After two years in the making, the OJK, Indonesia’s financial services authority finally issued the new regulation on material transaction and change of business activity, Regulation No. 17/POJK.04/2020, which will revoke and replace Bapepam-LK Regulation No. IX.E.2.
The OJK Regulation 17/2020 was issued as part of a series of regulations issued by OJK to support the government’s attempt to safeguard the stability of the nation’s financial system. Some of the regulations were issued to respond to the Covid-19 pandemic. Others, including this one, have a wider reach.
As we will see below, while it offers some clarity over the previous regulation, the requirements in the new regulation are much stricter.
OJK Regulation 17/2020 significantly broadens the definition of a material transaction, capturing any transaction conducted by a public company or its controlled company that meets or exceeds the thresholds stipulated in the regulation. The elucidation in the new regulation retains the examples of a material transaction from the previous regulation and adds new categories of material transaction.
These new categories include:
In addition to the threshold in the previous regulation of at least 20% or more of a public company’s equity, OJK Regulation 17/2020 sets the following additional thresholds:
If a transaction satisfies any of the above thresholds, it will be deemed as a material transaction.
For financial statements used as the base to calculate the other threshold, OJK Regulation 17/2020 allows a public company to use the audited annual financial statements, the limited review or audited quarterly financial statements, or any other audited interim financial statements. However, if the material transaction involved the purchase or disposal of a company or a business segment, OJK Regulation 17/2020 is silent on which financial statements must be used for the calculation of the transaction object. Similar to the previous regulation, the period between the date of the financial statements and the date of the transaction or GMS must not be longer than six months.
Disclosure in the annual report
The old regulation’s requirements to appoint an independent appraiser to assess the material transaction, announce the material transaction in the IDX’s website and the public company’s website and obtain approval for the material transaction from GMS still apply. The new regulation now also requires the company to disclose the result of the material transaction in its upcoming annual report, even if the company has not fully implemented such transaction. If so, the company must provide a specific reason in its nearest GMS.
The new regulation retains the old regulation’s requirement of GMS’ approval for a material transaction that exceeds 50% of the company’s equity, save for 25% or more of the company’s total assets if the company’s equity is negative. However, now, a material transaction must also obtain a GMS’ approval if the fairness opinion finds the material transaction to be unfair. The OJK Regulation 17/2020 is unclear whether an unfair opinion from the appraiser is immediately deemed as having a conflict of interest, as this relates to the quorum of the GMS.
In addition, a material transaction must now be approved by the independent shareholders if the material transaction:
OJK Regulation 17/2020 provides a list of transactions exempted from obtaining a fairness opinion and GMS’ approval.
The exemptions include a transaction between the public company and its controlled company that is owned at least 99% by the public company; a loan and collateral transaction with onshore or offshore banks, venture capitals or financial institutions; a transaction resulting from a court ruling or an auction; and restructuring transaction by a public company controlled, directly or indirectly, by the government. But these transactions must still be disclosed to the public and submitted to the OJK along with its supporting documents.
The new regulation exempts a transaction relating to a public company’s business activity that is intended to generate revenue and has been implemented continuously. This type of transaction must be disclosed in the company’s annual report or financial statements. The exemption also applies to financial institutions in a specific condition, which will be determined by the OJK. Here, such institutions will only be required to report the transaction to the OJK.
But there is a major shift in the exemption. Previously, Bapepam-LK Regulation No. IX.E.2 exempts a transaction over assets that are directly used by the public company for its production or main business activity that directly support such production or main business activity. Now, OJK Regulation 17/2020 deems such transaction as a material transaction. This change is in line with the OJK’s explanation that only operational expenditures, e.g. the purchase of raw materials, will be considered as a company’s business activity. In contrast, capital expenditure transactions such as land acquisitions for plants or assets purchased for production, will not be exempted.
Change of Business Activity
The new regulation clarifies that the change of business activity that requires GMS, public disclosure and feasibility study will be triggered if the company intends to:
While the OJK Regulation 17/2020 broadens the definition of a material transaction and clarifies the thresholds to calculate a material transaction, it also imposes stricter requirements, especially concerning the independent shareholders’ approval requirement. It is unclear why the OJK still requires the independent shareholders to give their approval if a transaction has already been deemed as a fair transaction by an appraiser.
Further, compared to the previous regulation, OJK Regulation 17/2020 does not explicitly exempt debt securities offerings through a public offering. Thus, it is unclear whether a public offering of debt securities will be subject to the material transaction requirements. It is also unclear whether a material transaction that is already disclosed in a prospectus will be subject to OJK Regulation 17/2020.
Keeping in mind that there will be a six-month gap before the new regulation becomes effective, the OJK may issue further clarifications during this period.
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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.