Master Thesis_R.A.Sabrina Stamboel

Transcription

AN ANALYSIS OF THE CORPORATE SPIN OFFS IN INDONESIA: POTENTIAL, REGULATIONS AND ISSUES Master Thesis International Business Law 2011/2012 Written by: Ratna Ayu Sabrina Stamboel U1245758/ANR 195972 Thesis Supervisors: Prof. Erik P. M. Vermeulen Ms. Jing Li Mphil Tilburg University Tilburg 2012 ABSTRACT In the field of law, Indonesia is consistently developing, as shown by the issuance of numerous new regulations, including the Spin Off regulations. Spin Off is still considered a “new thing” by various industries in Indonesia and many are still not familiar with such a term. While mergers, acquisitions and consolidations have been regulated for quite a number of years, the first act regulating spin offs is Law No. 40 Year of 2007 regarding Limited Liability Companies. Since the enactment of Law No.40 Year 2007, there have been numerous companies conducting spin off transactions. The Government of Indonesia has also been encouraging many industries to undertake spin offs, especially those in the banking industry and various state-‐owned companies. As the implementing regulations on spin off have yet to be issued until today, regulations that specifically deal with spin off transactions are still lacking. This paper aims to show how Spin Offs work by theories, implementation and regulations under the laws of Indonesia, as well as the main issues most often encountered during the process in Indonesia and their temporary solutions. i PREFACE This thesis would not have been possible without the support of several thoughtful and generous individuals. Foremost among those are my loving parents, sisters and family, who have provided all their love, support and prayers for me. Krishna Yana Stamboel, Irma Stamboel, Sharinna Tasha Stamboel, Amanda Krishana Stamboel and my guardian angel Tartika Darina, I am very grateful to have you all in my life. I can never thank you enough for everything. Pa and Ma, this is for you; I hope I can always make you proud. I would like to express my deepest and sincere gratitude to my thesis supervisor, Ms. Jing Li Mphil, who has provided tremendous insight, advice, support and guidance; to Prof. Erik P. M. Vermeulen, all of the lecturers and staff at Tilburg University International Business Law LLM masters program (“IBL”) for their kindness, assistance, time and help. Without all of you, this thesis would never become a reality. I would like to thank my firm, Hanafiah Ponggawa & Partners, in particular to Fabiola Hutagalung SH., for being my mentor who I can always trust and rely on; and Bobby Noer Rahman SH., LLM. who is more like a brother than just a colleague for me. Thank you both for lots of great inspirations, ideas, comments and endless support. I am grateful to Akina Dinar Sesari and Indria Prasastia, for always being there for me and for understanding me completely. For me, you two are more like sisters than best friends. I cannot imagine my life in Tilburg without you two, the best housemates that anyone could ask. I wish to express my warm and sincere thanks to all my friends from Jakarta and Tilburg. Although I cannot mention your names one by one, you know who you all are. Your friendship and support have given me the confidence to achieve this. And thank you to all my IBL classmates for creating such a friendly and supportive environment. Last, but not least, to Muhammad Ikhsan. Thank you for always giving your best and never giving up on me. Without your love, encouragement and understanding, it would be impossible for me to finish all of these. I love you, Da. Tilburg, June 2012 R. A. Sabrina Stamboel
ii TABLE OF CONTENTS ABSTRACT…………………………………………………………………………………………………………. i PREFACE…………………………………………………………………………………………………………… ii TABLE OF CONTENTS………………………………………………………………………………………… iii CHAPTER I: INTRODUCTION………………………………………………………………………….. 1 The Potential of Spin Offs in Indonesia…………………………………………………………………. 1 CHAPTER II: OVERVIEW OF SPIN OFF IN INDONESIA.…………………………………...... 7 A. Spin Off as one type of Division…………………………………………………………………… 7 B. Shareholders of the New Company Resulting from Spin Off………………………… 14 C. Relationship between the transferring company and the transferee company in Spin Offs…………………………………………………………………………………… 16 D. Key Motivations of Spin Off…………………………………………………………………………. 18 CHAPTER III: INDONESIAN LEGAL FRAMEWORK IN SPIN OFF…………………………… 25 A. Company Law……………………………………………………………………………………………….. 25 1. Basic requirements……………………………………………………………………………….. 25 2. Procedures……………………………………………………………………………………………. 28 3. Time line………………………………………………………………………………………………. 32 B. Islamic Banking Law and PBI No. 11……………………………………………………………….. 32 1. Obligations and sanction………………………………………………………………………. 33 2. Types and requirements…………………………………………………………………….... 33 a. Establishing a new Islamic Bank……………………….……………………....... 33 b. Transferring the assets and liabilities of the sharia business unit to an existing Islamic Bank…………………………………………………………… 35 3. Procedures and time lines…………………………………………………………………….. 35 a. Spin Off of sharia business unit by establishing an Islamic Bank….. 35 b. Spin Off sharia business unit by transferring the rights and liabilities to an existing Islamic Bank…………………………………............ 39 C. Other related regulations for public companies…………………….……………..……….. 41 1. Material transaction…………………………………………………………………………….. 41 2. Disclosure of information that must be immediately announced to the public……………………………………………………………………………......................... 43 3. Obligation to report information……………………………………………………........ 44 CHAPTER IV: ANALYSIS OF THE ISSUES IN SPIN OFF PROCESS IN INDONESIA…... 45 A. Spin Off plan and the announcement of an abridged Spin Off plan………………. 45 B. The transfer of employees……………………………………………………………………………. 47 C. Mismatch between the MOLHR Regulation and PBI No. 11…………………………… 54 CHAPTER V: CONCLUSIONS……………………………………………………………………………. 56 REFERENCES……………………………………………………………………………………………………… 58 iii CHAPTER I INTRODUCTION The Potential of Spin Offs in Indonesia The fast development of Indonesia’s economy has brought forth the need for a set of laws that can become the foundation for, and are able to guarantee the implementation of a conducive business climate. As a result, Indonesia has constantly been issuing new regulations to follow such economic development. One of the important new provisions introduced by Law No. 40 Year of 2007 regarding the Limited Liability Companies (“Company Law”), which was issued on 16 August 2007, is the inclusion of the new regulation on Division of company’s assets and liabilities. In the Company Law, Division is defined as a legal action taken by a company to separate its businesses resulting in all of the assets and liabilities of the company being transferred by operation of law to two or more companies or a part of the assets and liabilities of the company being transferred by operation of law to one or more companies (“Division”).1 Further, Divisions can be carried out by means of (i) an absolute Division or (ii) a partial Division, which is commonly known as spin off (“Spin Off”) 2. In contrast to the other corporate restructuring transactions, namely merger, acquisition and consolidation, Division is a brand new transaction in Indonesia because the Company Law is the first law that regulates and gives the legal basis for Division. Although the business term “spin off” has already been used for a long time to describe some of the divestment transactions in Indonesia3, the actual Spin Off transactions can only be done after the issuance of Company Law. 1
Indonesia (a), Law No. 40 of 2007 regarding Limited Liability Companies, Art 1 (12). 2
Ibid., Art 135 (1) jo. elucidation Art 135 (1) b. 1 The first case of Spin Off after the enactment of Company Law was undertaken by PT Bank Rakyat Indonesia (Persero), Tbk. (“BRI”) in January 2009.4 BRI spun off its sharia business unit into PT Bank BRISyariah (“BRISyariah”), which was originally named as PT Bank Jasa Artha (“BJA”) before being acquired by BRI in 2007 and converted as a sharia/Islamic commercial bank (“Islamic Bank”) in 2008.5 The whole BRI’s spin off transaction, including the acquisition of BJA, took approximately two years to be completed. However, BRI’s spin off had indicated a positive response by the business world to the then considered “new” regulation in Indonesia. Further, the Government of Indonesia (“Government”) has also been encouraging industries to perform spin off transactions, especially for the state-‐owned companies and the banking industry: 1.
