debt securities;
    3. interest rate or yield; and
    4. summary of the appraiser’s report.

    Therefore, the announcement of the GMS only needs to provide the following information:

    1. an elaboration of the material transaction in the form of the issuance of debt securities;
    2. explanations, considerations and the rationale behind the proposed issuance of debt securities and its effect on the issuer’s financials, which must be presented in a proforma financial statement reviewed by an independent accountant. 

    These new exemptions may resolve some of the problems that currently arise under Rule IX.E.2 as sensitive information such as pricing, amount and the appraisal report will no longer need to be disclosed. However, the pre-announcement requirement, regardless of its significance, still poses potential problems as counsel in the relevant jurisdiction may consider such announcement as tantamount to market conditioning. Now that significant information has been exempted, perhaps it may be apropos to question the precise significance of the pre-announcement and GMS approval requirements.

    The existing Rule IX.E.2 does not require GMS approval for a loan transaction, regardless of its value. Most offshore public offerings impose stringent disclosure requirements at a level generally more rigorous than in the case of loan transactions. Therefore, the issuance of offshore debt securities should at least enjoy the same complete exemption from being classified as a material transaction as a loan transaction under Rule IX.E.2.

     

  3. New Definitions, Different Reach
  4. If adopted, the new Draft Rule will replace the term “subsidiary” in Rule IX.E.2 with the term “controlled company,” which is defined as a company that is either directly or indirectly controlled by the issuers. “Control” means the ability to determine, either directly or indirectly, the management and/or policy of the issuer. This change broadens the application of this rule from a subsidiary that is 99% owned by the issuer to other direct or indirect subsidiaries insofar as the issuer controls them.

    In addition, the Draft Rule defines “core business” as an activity stipulated in the issuer’s articles of association and actually engaged in directly by the issuer.  The addition of “directly” into the definition may adversely impact on an issuer as at present it may not engage in the businesses mentioned in its articles of association directly, but instead through a direct or indirect subsidiary(ies).

     

  5. Additional Exemptions
  6. The Draft Rule also excludes four additional types of transaction from the definition of material transaction:

    1. obtaining a loan directly from a local or offshore bank, venture capital or other financing institution;
    2. pledging of collateral or extending a guarantee to a financial institution in respect of a loan obtained directly by the company or through any controlled company in which it holds at least 99% of the shares;
    3. a material transaction by a bank in the form of a loan facility from the Indonesian central bank, or any other Government institution, with a value of more than 100% of the bank’s own paid-up capital, or in any other circumstances that may result in the restructuring of such bank by the relevant Government authority;
    4. a material transaction by a company, other than a banking institution, that possesses negative net operational capital and net equity.
    5.  

  7. Additional Acquisition Procedure
  8. Under the Draft Rule, an issuer conducting an acquisition with a value exceeding 50% of the issuer’s equity must first secure GMS approval in accordance with BAPEPAM-LK Rule IX.J.1. This means that the transaction must be approved by at least ¾ of the total number of shareholders attending or represented at the GMS and approved by more than ¾ of the total votes cast at the GMS.

    In the event that a material transaction that has been announced, or been approved by the GMS, is cancelled, or any changes occur to the information provided in respect thereof, the issuer must immediately disclose such information under BAPEPAM Rule No. X.K.1.

     

  9. Conclusion
  10. The issuance of this Draft Rule is an interesting development as it reveals that BAPEPAM-LK is prepared to go some way to accommodate foreign securities regulations in order to facilitate Indonesian issuers wishing to conduct offshore debt securities offerings or private placements. Unfortunately, the effort remains half-hearted as the Draft Rule maintains the pre-announcement requirement, which, while being of little significance, has the potential to hamper such transactions. Hopefully BAPEPAM-LK, in the light of analyses such as the above, will reconsider the proposed changes and opt for a market-friendly approach instead.

