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Listed companies’ increase of capital without pre-emptive rights now requires independent (and unaffiliated) shareholders’ approval

 

17 May 2019

OJK recently passed a new regulation on increasing the capital of public companies through pre-emptive rights. This regulation consolidates two regulations regarding pre-emptive and non pre-emptive capital increase of public companies. The change tightens the shareholders’ approval requirement for a non pre-emptive rights issuance carried out by a public company (which is not in financial distress) in order to protect the independent and unaffiliated shareholders’ interests.

1. Introduction

The Indonesia Financial Services Authority (Otoritas Jasa Keuangan, OJK) issued Regulation No. 14/POJK.04/2019 on Amendment to Regulation No.32/POJK.04/2015 (POJK 32/2015) on Increase of Capital of Public Companies through Pre-emptive Rights (POJK 14/2019). The regulation came into effect as of 30 April 2019 but a copy of this regulation has only been made accessible to the public recently.  

POJK 14/2019 consolidates two regulations of OJK i.e. POJK 32/2015 and POJK No. 38/POJK.04/2014 regarding the non pre-emptive capital increase of listed companies (POJK 38/2014) by way of revoking POJK 38/2014 and incorporating the (amended) provisions which were contained in POJK 38/2014 into POJK 32/2015.

POJK 14/2019 tightens the shareholders’ approval requirement for a non pre-emptive rights issuance carried out by a public company (which is not in financial distress[1]) in order to protect the independent and unaffiliated shareholders’ interests.

2. What’s new and relevant for public companies?

Previously under POJK 38/2014 a non pre-emptive rights issuance could be done with only a general meeting of shareholders and did not require any independent and unaffiliated shareholders’ approval. POJK 14/2019 on the other hand, makes a distinction in the shareholders’ approval required in a non pre-emptive rights issuance to improve the financial condition of:

(i) a public company in a financial distress situation; or

(ii) a public company not in financial distress.

Both (i) and (ii) must be approved by the public company’s general meeting of shareholders through a simple majority of shareholders’ approval. Additionally for (ii), POJK 14/2019 mandates the public company to obtain approvals from its independent shareholders and unaffiliated shareholders (i.e. shareholders who are not affiliated with the public company itself, the public company’s directors, commissioners, principal shareholders and controlling shareholders) under the following quorums and with affirmative votes required:

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3. Commentary

In its attempt to protect public shareholders’ interests (so they are not diluted), OJK now raises the bar in requiring any non pre-emptive rights issuance carried out by a public company not in financial distress to be approved by both its independent shareholders and unaffiliated shareholders. Given this new requirement and how challenging it could be in obtaining independent shareholders’ and unaffiliated shareholders’ approvals, we expect to see fewer companies taking this route in the future.

1 Under POJK 14/2019, a public company is deemed to be in financial distress if: (a) for a bank, the bank received a loan from the Central Bank or other government agency amounting to more than 100% of the bank’s paid up capital or in a condition that could put the bank under restructuring by the government agency; (b) for a non-bank, the company has negative net working capital and liability of more than 80% of the company’s assets; or (c) for both banks and non-banks, the entity fails to satisfy its financial liability to its non-affiliated creditor and such creditor agrees to take shares or convertible bonds as settlement of the liability.     

 

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