State-‐owned companies Based on the Master Plan by Indonesia’s Minister of State-‐Owned Enterprises (“Master Plan”), the Government plans to restructure some of the state-‐
owned companies to enhance efficiency at all levels and promote better good corporate governance. The restructuring plans also aim to improve companies’ performances and values, so they will be able to provide more benefits in the form of dividends and taxes to the state of Indonesia (“State”), deliver better products and services at competitive prices to consumers and facilitate the implementation of privatization.6 3
nd
Abdul Moin, Merger, Akuisisi & Divestasi (Mergers, Acquisitions and Divestments), 2 ed., (Yogyakarta: Ekonisia, 2004), p. 330. 4
About BRISyariah. Retrieved May 9, 2012, from http://www.brisyariah.co.id/?q=sejarah 5
Ibid. 6
Kementerian Badan Usaha Milik Negara, Master Plan Badan Usaha Milik Negara Tahun 2002-‐2006, 2006-‐
2010, dan 2010 – 2014 (Indonesia’s Minister of State-‐Owned Enterprises, Master Plan of State-‐Owned Enterprises Year of 2002-‐20006, 2006-‐2010 and 2010-‐2014). 2 One of the programs for such restructuring plans is to form a holding company for state-‐owned enterprises engaging in the same sector.7 Further, one of the alternatives to form such holding is by Spin Off. The first case of Spin Off after the issuance of the Master Plan was conducted by PT Pupuk Sriwijaya (Persero) (“PT Pusri”), which engaged in the fertilizer business, in January 2011.8 PT Pusri spun off most of its assets and liabilities related to the production and distribution of fertilizer into a newly established subsidiary company, PT Pupuk Sriwidjaja Palembang (“PT Pusri Palembang”), in order to transform PT Pusri from an operating holding company into a holding company.9 2.
Banking industry Following the issuance of Company Law, Indonesia issued spin off regulations for the banking sector that are covered by Law No. 21 Year of 2008 regarding Sharia Banking (“Islamic Banking Law”), which was issued on 16 July 2008, and Bank Indonesia Regulation No. 11/10/PBI/2009 regarding Sharia Business Unit (“PBI No.11”), which was enacted on 19 March 2009, as one of the implementing regulations. Islamic Banking Law and PBI No.11 require all conventional commercial banks (“Conventional Bank”) that have sharia business units to spin off their sharia units to become Islamic Bank, whenever (i) such sharia business units have reached 50% (fifty percent) of the total asset value of the Conventional Banks that own them; or (ii) at the latest 15 (fifteen) years after the enactment of the Islamic Banking Law.10 PT Bank Pembangunan Daerah Jawa Barat dan Banten, Tbk. (“Bank Jabar”) was the first case in the 7
Ibid. 8
Restrukturisasi Pusri Holding mulai 2011. Retrieved, May 9, 2012, from http://www.pusri.co.id/50publikasi01.php?tipeid=DD&pubid=pub201011939 9
Pengumuman atas Ringkasan Rancangan Pemisahan Sebagian Aktiva dan Pasiva PT Pupuk Sriwidjaya (Persero) kepada PT Pupuk Sriwidjaja Palembang (“The Announcement of the Abridged Spin Off Plan by PT Pusri and PT Pusri Palembang”), published on 15 November 2010 in two newspapers: Koran Tempo and Sinar Harapan. 10
Indonesia (b), Law No. 21 of 2008 regarding Islamic Banking, Art 68 (1) jo. Indonesia (c), Bank Indonesia Regulation No. 11/10/PBI/2009 regarding Sharia Business Unit, Art 40 (1). 3 spin off of a sharia business unit by establishing an Islamic Bank based on PBI No. 11, conducted in January 2010.11 3.
Other institutions Apart from the state-‐owned companies and banks, the Government has also encouraged other institutions, especially financial institutions, to conduct Spin Off. The Capital Market and Financial Institution Supervisory Agency (“Bapepam-‐LK12”) is openly supporting the Spin Off of (i) sharia insurance business units of conventional insurance companies13 and (ii) investment management units of securities companies14. In line with the reasoning for the Spin Off of sharia business units in the banking industry, the Spin Off of sharia insurance business units to become sharia insurance companies (Islamic Insurance Companies) is also believed to help accelerate the development of the Islamic insurance industry in Indonesia. Such Spin Off encouragement is planned to be included in the upcoming insurance law.15 The Spin Off of investment management units of the securities companies to become independent companies is based on the Bapepam-‐LK Regulation No. V.D.11 dated 31 December 2009 regarding Guidelines for the Implementation of Investment Manager Functions (“Regulation No.V.D.11”), which basically requires compliance of the independence of the investment manager’s 11
Soft Opening Bank Jabar Banten Syariah Hasil Spin Off Unit. Retrieved March 3, 2012, from http://www.bandungwebs.com/2010/05/bandung-‐akhirnya-‐bank-‐jabar-‐banten.html 12
Bapepam-‐LK stands for Badan Pengawas Pasar Modal dan Lembaga Keuangan. 13
Agus & Antara, Bapepam-‐LK Desak Pemisahan MI. Retrieved March 5, 2012, from http://www.suarakarya-‐
online.com/news.html?id=270530 14
Indra Haryono, Bapepam-‐LK Izinkan Spin Off Aset Manajemen. Retrieved March 5, 2012, from http://www.indonesiafinancetoday.com/read/7453/Bapepam-‐LK-‐Izinkan-‐Spin-‐Off-‐Aset-‐Manajemen 15
Spin Off Dorong Perusahaan Asuransi Syariah Kompetitif. Retrieved March 5, 2012, from http://www.republika.co.id/berita/syariah/bisnis/12/02/01/lypncq-‐spin-‐off-‐dorong-‐perusahaan-‐asuransi-‐
syariah-‐kompetitif 4 functions.16 Within Regulation No.V.D.11, there is no obligation to conduct Spin Off, but Bapepam-‐LK urged the investment management units of securities companies to spin off in order to avoid potential conflict of interest between the investment managers and securities companies.17 The Bapepam-‐
LK states that the separation between securities companies and investment management units will be included in the draft of the upcoming capital market law18 and Bapepam-‐LK is currently drafting the Bapepam-‐LK regulation regarding separation (Spin Off) of the securities companies and their investment management units19. Following the issuance of Company Law, Spin Off has immediately become a popular transaction since many companies and shareholders (including the State) have become more aware of the ease and benefits of Spin Off. Therefore, quite a number of companies had done Spin Offs over these past few years, both voluntarily and involuntarily. The above explanations showed that there are many companies in Indonesia which have more than two different lines of business, each of which is commercially operated. Therefore the potential for Spin Off in Indonesia is huge. However, the provisions regarding Spin Off in the Company Law are not yet sufficient. According to Article 136 of the Company Law, further provisions regarding Division (including Spin Off) are to be regulated by Government Regulation after the enactment of Company Law, but such Government Regulation or other specific regulations related to the implementation of Division (including Spin Off) of limited liability companies in sectors other than the banking sector have yet to be issued. 16
Fransiska Firlana, Bapepam Dorong Spin Off Unit Usaha Syariah. Retrieved March 5, 2021, from http://keuangan.kontan.co.id/news/bapepam-‐dorong-‐spin-‐off-‐unit-‐usaha-‐asuransi-‐syariah-‐1/2010/08/14 17
