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In
business, parties, who can contribute different skill sets, assets, funding or
special expertise to a project, often would join forces in order to leverage
their respective qualities, i.e. the parties would enter into a ‘joint
venture’.
With
regard to any business undertaken by foreigners in Indonesia, including a joint
venture, it must be noted that strictly under law, any business activity should
be conducted through a foreign investment company (Penanaman Modal Asing or PMA),
which is a limited liability company established with approval by the
Investment Coordinating Board (BKPM) in Jakarta.
Like
every Indonesian company a PMA is generally regulated under the Indonesian
Company Law (Law No. 40 of 2007), which stipulates a general prohibition to use
nominee shareholders as Indonesian corporate law does not recognize the concept
of beneficial ownership or trust, where there is a separation of legal and
beneficial ownership. For a PMA such prohibition is explicitly regulated under
Article 33 of Investment Law No. 25 of 2007.
Having
said that, Indonesian law recognizes the principle of freedom of contract
(Article 1338 of the Indonesian Civil Code) within the boundaries of good
faith, public order and lawful purposes, so that the partners of a joint venture
agreement, i.e. the shareholders of a PMA, are generally free to include and
agree on any provisions they wish in relation to their joint venture.
Typical
provisions of a joint venture agreement
The
agreement setting out the respective rights and obligations of the partners and
shareholders is typically called a joint venture agreement (“JVA”) and would
commonly include and regulate the following matters:
Governing law of the JVA: The governing law would typically be
Indonesian law, although the parties may agree that the law of another
jurisdiction may apply to (parts of) the JVA. There is a general risk - in
relation to dealings with Indonesian corporate matters or assets located in
Indonesia, in particular land – to agree that another law than Indonesian law
shall apply as this may not be enforceable or seen in contravention with public
order when it comes to enforcing such an agreement.
Particulars regarding the organization and management of the joint venture: It
is important to clearly discuss and agree on organizational matters of the
joint venture company at the outset as this will determine the role and control
mechanisms by the
partners,
such as:
•
Business obligations by the parties, such as capital contribution, provision of
services and ongoing duties
•
Determining the company’s board of directors and board of commissioners
•
Requirements for periodic meetings of shareholders, board of directors and
commissioners, including a quorum for such meetings
•
Defining special or reserved matters, which would require certain majority
decisions of directors, commissioners and/or shareholders
On
the topic of management obligations, it should be noted that the role of
company director and commissioner are not to be taken lightly. Each member of
the board may be held personally liable for losses suffered by the company due
to negligent errors in management (Article 97 and 108 of Law No. 40 of 2007).
It is important to note that there is no limitation of such responsibility to
‘gross negligence’.
A
director or commissioner may be excused from this liability only where they can
prove that the losses were not caused by their mistakes or negligence, which in
practice might be a difficult task to accomplish and which would require them
to prove that
•
They have managed the company affairs in good faith and in the interest of the
company;
•
That there were no direct or indirect conflicts of interest in respect of the
act causing the losses; and
•
That they acted to prevent the losses from occurring and continuing
Matters relating to shares: A JVA would also regulate general matters
with regard to dealing with shares by the partners.
. The
partners may agree a lock-in period, i.e. a certain time within which no
partner shall transfer his/her interest and shares in order to allow an initial
set-up and establishment phase for the joint venture
•
The partners may agree on a general prohibition on share transfers without the
consent of the other partner(s) with the exception of a transfer of shares to a
subsidiary owned by the same partner.
•
Often a prohibition to pledge or mortgage shares is agreed to prevent
encumbrances of the shares, which may negatively effect the status and standing
of the PMA and joint venture
•
The JVA may also contain a share buy-sell provision and clearly set out its
terms and procedures, such as notification requirements, right of first refusal
or terms under which a partner can compel a sale of shares.
Specific Restrictions: In order to ensure the success of a joint venture
and full commitment by the partners, the JVA may provide for restrictive
covenants such as:
•
Partners must refrain from engaging directly or indirectly in activities
competitive with the joint venture business unless with prior approval by the
other partner(s)
•
Partners must keep confidential any matters relating to the joint venture
•
The JVA may also provide for a non-solicitation clause prohibiting a partner
from recruiting or enticing away employees or customers of the joint venture.
The
above matters may be combined with a clause regulating a fixed contract penalty
and liquidated damages in the event of breach, which may serve as a deterrent.
General provisions: Besides the above, a JVA will typically contain
certain general provisions such as:
•
Waiver of court decision as termination requirement (Article 1266 and 1267 of
Indonesian Civil Code)
•
An indemnity by the company of its directors or commissioners for certain acts.
•
Force Majeure provisions
•
Dispute resolution provisions. Regarding disputes there is the general option
between litigation in court and arbitration. A common choice for foreign
investors with joint venture operations in Indonesia is to stipulate for
arbitration in a neutral forum such as Singapore (SIAC). Indonesia is a
signatory to the New York Convention and enforcement of arbitration awards can
be executed in Indonesia. With regard to stipulating that a dispute would be
settled before a court outside of Indonesia, it must be noted that in practice
it is not possible to enforce a foreign judgment in Indonesia so that any
partner seeking to enforce a decision in Indonesia would have to start a new action
before the Indonesian courts.
In
summary, it is strongly advisable to spend considerable time to do some advance
planning and negotiations with regard to any proposed joint venture at the
outset, taking into account the nature of the joint venture and the partners
involved. It is commercially worthwhile to discuss
potential
conflicts, including ‘worst case scenarios’ and to agree on certain mechanisms
at a time when the partners are on good terms, willing to cooperate and to find
mutually beneficial solutions.
This
article was co-written by Ingo Müller (Partner) and Gerry Purba (Senior
Associate), who are based in our Bali office. For further information, please
contact our Bali office at +62 (0) 361727114 or email to Bali@Limcharoen.com.
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