Legal Protection for Minority Shareholders in the Acquisition of Private Limited Liability Company

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The information contained in this perspective is not intended to provide a legal opinion or views of the Anggraeni and Partners law offices against a particular legal issue.

Neither party may assume that he or she should act or cease or choose to act on a particular matter based on this information without seeking advice from professionals in accordance with the certain facts and certain circumstances it faces.

The acquisition and merger of a limited liability company are one of the most common corporate actions. Globally, the recorded number of acquisition and merger transactions announced to the public  reached 62,000 transactions in 2021, this number has increased 24% from 2020.[1] In Indonesia,[2] the Business Competition Supervisory Commission/Komisi Pengawas Persaingan Usaha (“KPPU“) recorded as many as 187 notifications of mergers and acquisitions from the beginning of the year until November 2021,  in which 58 of them were classified as foreign notifications.[3] It is clear that the actual number of acquisition and merger transactions will be higher, considering that only transactions with the asset value of a limited liability company resulting from the acquisition or merger exceeds Rp2,500,000,000,000.00 (two trillion five hundred billion rupiahs); or the sales value of the company resulting from the acquisition or merger exceeds Rp5,000,000,000,000.00 (five trillion rupiahs), must require notification  to the KPPU.[4]

One legal issue that arises on the acquisition is the protection of minority shareholders. Most likely, minority shareholders are the ones who are disadvantaged by the acquisition. Therefore, it is important to understand the legal protection provided by law to minority shareholders of a limited liability company, especially a private company, as well as the available options that may be offered by the relevant shareholders through an agreement.

A. Definition of Minority Shareholders

Article 1 number 11 of Law Number 40 of 2007 concerning Limited Liability Companies (“Company Law“) defines an acquisition as a legal action carried out by a legal entity or individual to acquire the shares of the company which results in the transfer of control over the company. Meanwhile minority shareholders, are not specifically defined under Indonesian laws and regulations. Black’s Law Dictionary states as follows:

“Those stockholders of a corporation who hold so few shares in relation to the total outstanding that they are unable to control the management of the corporation or to elect directors.”

Based on the aforesaid definition, it can be concluded that minority shareholders are owners or shareholders of a small portion of the total shares in a company where the minority shareholders cannot exercise control over the management of the company or become a determinant in determining the directors of the company. In the context of acquisition, minority shareholders can be defined as shareholders who do not have a bargaining position to determine whether the acquisition can take place or not.

Article 89 paragraphs (1), (2), and (3) Company Law state the following:

(1) GMS [General Meeting of Shareholders] to approve the Merger, Consolidation, Acquisition, or Separation, submission of application for bankruptcy of the Company, the extension of the term of establishment, and dissolution of the Company can be held if at the meeting at least 3/4 (three quarters) of the total shares with voting rights are present or represented at the GMS and the decision is valid if it is approved by at least 3/4 (three quarters) of the total votes cast, unless the articles of association specify a quorum for attendance and/or provisions regarding the requirements for a larger GMS decision.

(2) If the quorum of attendance as referred to in paragraph (1) is not reached, a second GMS may be held.

(3) The second GMS as referred to in paragraph (2) is valid and has the right to make decisions if at the meeting at least 2/3 (two thirds) of the total shares with voting rights are present or represented at the GMS and the decision is valid if approved by at least 3/4 (three quarters) of the total number of votes cast, unless the articles of association specify a quorum for attendance and/or provisions regarding the requirements for a larger GMS decision.

Referring to the above provisions, minority shareholders can be defined as shareholders with ownership of less than 1/4 (one quarter) of all shares with voting rights.

B. Protection of Minority Shareholders under the Company Law

Company Law provides rights to minority shareholders as a form of legal protection. Article 126 paragraph (1) of the Company Law expressly states that acquisition must pay attention to the interests of minority shareholders. However, the form of protection provided is only limited to the rights to request the company to buy its shares at a reasonable price if minority shareholders do not agree to the acquisition plan.[5]

In addition, Company Law also provides rights for minority shareholders, inter alia the following:

1. The rights to file a lawsuit against the company to the district court if the shareholders deem themselves disadvantaged by  the company’s reasons which are considered unfair and without reasonable reasons due to the decision of the GMS, the Board of Directors, and/or the Board of Commissioners.[6]
2. The rights to obtain a share offering beforehand in a balanced manner with share ownership for the same classification of shares in the event of a capital increase.[7]
3. The rights to convene a GMS (provided that it must represent the minimum number of shares regulated in Article 79 (2) Company Law or Articles of Association (“AoA“) of the company), then the request is submitted to the Board of Directors with a Registered Letter along with the reasons.[8]

C. Legal Protection Options in the Form of Agreement

In addition to the forms of protection provided by law, minority shareholders can also protect their interests through the creation of shareholder agreements. Several option clauses that can be incorporated in the shareholder agreement inter alia are as follows:

1. Right to Participate (Tag Along) The clause that gives rights to minority shareholders if the majority shareholder wants to sell their shares, minority shareholders can participate to sell their shares at an equivalent price. With this right, minority shareholders can sell their shares to the buyer at the same price as the majority shareholder’s price.
2. Clause for Lending Funds in terms of Capital Increase. This clause aims to protect minority shareholders if they do not have sufficient funds, but the majority shareholders still insist to increase their capital in the company. Alternatively, the minority shareholder can request a clause in the shareholder agreement which states that in the event of capital increase and the minority shareholder does not have sufficient funds, the majority shareholder must lend the funds to the minority shareholder to participate in the capital increase.

D. Conclusion

In the end, although the Company Law is not strong enough to protect minority shareholders, minority shareholders can increase their bargaining power to protect their legal interests in the event of a acquisition, namely by incorporating clauses including the right to participate (tag along) and clause for lending funds in the event of capital increase. (SCN/MCL)

 

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[1] https://www.cnbcindonesia.com/market/20220422131833-17-333977/merger-akuisisi-cetak-rekor-baru-di-2021-banyak-startup-ri, was accessed on 24 May 2022.

[2] The data presented in the CNBC news and information from the KPPU do not specify transactions based on whether a company is a private company or a public company.

[3] https://newssetup.kontan.co.id/news/kppu-mencatat-ada-187-notifikasi-merger-dan-akuisisi-hingga-november-2021, was accessed on 24 May 2022.

[4] Article 2 Paragraph (3) KPPU Regulation Number 3 of 2019 on Assessment of Merger, Consolidation, or Acquisition of Business Entity which May Cause Monopoly Practice and/or Unfair Business Competition.

[5] Article 62 Company Law.

[6] Article 61 Company Law.

[7] Article 43 Company Law.

[8] Article 72 Company Law.