Astri Karina Bangun, Peraturan Spin Off Bapepam – Masih ada 11 perusahaan yang belum penuhi aturan manajer investasi. Retrieved March 5, 2012, from http://investasi.kontan.co.id/news/masih-‐ada-‐11-‐perusahaan-‐
yang-‐belum-‐penuhi-‐aturan-‐manajer-‐investasi-‐1 18
Pemisahan Manajer Investasi Diatur Undang-‐undang. Retrieved March 5, 2012, from http://www.indonesiafinancetoday.com/read/2752/Pemisahan-‐Manajer-‐Investasi-‐Diatur-‐Undang-‐Undang 19
Agus & Antara, loc. cit. 5 Spin Off as an alternative for corporate restructuring in Indonesia is still a current issue due to the fact that the potential of doing Spin Off in Indonesia is huge and growing in number and complexity despite it being considered as a ‘new’ transaction in Indonesia. At the same time, only a limited number of in-‐depth research on this topic have been conducted, leaving a vast number of practical legal issues that have yet to be exhaustively studied. Hence, the study of Spin Off in Indonesia is prospective, because as Spin Offs are expected to further develop and become more complex, detailed analysis of the prevailing regulations and issues is needed. The research methodology is based on the goal of the study, which is to analyze the existing regulations of Spin Off and to identify the problems that arise in Spin Off process due to the limitation of such regulations, and it mainly includes the use of qualitative data. The main research technique used is documentary research (including legal research documents, as well as real life Spin Off cases in Indonesia), combined with discussing relevant aspects of the topic with professionals in the field. While semi-‐structured discussions with Spin Off professionals have been used mainly to validate the reliability of the collected data, documentary research has been the primary source of collecting information. The remainder of this paper is organized as follows. Chapter II discusses the theoretical background of Spin Off and briefly reviews such relevant theories with Spin Off cases in Indonesia. Chapter III describes the mechanism of Spin Off based on the prevailing regulations in Indonesia. Chapter IV analyzes the issues that arise in the process of Spin Off in Indonesia. The paper concludes with Chapter V. 6 CHAPTER II OVERVIEW OF SPIN OFF IN INDONESIA A. Spin Off as one type of Division As outlined in the Introduction, Spin Off is a part or variation of Division. Since Company Law is the first law that regulates Division and there are no other rules that govern Spin Off separately, thus the legal basis of Division and Spin Off is identical. The materials for drafting the Division provisions in the Company Law, among others, are using Title 7 Book 2 BW Netherlands (New), which comes into effect since 1 March 1998 as the implementing regulation of the Sixth Directive of EC Law regarding the Division of Public Limited Liability Companies (82/891/EEC) (“Sixth Directive”).20 However, there are some differences between the Division based on the Company Law and division based on the Sixth Directive, among others, the types of division. According to the Sixth Directive, there are four (4) types of division: (i) division by acquisition21, (ii) division by the formation of new companies22, (iii) division by combined method, which is basically a combination of division by acquisition and division by the formation of new companies23; and (iv) division under the supervision of a judicial authority24. Whereas, based on Article 135 Paragraph (1) of the Company Law, there are only two types of Division: 20
Fred B.G Tumbuan, Konsep Pemisahan Menurut UUPT (The Concept of Division According to the Company Law) -‐ Pointers of Discussion, presented at the event of Company Law Socialization, Jakarta, 22 August 2007. 21
EEC, Sixth Council Directives 82/891/EEC of 17 December 1982 based on Article 54 (3) (g) Treaty, concerning the division of public limited liability companies, Art 2 (1). 22
Ibid., Art 21 (1). 23
Ibid., Art 1 (3). 24
Ibid., Art 23. 7 1.
Absolute Division Absolute division is a legal action taken by a company to separate its business resulting all of the assets and liabilities of the company being transferred by operation of law to two or more other transferee companies and the company that conduct such separation expires by operation of law (“Absolute Division”)25. The term “expires by law” intends to make explicit that the company which conducts Absolute Division will no longer have legal status as a legal entity under the law, without any prior liquidation.26 2.
Spin Off (Partial Division) Many definitions of spin offs Literally, a spin off means “something that comes about unexpectedly, as a result of activities that were designed to achieve something else” (Parhankangas 1999).27 Many dictionaries, articles and literatures provide definitions of corporate spin off which shall be reviewed in this section, among others: a.
“. . . an individual or an organizational unit leaving an existing firm to start as a new firm on the basis of his/their specific knowledge and competence” (Elfring and Foss 2000).28 25
Indonesia (a), op.cit., Art 1 (12) jo. Art 135 (2). 26
Hadi Setia Tunggal, Undang-‐Undang Perseroan Terbatas Indonesia Dalam Tanya Jawab (The Company Law’s Frequently Asked Questions), (Jakarta: Harvindo, 2008), p. 40. 27
A. Parhankangas, Disintegration of technological competencies, an empirical study of divestment through spin-‐off arrangements, ACTA Politechnica Scandinavica, Mathemathics, Computing and Management in Engineering Series no. 99, (Espoo: Finish Academy of Technology, 1999), p. 21. 28
T. Elfring and N.J. Foss, Competence Building: Understanding the Role of International Venturing and Spin-‐offs, Advance in Applied Business Strategy, vol. 6A, (2000), pp. 97-‐119. 8 From the above definition, other author develops such definition to become: ”A spin off is an individual or a group of individuals leaving a ‘parent’ firm to start up a new, independent business. The start up occurs on basis of specific knowledge and competence built up within the parent firm. The parent firm supports the spin off by allowing the transfer of knowledge, competence and/or direct means.”29 Elfring and Foss further classified spin offs according to the character of separation (‘virtuous’ or ‘vicious’) and the unit of analysis (individual or organizational units). The vicious spin off is the one whose motive to start a new firm is negative: the organizational unit or the individual leaves the company because they are frustrated in the relationship with the employer or because they expect to be able to gain higher rewards as an entrepreneur. The spun off company in this case often competes with the previous firm.30 On the other hand, the virtuous spin off is based on positive motivation: the activities of the spun off company are complementary or part of the value chain of the parent company. Alternatively, the parent company may be able to concentrate on its core business and the new company’s business opportunities may have higher value as a separate company. In this case, the new company does not compete with the parent company.31 b.