 ***

 

AHP Client Alert is a publication of Assegaf Hamzah & Partners. It brings an overview of selected Indonesian laws and regulations to the attention of clients but is not intended to be viewed or relied upon as legal advice. Clients should seek advice of qualified Indonesian legal practitioners with respect to the precise effect of the laws and regulations referred to in AHP Client Alert. Whilst care has been taken in the preparation of  AHP  Client Alert, no warranty is given as to the accuracy of the information it contains and no liability is accepted for any statement, opinion, error or omission.

Download

AREAS OF PRACTICE

  • Pic Mgmt

    Capital Markets

    As a full-service firm, we do a broad range of transactions covering the entire spectrum. Many are high profile and cement our position as a top-tier firm, including global equity offerings in reliance on Reg. S/Rule 144A, private placements, rights issues and other share-related offerings, such as convertible and exchangeable bonds. We also frequently advise on foreign offerings by issuers having significant interests in Indonesia, bond issuances under global offering rules, mergers, acquisitions, combinations of acquisitions and IPOs, consent solicitations and exchange offers of debt instruments listed on the Indonesia Stock Exchange or offshore. more »

  • Pic Mgmt

    Banking & Finance

    We are a leading force in the Indonesian banking & finance sector, advising on all manner of structured financing transactions, from simple secured or unsecured bilateral lending to multifaceted and complex credit facilities. We handle syndicated, club and bilateral loan documentation; project finance; property finance; acquisition finance; securitization and structured finance; regulatory and compliance issues; banking documentation and legal due diligence reporting. more »

  • Pic Mgmt

    General Corporate/M&A

    Our General Corporate/M&A practice provides advice on corporate governance, compliance, negotiating and drafting agreements, transaction structure, management and succession, legal due diligence reporting, formation of new entities, preparation of internal corporate documents and approvals, and completion of regulatory filings. With a wealth of experience amassed over the years in a wide variety of industries, we are strategically placed to provide you with everything you need to satisfy your corporate or M&A needs. more »

  • Pic Mgmt

    Debt & Corporate Restructuring

    We offer a full range of services in the debt & corporate restructuring arena, including advice on capital reduction, recapitalization and rescue schemes, financial sector takeovers, global asset recovery measures, mergers, creation of new entities, compromise schemes, demergers, buyouts, preparing documents and agreements, and ensuring statutory and regulatory compliance. As an AHP client, you will benefit from the unparalleled expertise gained by many of our senior lawyers as advisors or counsel to the Indonesian Bank Restructuring Agency (IBRA), which restored the country’s banking sector to health in the wake of the Asian financial crisis of 1997/98. more »

  • Pic Mgmt

    Foreign Direct Investment

    As an Indonesian law firm, we are obviously very much at home in our own jurisdiction, and so are able to make you feel at home as well. We know how things work in Indonesia, and have excellent relations with all the relevant government and regulatory agencies. We advise on the establishment of foreign investment companies, permanent business establishments, subsidiaries and joint ventures under the Indonesian FDI regime, merger & acquisition issues, foreign ownership caps, manpower issues, regulatory and environmental compliance, land acquisition, taxation matters -- in fact, everything you will need to get your venture off the ground and to keep it running smoothly throughout the investment lifecycle. more »

  • Pic Mgmt

    Competition Law

    We are widely recognized as being at the forefront of competition law in Indonesia, a rapidly developing field in which we have been instrumental in securing a number of ground-breaking judicial precedents in recent years. We consistently focus on the practicality and commerciality aspects, and combine legal expertise with in-depth experience across a wide range of industries so as to support the achievement of your strategic goals. more »

  • Pic Mgmt

    Dispute Resolution

    AHP has a very strong litigation team made up of one partner and 15 associates, all of whom are licensed advocates. We regularly represent clients in tort, contract, employment, internal corporate fraud, real estate, trademark and intellectual property disputes, to name but a few, with our primary focus being on commercial disputes. In the arbitration field, we have developed a formidable reputation for expertise and successful outcomes with the result that AHP advocates regularly appear before the Indonesian National Arbitration Board (BANI), as well as overseas arbitration bodies, such as the Singapore International Arbitration Centre. more »

