New OJK regulation on Material Transaction
Managing Partner, Ginting & Reksodiputro in association with Allen & Overy
Partner, Ginting & Reksodiputro in association with Allen & Overy
Partner, Ginting & Reksodiputro in association with Allen & Overy
Counsel, Ginting & Reksodiputro in association with Allen & Overy
Senior Associate, Ginting & Reksodiputro in association with Allen & Overy
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POJK 17/2020 remains unclear on numerous practical aspects. Therefore, careful fact-finding and a thorough assessment of the nature of your transaction would be critical.
A couple of key highlights are as follows:
- The scope of the definition of a “material transaction” is broadened to include, among others, “obtainment, disposal and/or utilisation of services”, “loan assignment”, and “utilisation of assets or operating segment”. (see “New aspects in definition of “Material Transaction” below).
- A dilution of a public company's ownership in its controlled company which results in a deconsolidation will be considered a material transaction (see "Material Transactions Thresholds" below).
- Any transaction with an affiliate, even if it being done with fair market value must also be approved by independent shareholders if the value of the transaction requires GMS approval. (see “Transactions requiring Independent Shareholders' Approvals” below).
- The phrase “the date of the material transaction” as a triggering event suggests referring to the date on which the last condition is satisfied (see “Commentary and Conclusion” below).
- Elements that may enjoy exemption due to primary business activities are specifically framed and must be approved by the public company’s GMS (see further "Commentary and Conclusion" below).
- A material transaction could also be triggered even if it has a lower value if the company has negative equity (see “New Thresholds in POJK 17/2020” below).
New aspects in definition of "Material Transaction"
The existing list of "material transactions" under Rule IX.E.2 is being expanded to include a number of new items i.e. "obtainment, disposal and/or utilisation of services" (perolehan, pelepasan dan/atau penggunaan jasa), "loan assignment" (pinjam meminjam dana, termasuk pengalihannya), and "utilisation of assets or operating segments" (penggunaan aset atau segmen operasi).
The inclusion of phrase "among others" means the list under POJK 17/2020 is not exhaustive. Therefore, it would be difficult to reach to a definitive interpretation of a "transaction". The new rule also clarifies the parameters of the phrase "in a series of transactions", so that it covers among others: (i) interdependent and/or continuous transactions; (ii) gradual acquisition or disposal of a company; or (iii) partial purchase/disposal of assets.
Material Transaction Thresholds
The definition of "material transaction" under POJK 17/2020 relies solely on the thresholds. The thresholds remain similar to requirements under Rule IX.E.2:
(i) 20% - 50% of the public company's equity, which requires certain disclosure to be made through the public company's and the IDX's websites (but no longer through newspaper announcements), procure a fairness opinion from an independent appraiser, and submit the disclosure documents to the OJK no later than two business days from of the date of the material transaction; or
(ii) more than 50% of the total equity of the public company, which requires approval from the GMS in addition to the requirements above.
A dilution of a public company's ownership in its controlled company which results in deconsolidation will be considered a material transaction if it exceeds certain thresholds i.e. 20% or more of the total assets/net income/operating revenue of the public company based on an audited financial statement within 12 months before: (i) the date of dilution, if the ratio is not higher than 50%; or (ii) the GMS date, if the ratio is more than 50%.
New Thresholds in POJK 17/2020
POJK 17/2020 introduces certain corporate actions that can be implemented with lower threshold requirements under certain conditions:
Disclosure and Fairness Opinion
(a) if the public company has a negative equity, the threshold is 10% or more of the public company's total assets;
(b) specifically, for an acquisition and a disposal of a company or business, the threshold for a material transaction is as follows:
- the transaction value is equal to or exceeds 20% of the public company's equity;
- the total assets of the transaction object divided by the public company's total assets is equal to or exceeds 20% of the company's total assets;
- the net income for the year of the transaction object divided by the public company's net income is equal to or exceeds 20% of the public company's net income; or
- the operating revenue of the transaction object divided by the public company's operating revenue is equal to or exceeds 20% of the public company's operating revenue.
General Meeting of Shareholders
(a) if the value of the transaction is more than 25% of the public company's total assets (for a public company with negative equity); or
(b) if the independent valuer's report opines that the transaction is "unfair".
Transactions requiring Independent Shareholders' Approval
(i) if the material transaction is subject to GMS approval and at the same time it qualifies as an affiliated transaction. This means any transaction with an affiliated company with less than 99% shareholding, if the value of the transaction requires GMS approval, must also be approved by the public company's independent shareholders;
(ii) if the material transaction has a conflict of interest element. This includes a situation where the independent valuer's report opines that the transaction is "unfair" (as discussed earlier); and/or
(iii) if the material transaction potentially disrupts the going concern of the public company, e.g. if the transaction should reduce the company's pro forma operating revenue by 80% or more or results in a pro forma net loss for the company.
What are the available exemptions?
The available exemptions under the new rule are generally similar to those as provided under Rule IX.E.2. However, it is worth highlighting that POJK 17/2020 removes the following exemptions:
(i) a corporate guarantee by a parent over the transaction of the controlled company that is at least 99% owned; and
(ii) a transaction over assets that are directly used by the public company for its production process or main business activities and/or that directly supports such production process or main business activities.
Similar to Rule IX.E.2, POJK 17/2020 also exempts the public company's "Business Activities" from the material transaction requirements if they are listed in the articles of association and have been operational. POJK 17/2020 however added that the exempted "Business Activities" must be the businesses that are intended to generate revenue and have been implemented on a day-to-day basis, repeatedly and/or continuously.
If the transaction qualifies as "Business Activities", the public company will only need disclose the transaction in the company's annual report or annual financial statement.
The similar exemption also applies to "certain financial institutions" in "specific conditions", both terms which will be determined by the OJK. Such institutions will only be required to report the transaction to the OJK and disclose it in its annual report.
Commentary and Conclusion
While POJK 17/2020 introduces new important provisions (e.g. specific threshold for companies in certain conditions by assessing the company's financial conditions instead of the transaction value), we note that there are a number of unanswered practical questions among others:
(i) an independent shareholder approval is needed for a material transaction that is subject to GMS approval and at the same time qualifies as an affiliated transaction. In most cases, an independent shareholders' approval would be difficult to obtain. Thus, this provision may significantly delay the process of a public company to undertake certain corporate actions;
(ii) it is not clear the reason why the OJK excludes "a corporate guarantee by a parent over the transaction of the controlled company that is at least 99% owned" from the list of exempted transactions under Rule IX.E.2; while at the same time, POJK 17/2020 still exempts encumbrance of security for direct loans from banks, venture capital, multi-finance companies or infrastructure funds. This may potentially create problems from a timing perspective in such transactions, where parties may need to allocate an additional timing to comply with POJK 17/2020 for a granting of a corporate guarantee; and
(iii) in the elucidation, POJK 17/2020 elaborated some examples which seems to suggest that the date of the material transaction for a conditional agreement is the date on which the last CP (if any) is fulfilled. In a situation where there is a time gap between the last CP completion and the actual closing date, there is always a possibility that a transaction might not move forward to closing. Any premature disclosure with regards to the transaction may be problematic.
With the new framework, we would expect to see a number of new transactions fall under the ambit of this new rule (when it comes into force). Some practical aspects remain unanswered and may require consultation with and guidance from the OJK. This may impact the flexibility and timing of public companies to undertake corporate actions, and might affect the practice going forward.
It is also worth noting that currently, the OJK has been receiving requests for clarification on various items under POJK 17/2020, on which the OJK intends to issue an official guideline before the rule comes into force.