“. . . the division of an existing company into two, usually a bigger one (the parent company) and a smaller one (the spin off)” (Moncada et al. (1999).32 29
Yonne Bernardt, Richard Kerste and Joris Meijaard, Spin-‐off start-‐ups in the Netherlands: At First Glance, EIM Business & Policy Research, (Zoetermeer: May 2002), p. 13. Retrieved June 20, 2012 from http://www.entrepreneurship-‐sme.eu/pdf-‐ez/B200106.pdf 30
Ibid., p. 10. 31
Ibid. 32
P. Moncada Paternò-‐Castello, A. Tübke, J. Howells and M. Carbone, The impact of corporate spin-‐offs on the competitiveness and employment in the European Union, a first study, European Commission, IPTS, (1999). 9 Moncada et al. also make a further division into two types of spin off process: (i)
Restructuring-‐driven spin offs: “. . . because the business no longer fits the parent’s strategy, because functions of the business are externalized and/or because the parent company tries to avoid costly layoffs and social plans”. (ii)
Entrepreneurial spin offs: “. . . based on critical know-‐how acquired during his previous professional experience in order to exploit an unused potential”. This type can be further divided into two types: spin offs that collaborate with their parent company and spin offs that compete with their parent company (which has an analogy with the above mentioned virtuous or vicious spin offs).33 c.
Shrader and Simon (1997) divided spin offs into: (i) independent venture, which is a new independent company, established by individual entrepreneurs; and (ii) corporate ventures, which initiatives are controlled and sponsored by the parent company. Both of them started by individuals, using specific knowledge from their former jobs.34 In accordance with Shrader and Simon, Green et al. (1999) also define corporate venturing as a creation of new business by members of a firm that already exists.35 d.
Other author describes ‘entrepreneurial’ spin offs as “. . . entrepreneurs that leave a company to start a firm of their own. This 33
Bernardt, op.cit., p. 11. 34
Rodney C Shrader and Mark Simon, Corporate versus independent new ventures: resource, strategy, and performance differences, Journal of Business Venturing (1997), 12, pp. 47-‐66. 35
Patricia G. Greene, G. Candida Brush and Myra M. Hart, The Corporate Venture Champion: A Resource-‐
based Approach to Role and Process, Entrepreneurship Theory and Practice (1999), vol. 23, no. 3, pp. 103-‐
121. 10 transfer to a new company must include the transfer of some rights, e.g. assets or knowledge, from the existing legal body to the new firm body” (Lindholm Dahlstrand 1997).36 e.
“. . .occurs when a company distributes all of the common shares it owns in a controlled subsidiary to its existing shareholders, thereby creating a separate public company.”37 f.
“. . .a pro-‐rata distribution of the stock of a subsidiary to existing shareholders. The subsidiary may be an existing division or a newly created subsidiary of the parent. At the time of the spin-‐off, the subsidiary becomes a freestanding company. No funds are raised in a spin-‐off, and neither firm revalues its assets.”38 g.
“ …the property company is split up and the resulting “parts” are transferred either in its entirety to two or more acquiring companies, or the dividend company continues in “reduced circumstances” retaining its remaining property.”39 h.
Further, the Black’s Law Dictionary’s definition of spin off is a corporate divestiture in which a division of a corporation becomes an independent company and stock of the new company is distributed to the corporation’s shareholders.40 36
Åsa Lindholm Dahlstrand, Growth and inventiveness in technology-‐based Spin-‐off Firms, Research Policy (1997), 26, pp. 331-‐344. 37
James A. Miles and James D. Rosenfeld, The effect of Voluntary Spin-‐off Announcements on Shareholder Wealth, The Journal of Finance (December 1983), vol. 38, no. 5. Retrieved June 24, 2012, from http://bbs.cenet.org.cn/uploadimages/200462219135045452.pdf 38
Amy K. Dittmar, Capital Structure in Corporate Spin-‐offs, The Journal of Business (January 2004); 77, 1, The University of Chicago Press. Retrieved May 9, 2012, from http://www.journals.uchicago.edu/cgi-‐
bin/resolve?JB770102 39
nd
Erik Werlauff, EU–Company Law: Common Business Law of 28 States, 2 ed., translated by Hanre Gron, (Denmark: DJØF Publishing, 2003), p. 587. 11 Based on the above definitions, spin off can be described as a corporate action, which is taken by a company to separate its division/business unit or subsidiary by forming a new company or into an existing company or even the departure of an individual from an existing company by establishing a new company. However, since there are many definitions in use, this paper shall specifically address the Spin Off in which the meaning is in line with the definition contemplated in the Company Law, which gives the following definition of Spin Off as: Spin Off is a legal action taken by a company to separate its business resulting in part of the assets and liabilities of the company being transferred by operation of law to 1 (one) or more other transferee companies but the company conducting such separation remains in existence.41 According to the Company Law, the assets and liabilities that are being separated is a part of the company itself, such as the separation of a division/business unit of the company, and it will be separated by operation of law with only one deed, which is the deed of Spin Off. Therefore, neither the separation of a subsidiary from its parent company nor the departure of an individual from an existing company is included in this specific definition of Spin Off. Consistent with the definition of Spin Off according to Company Law, PBI No.11 defines Spin Off as a business separation of one Conventional Bank into two or more business entities in accordance with the stipulations of prevailing legislations.42 40
Black’s Law Dictionary, 8th ed., edited by Bryan A. Garner, (St. Paul, Minnesota: West Publishing CO, 2004), p. 1437. 41
Indonesia (a), op.cit., Art 1 (12) jo. Art 135 (3) jo. elucidation Art 135 (1) b. 42
Indonesia (c), op.cit., Art 1 (14). 12 Spin off and merger Spin Off is the opposite of merger.43 The term Spin Off is also known as demerger, which is the converse of a merger.44 The Company Law defines merger as a legal action taken by one or more companies to merge with another existing company resulting the assets and liabilities of the companies being transferred by operation of law to the surviving company and thereafter the merging companies status as legal entities ceases by operation of law (“Merger”).45 Basically, in Merger, there are two or more companies being merged into one of the merging companies, conversely in Spin Off there is one company which will be divided into two or more companies. Further, the transfer of assets and liabilities in both Merger and Spin Off occurs by operation of law. Therefore, the mechanism of Spin Off is very similar to the mechanism of Merger, which makes the provisions of Merger are the best reference in filling out the provisions of Spin Off in Indonesia that have not yet been set (if it is deemed necessary). Other important things that need to be noted regarding Division in Indonesia, among others, that the cross-‐border Division, for example between an Indonesian company and a Singaporean company, cannot be done.46 Since the laws that regulated both countries are different and especially for immovable properties, lex rei sitae will be applied.47 Lex rei sitae (lex situs) means that the law that should be imposed on a property is the law where the property is 43
Masih Banyak Yang Perlu Disempurnakan RUUPT. Retrieved March 5, 2012, from http://hukumonline.com/detail.asp?id=15752&cl=Berita 44
SHP, Demerger / Spin-‐Off – Mandatory Corporate Action, (21 July 2009). Retrieved May 9, 2012, from http://shareholdersportal.co.uk/investments/demerger-‐spin-‐off-‐%e2%80%93-‐mandatory-‐corporate-‐
action#ixzz1uDYfBFxY 45
Indonesia (a), op.cit., Art 1 (9). 46
Tumbuan, op. cit. 47