  • Pic Mgmt

    Energy, Oil and Gas

    Our Energy, Oil and Gas practice provides top-quality legal advice and transactional support to domestic and international companies operating in the oil and gas, geothermal and renewable energy sectors. As a relatively compact firm, we are able to offer advice across the entire range of practice areas, thereby allowing us to deliver outstanding legal and commercial results for our clients in a practical and cost effective way. more »

  • Pic Mgmt

    Projects & Natural Resources

    As an Indonesian law firm, we know our country, our regulatory environment and our governmental system. Armed with this knowledge, we have garnered a wealth of experience down the years guiding both domestic and international companies through areas that are often fraught with competing interests and controversy. This experience provides us with the expertise and breadth of vision needed to ensure successful outcomes for your business objectives. In doing so, we offer a comprehensive suite of services, all of which dovetail seamlessly one with the other so as to provide holistic solutions to all your legal needs. more »

  • Pic Mgmt

    Telecommunications & Media

    Indonesia has seen exponential growth over the last decade in both the telecommunications and media sectors -- both areas in which AHP is in the vanguard of legal development. Besides having a professional interest in the two sectors, all of our lawyers in the T&M practice share a genuine passion for what they do and are therefore able to offer a combination of solid technical legal knowhow and an excellent understanding of the industries, the technical aspects, the principal factors at work, and the key players in Indonesia. more »

  • Pic Mgmt

    Real Property

    We offer a full range of real property services, including assisting with purchase and sale agreements, leasing agreements, title searches and registrations, conveyancing, and real property dispositions and bequests,.We also provide effective and reliable advice on the complex rules governing property ownership by non-nationals in Indonesia, an area of the law that is set for liberalization in the near future. more »

  • Pic Mgmt

    Intellectual Property

    Our IP practice offers trademark, copyright, patent and design searches and registration, and regularly mounts successful challenges on behalf of clients against decisions of the trademark authorities. Our IP associates are all members of key associations and are frequently engaged to speak at international events as recognized leaders in the field. Combing cutting-edge expertise and a high level of commercial acumen, we take pride in our results and a high level of customer satisfaction, and do our utmost to help ensure the protection of your rights and your peace of mind. more »

  • Pic Mgmt

    Islamic Finance

    At AHP, we understand Islamic finance and have been in the vanguard of the sector’s rapid expansion and development in Indonesia. With an in-depth understanding of the religious and conventional legal principles that underpin the Shariah sector, we believe we are uniquely well-positioned to offer expert and innovative advice on how to conduct any transaction in a Shariah-compliant manner, and to provide the kind of end-to-end solutions that you need. more »

  • Pic Mgmt

    Shipping & Aviation

    As an archipelagic nation, the shipping and aviation industries are of the utmost importance to the Indonesian economy. To accommodate the needs of ship owners, charterers, and marine insurers, we provide advice on all aspects of shipping law, including ship finance & security, sale and purchase, disputes arising out of charter parties, bills of lading, insurance, and collisions, and all other admiralty matters, while in the aviation sector, we assist with aircraft financing, sale and purchase, statutory obligations related to aviation, aviation safety and the aftermath of aviation accidents. more »

  • Pic Mgmt

    Labor Law

    We have a outstanding record in representing both individuals and corporations in employment matters, and in general advisory work on the complex rules governing the employment of expatriates in Indonesia. On the litigation front, we are frequently called upon to advise in cases involving internal fraud and embezzlement, and on the remedies available to employers. We also offer expert advice on employee compensation and incentive schemes (stock options, benefits, allowances), the employment implications of mergers, acquisitions and amalgamations, and the rights and benefits available to employees upon termination. more »

Assegaf Hamzah & Partners