Ibid. 13 situated.48 This shows that the transfer of assets and liabilities by operation of law might be invalid or cannot be applied in the said country.49 Moreover, a company within the status of “under liquidation” after dissolution cannot be a party in Division process.50 This condition also applied with a company that has been declared bankrupt or insolvent.51 B. Shareholders of the New Company Resulting from Spin Off In Indonesia, a company must be established by at least two shareholders.52 In the event that the company has obtained the status of legal entity the number of shareholders become less than two persons, then within six months from that the time the situation arises, the shareholder concerned must assign part of the shares to some other person or the company must issue new shares to some other person.53 With regard to the shareholders of the new company resulting from Spin Off transaction (the transferee company), neither the Company Law nor Islamic Banking Law has explicitly stated who are the shareholders of the new company, whether the initial shareholders of the divided company or the divided company itself. Towards this, Fred B.G. Tumbuan, one of the legal experts in Indonesia involved in drafting the Division provisions in the Company Law, suggests that the basic 48
Bayu Seto, Dasar-‐dasar Hukum Perdata International -‐ Buku Pertama (The Basics of International Private Law -‐ The First Book), (Bandung: PT Citra Aditya Bakti, 1994). 49
Tumbuan, op.cit. 50
Ibid. 51
Ibid. 52
Indonesia (a), op.cit. Art 7 (1). 53
Ibid., Art 7 (5). 14 principle in Division is the shareholders of the companies that conduct Spin Off by operation of law shall become the shareholders of the transferee companies.54 Such basic principle is in line with the definition of Spin Off based on Black’s Law Dictionary, which is “. . . a corporate divestiture in which a division of a corporation becomes an independent company and stock of the new company is distributed to the corporation’s shareholders . . .”55. Although in practice, it is not necessarily so. In many cases, for example the establishment of PT Bank BNI Syariah (“BNI Syariah”), PT Pusri Palembang and PT Bank BJB Syariah (“BJB Syariah”), which are companies that resulted from Spin Off transactions, one of their shareholders was not the shareholder of the divided companies, but the divided companies themselves. Such condition can occur because in Indonesia there is no automatic distribution of shares as a result of Spin off. Shareholders of the new company are not determined based on the transferred of assets and liabilities, but based on who injected capital in the company which can be calculated as shares. In the event that the assets and liabilities being transferred to the transferee company are in balance, they cannot be considered as a capital injection that can be calculated as shares in the transferee company. The only way that the assets can be calculated as shares in the transferee company is, if there is a difference between the assets and liabilities that are being transferred, and the difference must show that the value of assets is greater than the value of the liabilities. Such difference shall be considered as a capital injection that can be calculated as shares.56 54
Tumbuan, op.cit. 55
Black’s Law Dictionary, op.cit., p. 1437. 56
Interview with Fabiola Hutagalung, Partner at Hanafiah Ponggawa & Parners law firm, Jakarta, Indonesia 0n 16 May 2012, at 17.00 time in Tilburg -‐ Netherlands. Mrs. Hutagalung also happens to be one of the lawyers who involved in the Spin Off of BRI, PT Pusri, PT Bank Negara Indonesia (Persero), Tbk. and BJB. 15 Relationship between the transferring company and the transferee C. company in Spin Offs Almost every single company resulting from Spin Off received different kind of support from their parent companies (transferring companies) at least until they can be truly independent. Resources are not only shared unintentionally.57 In some case the transferring company, as the parent company, deliberately helps creating a new company (by Spin Off) as part of the business strategy, which they believe can offer several benefits to the existing company.58 The type of support received by the transferee company from the transferring company, among others, are sales or job orders, knowledge, financial support and other support that contain a range of different support types, depending on each case. Many companies also offered their former employees the possibility to work part time or with flexible hours during the transition period.59 Physical resources, such as the (temporary or permanently) use of machines, computers, and other equipment are also sometimes transferred.60 Further, one of the most important aspects is the reputation of the parent company, especially for a start up company. The use of network, access to customers, suppliers and access to finance are relevant positive effects for a new company resulting from Spin Off.61 In Indonesia, an agreement between the transferring company (the parent firm) and the transferee company (the subsidiary) regarding the commitment from the parent company to the subsidiary usually become one of the attachments of the deed of Spin Off. Such agreement shall state that the transferring company shall 57
Sierdjan Koster, Spin-‐off firms and individual start-‐ups. Are they really different?, paper prepared for th
44 ERSA conference, (Porto: 25-‐29 August 2004), p. 4. Retrieved June 20, 2012, from: http://www-‐sre.wu-‐
wien.ac.at/ersa/ersaconfs/ersa04/PDF/287.pdf 58
Ibid. 59
Bernardt, op.cit., p. 24. 60
Ibid. 61
Ibid., p. 30. 16 commit to the transferee company to give its supports in relation to, for example, financial support (capital injection), human resources, physical resources (equipments or even buildings for office), information technology (IT), intellectual property rights and others deemed necessary until a specified time or as long as needed. Success factors of Spin off Start Ups The advantage of the above mentioned relationship with the transferring companies is the most significant difference between an ordinary new established companies and new companies resulting from Spin Off. A survey, which was conducted in the Netherlands, showed that companies resulting from Spin Offs might perform better than regular companies.62 The support of the parent companies most likely becomes a very important contribution of the spun off companies’ success. The spun off companies can be seen as new companies managing existing resources or assets originating from their parent companies, while the resources of the ordinary companies originate from elsewhere.63 Apart from the financial support, including the physical resources, which is obviously very helpful for start ups, the knowledge and experience that those companies gained within the parent companies enable them to expand their activities rather quickly and to make progress in the development of their activities.64 When an employee utilizes sector-‐specific knowledge in a new company, resources of the former company are unintentionally shared with the newly developed company. In some knowledge intensive industries it is not uncommon for employees to sign a contract in which they state that knowledge 62
Ibid., p. 36. 63
Koster, op.cit., p. 3. 64
Bernardt, op.cit., p. 36. 17 will not be used outside of the company.65 Therefore, this is a huge advantage for spin off startups since the parent companies are allowing them to use such knowledge. On the contrary, many new established companies lose considerable time commercializing their ideas. Further, the reputation of the parent company is also an advantage. As financiers, potential clients and partners with whom they cooperate shall have a positive consideration and take the spun off companies more seriously once they know their background and the trusted reputation of the parent companies that support them.66 In addition, orders from the parent companies or other kinds of indirect financial support also contribute to the first success of spun off companies. For example, the spun off companies may get through the difficult start-‐up phase because the parent company is a reliable client.67 D. Key motivations of Spin Offs Generally, Spin Offs come in two forms68: 1.
Voluntary Voluntary Spin Offs typically yield and thus not essential to the parents companies.69 Companies may have a number of reasons for spinning off their business units such as to improve the value of such business units or to take advantage of the tax benefits as discussed below.70 While many Spin Offs are motivated by the desire to dispose unprofitable 65
Koster, op.cit., p. 3. 66
Ibid. 67
Ibid. 68
Spin-‐Off Benefits, Spin Off Advisors L.L.C: Independent Research on Corporate Spin-‐Offs. Retrieved May 10, 2012, from http://www.ibtimes.com/clients/2010/spin-‐off/pdffiles/Spin-‐Off_Benefits_4_10.pdf 69
Ibid. 70
Ibid. 18 divisions/business unit, there are also many very good business reasons to spin off profitable divisions/business unit. 2.
Involuntary/mandatory On the other hand, involuntary Spin Offs, which may also result from a variety of causes, generally result from obligations under any law or other relevant regulations or also by court decisions or complaints filed by the State regulatory agency71 that basically require companies to Spin Off and leave the companies with no other choice than to spin off their business units. Spin Off is also a sensible option if negative synergies or diseconomies of scale exist that can be eliminated by separating the company into two or more independent companies.72 According to Kudla and McInish (1984), companies have a variety of motivations for Spin Off, including management reasons, capital market factors, risks, tax benefits, marketing factors, and regulatory/legal reasons73. Possible explanations for conducting Spin Offs are plentiful and can be broadly categorized into the following: 1.
Organizational improvements Spin Off is most often conducted in circumstances where a company is engaged in a number of businesses, one of which is considered non-‐core in relation to the company’s primary business areas.74 71
Ronald J. Kudla and Thomas H. Mcinish, Corporate Spin-‐Offs, (London: Quorum Books, 1984), p. 7. 72
Thomas Kirchmaier, The Performance Effects of European Demergers, Centre for Economic Performance (London: London School of Economics and Political Science, May 2003). Retrieved May 10, 2012, from http://eprints.lse.ac.uk/20047/ 73
Kudla, op.cit. 74
Phillip Webb, Spin-‐off: How to find hidden treasures in the desert of market crisis, IR Magazine (January/February 2009). Retrieved May 28, 2012, from http://www.debevoise.com/files/Publication/a0ca3db2-‐ce22-‐4bea-‐abd8-‐
9ad6cf74207c/Presentation/PublicationAttachment/bdbdbe46-‐ea14-‐466b-‐b655-‐
9f4500c665e0/IRmagazinereprint.pdf 19 From an organizational perspective, value can be created through the elimination of misfits in the strategic focus or organizational properties of the organization. In addition, the reduction of the size of an organization leads to an over-‐proportional reduction in ‘information loss’ hierarchy.75 Spin Offs can also alleviate management problems for the companies conducting Spin Offs and the spun off companies because both companies often have different and/or unrelated lines of business or different business environments and market sectors.76 Unrelated business lines means that they also have different business risks, which affect operating earnings thus Companies sometimes Spin Off their units to protect both companies and units from one another’s risks.77 Moreover, the original companies often cannot provide the kind of management, financial, and resources support that the units need for continuous growth.78 Consequently, Spin Offs allow the spun off companies to negotiate management, finance and resource issues with their own board of directors (“BoD”), to make decisions for themselves79 and concentrate on their specific market segment thus enabling the market to better appreciated the spun off companies. Further, companies conducting the Spin Offs can better concentrate on their most important operations or core businesses unencumbered by the spun off companies.80 Therefore, Spin Offs that increase corporate focus should create value and improve efficiency.81 75
Kirchmajer, op.cit. 76
Spin-‐Off Benefits, loc.cit. 77
Ibid. 78
Ibid. 79
Ibid. 80
Ibid. 81
Dmitri Boreiko and Maurizio Murgia, Which spin-‐offs generate value and performance improvements?, Free University of Bolzano-‐Bozen: School of Economics and Management, (Italy: September 2008). Retrieved June 20, 2012, from http://69.175.2.130/~finman/Turin/Papers/EUSpinoffPaper_V_09_2008.pdf 20 For example, based on BJB’s Announcement of Abridged Spin Off Plan, the purposes from spinning off its sharia business unit by establishing PT Bank Jabar Banten Syariah (“BJBS”) are, among others, (i) to increase productivity and efficiency; (ii) to improve the capital structure; and (iii) to enhance the business prospect of BJB’s sharia business unit.82 The above three purposes can be better achieved if BJB’s sharia business unit stands on its own as an independent company with its own organizational structure. 2.
Capital market improvements More focused units might improve access to the capital market or attract a new set of investors, thereby eliminating barriers to growth from a capital market perspective.83 Further, the spun off company has the advantage of an independent stock price which should reflect the capital market’s assessment of management’s performance.84 Therefore, the spun off companies could be worth more in the open market if they traded on their own. This is a way to bring out hidden asset value.85 In line with the above, PT Bank Negara Indonesia (Persero), Tbk. (“BNI”) declared in its Announcement of Abridged Spin Off Plan that one of the positive benefits expected from the spun off of BNI’s sharia business unit is that BNI Syariah, as an independent company, shall be able to enter the Islamic capital market and international financing.86 Such condition will 82
Pengumuman atas Ringkasan Rancangan Pemisahan Dan Rencana Pengalihan Hak Dan Kewajiban Unit Usaha Syariah PT Bank Pembangunan Daerah Jawa Barat dan Banten Tbk. Dengan Cara Mendirikan PT Bank Jabar Banten Syariah (“The Announcement of the Abridged Spin Off Plan by BJB”), published on 1 December 2009 in Business Indonesia newspaper. 83
John A., Why Do Companies Spin Off?. Retrieved May 23, 2012, from http://www.cdnbusinessdirectory.com/financial-‐planning/39439-‐why-‐do-‐companies-‐spin-‐off 21 never happen if BNI Syariah remained as part of BNI as its sharia business unit. 3.
Corporate governance improvements Value creation through improvements in the role and function of the head office, improvement in the structuring of managerial incentives and more effective market based governance mechanisms due to increased transparency.87 One of the examples in line with the above is the spun off PT Pusri. As mentioned in the Introduction, PT Pusri spun off all its assets and liabilities that related to its operations and distributions of fertilizer into PT Pusri Palembang. The transaction was conducted in order to transform PT Pusri from an operating holding company to a holding company.88 Such condition is intended to apply better principles of good corporate governance on the fertilizer industry (for the state-‐owned companies) in relation to PT Pusri’s position as the holding of all state-‐owned fertilizer companies, especially in terms of: a.
To avoid any conflict of interest between the holding and its subsidiaries. b.
To create a more effective control mechanism by the holding company towards its subsidiaries thus the accountability of the subsidiaries’ performances will be better established. 86
Pengumuman atas Ringkasan Rancangan Pemisahan Unit Usaha Syariah PT Bank Negara Indonesia (Persero) Dengan Cara Pendirian Bank Umum Syariah (“The Announcement of the Abridged Spin Off Plan by BNI”), published on 12 August 2009 in three newspapers: Business Indonesia, Media Indonesia and the Jakarta Globe. 87
The Announcement of the Abridged Spin Off Plan by PT Pusri and PT Pusri Palembang, op.cit. 22 c.
To avoid any conflict of interest and job function between the BoD and board of commissioners of the holding company and its subsidiaries. d.
Harmonization and synchronization of the corporate policy inter-‐
subsidiaries. e.
The centralization of the strategic organizational functions and policies to the holding company to increase the overall value of the fertilizer state-‐owned companies.89 4.
Tax advantages Spinning off the companies’ assets and liabilities can be a better way to create shareholder value while taking advantage of tax laws. In Indonesia, Regulation of the Minister of Finance No. 43/PMK.03/2008 regarding the Use of Book Value upon the Transfer of Assets in Mergers, Consolidations or Divisions allows the company which is going to conduct a spin off to use the book value for the calculation of the tax on the transfer of its assets, provided that: a.
The approval of the Directorate General of Tax for the proposed transfer in the Spin Off has been obtained90; b.
Such company is (i) a private company who is about to make an initial public offering within 1 year after the approval from the Directorate General of Tax is obtained, or (ii) a public company as long as the company which receives the assets in the Spin Off will make an IPO within 1 year after the approval from the Directorate General of Tax is obtained.91 89
Ibid. 90
Indonesia (d), Regulation of the Minister of Finance No. 43/PMK.03/2008 regarding the Use of Book Value upon the Transfer of Assets in Mergers, Art 2. 23 Further, Spin Off can also be used as an alternative restructuring strategy for companies. In many events, restructuring companies through selling (assets and/or shares) could generate a big capital gain tax. Conducting Spin Off can reduce such condition. 5.
Regulatory reason Finally, laws and regulations may cause companies to Spin Off units by voluntarily or involuntarily.92 As previously mentioned, laws and regulations sometimes lead to involuntary spin offs when such regulations oblige companies to conduct Spin Off. For example, PBI No.11 requires all the Conventional Banks that have sharia business units to spin off their sharia business units to become Islamic Banks, whenever (i) such sharia business units have reached 50% (fifty percent) of total asset value of the conventional commercial banks that own them; or (ii) at the latest 15 (fifteen) years since the enactment of the Islamic Banking Law.93 Those banks that have met the first and the second requirements have to do spin off by mandatory and all the banks in Indonesia that have sharia business units in the year 2023 have to Spin Off such units by mandatory as well.
91
Ibid., Art 1 (5) jo. Art 6 (1). 92
Islamic Banking Law was enacted on 16 July 2008. 24 CHAPTER III INDONESIAN LEGAL FRAMEWORK IN SPIN OFF A. Company Law As the first law regulating Spin Off in Indonesia, Company Law contains the basic requirements and general procedures for conducting Spin Off. 1.
Basic requirements The basic requirements for Division (including Spin Off) are stipulated under Article 126: a.
The legal actions of Merger, consolidation, acquisition and Division must be subject to the interests of the company, minority shareholders, the company’s employees, creditors, other business partners of the company, the public and sound business competition.94 b.
Merger, consolidation, acquisition and Division shall not reduce the rights of minority shareholders to sell their shares at a reasonable price.95 As stated above, there are some interests that must be considered by the BoD, as the authorized organ of the company96, in performing Spin Off, among others: 94
Indonesia (a), op.cit., Art 126 (1). 95
Ibid., Art 126 (2) jo. Art 62. 96
The Board of directors shall be fully responsible for the management of the companies and represent companies in and out of the courts. See Indonesia (a), op.cit., Art 97 (1) jo. Art 98 (1). 25 a.
The company’s interest Company’s interest becomes the main interest to be considered in conducting Spin Off. In this matter the BoD is to be reminded by such provisions that the execution of Spin Off shall not be detrimental to the company. The decision of conducting Spin Off must be based on good faith and responsibility of the BoD for the benefit of the company and in accordance with the purpose and objectives of the company.97 b.
Minority shareholders’ interest The term “subject to the interest of minority shareholders” is intended to ensure that the majority shareholders do not act as they pleased themselves without considering the interest of the minority shareholders, but rather on good faith. On the other hand, the minority shareholders are also required to act wisely and based on good faith since the minority shareholders are not always the party with the weak economic condition. Sometimes for various reasons, the party with the strong economic condition agreed to hold shares in small quantities.98 The problems of minority shareholders could be a dilemma if the majority shareholders or the minority shareholders show dictatorial attitudes, especially when the minority shareholders represent more than ¼ (one quarter) of the total shares with voting rights while the majority shareholders insisted on continuing the plan for Spin Off without considering the minority shareholders’ interests. In this case, the minority shareholders with their ability to prevent decision-‐
97
Indonesia (a), op.cit., Art 97 (2) jo. Art 92 (1). 98
Kartini Muljadi, Merger, Konsolidasi, dan Akuisisi Dalam UU Perseroan Terbatas No. 1 tahun 1995, Newsletter (Juni 1995). 26 making process through the general meeting of shareholders (“GMS”)99 could insist on refusing the plan for Spin Off regardless of the majority shareholders’ interests and reasons. Therefore, the execution of Spin Off shall not reduce the rights of minority shareholders to sell their shares at a reasonable price in the case when the minority shareholders do not agree and feel disadvantaged with such plan. Shareholders’ rights shall be settled in accordance with the provisions of Article 126 jo. Article 62 of the Company Law, which stated that their shares could be purchased according to the company’s reasonable price. c.
Creditors’ interest The creditors of the companies in Spin Off are entitled to obtain complete information regarding the company that will receive the transfer of assets and liabilities resulting from such Spin Off. This is reasonable since the transferee company shall bear the fulfillment of all the engagements in relation to the transferred assets and liabilities from the transferring company. This is also to avoid any abuse of law against the creditors since Spin Off could be used as a loophole to avoid paying obligations or debts.100 Therefore, it is appropriate for the creditors to have the right to submit objections to the company with regard to the plan for Spin Off.101 In the event that a creditor’s objection cannot be resolved by the BoD as of the date on which the 99
The GMS resolutions regarding Spin Off shall be valid if adopted on the basis of deliberation to reach a consensus. In the event that resolutions on the basis of deliberation to reach a consensus cannot be achieved, resolutions shall be lawful if in the meeting at least ¾ (three quarters) of the total number of shares with voting rights are present or represented in the GMS and approved by at least ¾ (three quarters) of the number of vote cast. See Indonesia (a), op.cit., Art 127. 100
Ketentuan tentang Pemisahan (juga) tak Komplet RUUPT. Retrieved May 28, 2012, from http://hukumonline.com/detail.asp?id=16951&cl=Berita 101
Tumbuan, op.cit. 27 GMS is convened, the objection must be presented in the GMS in order to find a resolution. Until the resolution is achieved, the act of Spin Off cannot be performed.102 d.
The company’s employees interest Considering the company’s employees interest is also a very reasonable requirement. Because labor settlement is absolutely necessary, Spin Off should not cause a termination of employment. If there are objections from the company’s employees regarding the plan for Spin Off, it must be resolved in accordance with the applicable provisions of labor law and internal policies of the company. e.
Public interest The term “public interest” has a broad meaning. It depends on which sector the Spin Off is conducted. For example, if it is associated with the banking sector, then the interest of the banks’ customers is included as part of public interest. f.
The sound business competition The consideration of sound business competition is intended to avoid any possibilities of a monopoly or monopsony occurring in various forms and can be detrimental to the public.103 Spin Off should not lead to a condition that runs counter to the applicable competition law. 2.
Procedures The following is general procedures for conducting Spin Off based on the Company Law: 102
Indonesia (a), op.cit., Art 127 (6) and (7). 103
Ibid., elucidation Art 126 (1). 28 No. Steps to be completed Remarks 1. GMS which approves the BoD’s plan The Company Law does not require to conduct plan for Spin Off. this step. However, the BoD would not usually proceed to take action with regards to the plan for Spin Off without obtaining prior approval from the shareholders of the company. 2. The BoD of the companies in Spin Commonly, both companies, the Offs shall compile a plan of Spin Off. company conducting the Spin Off and the transferee company, jointly formulate the plan of Spin Off. In the event that the transferee company has not yet been established, the plan of Spin Off shall be made by the company conducting the Spin Off and containing all information on the company to be established as a result of the Spin Off. 3. The plan of Spin Off shall, after obtaining approval from the board of commissioners (“BoC”) of each company, be submitted to the extraordinary GMS (“EGMS”) of each company to obtain their respective shareholders’ approval. 4. Apart from the provisions in the For example, in the banking sector, Company Law, certain companies in the company must obtain prior Spin Offs will also need to obtain approval from Bank Indonesia, prior approval from the relevant which regulated through PBI government agencies in accordance No.11. For public companies, they with the provisions of legislative need to conduct reports or obtain regulations and for public certain approvals from the companies, the provision Bapepam-‐LK (if deemed contemplated in the Company Law necessary). shall also apply in so far as the legislative regulations in the field of capital markets do not provide otherwise. 5. The BoD of the companies in Spin Those announcements are Offs must publish the announcement intended to give the parties of abridged Spin Off plan in at least concerned the opportunity to find one (1) newspaper and publish it in out about the plan for Spin Off and writing to the employees of the submit objections if they feel their Legal Basis N/A Art 123 (1) Art 123 (2) Art 123 (4) and (5) Art 127 (2) and (3) 29 companies in Spin Offs not later than 30 (thirty) days before the invitation of EGMS. Such publication must also contain notice that the interested parties may obtain the plan of Spin Off at the company’s office as from the date of its publication to the date on which the EGMS is to be convened. 6. The creditors may submit objections to the company within a period of not more than 14 (fourteen) days after the announcement of the abridged Spin Off plan in accordance with such plan. 7. The BoD shall issue EGMS invitations within a period of not later than 14 (fourteen) days before the date on which the EGMS is held, exclusive the date of the invitation and the date of EGMS. Such Invitations must fulfill the requirements under Art 82 and 83 of the Company Law. 8. Spin Off shall only be done if the EGMS regarding Spin Off approved the plan of Spin Off, which has already been approved by the BoC. The EGMS resolutions regarding Spin Off shall be valid if adopted on the basis of deliberation to reach a consensus. In the event that resolutions on the basis of deliberation to reach a consensus cannot be achieved, resolutions shall be lawful if in the meeting, at least ¾ (three quarters) of the total number of shares with voting rights are present or represented in the GMS and approved by at least ¾ (three quarters) of the number of vote cast. interests will be harmed. If within the set period, no Art 127 (4), creditors have submitted any (5), (6) and objections, the creditors will be (7) deemed to have approved the Spin Off. In the event that the BoD as of the date on which the EGMS is to be convened cannot resolve a creditor’s objection, the objection must be presented in the EGMS in order to find a resolution. Until the resolution is achieved, the Spin Off cannot be performed. The invitations may be issued by Art 82 jo. registered letter and/or by an Art 83 advertisement in newspapers. For public companies, invitations to an EGMS must be preceded by an announcement that invitations to an EGMS will be issued with due attention to the provisions of legislative regulations in the field of capital markets. Both of the transferring company Art 127 (1) and the transferee company must conduct the EGMS. In practice, the EGMS resolutions shall approve at least: (i)
The Spin Off (for the transferring company the EGMS shall approve the legal action of transferring the assets and liabilities and for the transferee company the EGMS shall approve the legal action of receiving such assets and liabilities); (ii)
The plan of Spin Off; and (iii)
The draft of the deed of 30 Spin Off. 9. The plan of Spin Off approved by the EGMS of each companies involved in the Spin Off shall be set forth in a deed of Spin Off made before a notary in Indonesian language. In practice, the deed of Spin Off has several of attachments, such as: the EGMS approval, the Spin Off plan approved by the BoC, the written announcement to employees, copy of any relevant licenses, the announcement of abridged Spin Off plan, statement of no objections from the creditors, the concept of the deed of Spin Off, agreement between the transferring company and transferee company, and the list of assets and liabilities being spun off. 10. The copy of the deed of Spin Off, accompanied by amendments to the articles of association (“AoA”) of the respective companies, need to be attached to (i) the application submitted to obtain approval or (ii) the delivery notification to the Minister of Law and Human Rights (“MOLHR”). 11. In the event that the deed of Spin Off is not accompanied by amendments to the AoA, a copy of the deed must be delivered to the MOLHR for recording in the registry of companies. 12. The BoD of the transferee Company must publish the result of Spin Off in one (1) newspaper within no more than 30 (thirty) days as from the date the Spin Off comes into effect. Art 128 (1) Art 129 (1) Art 129 (2) Art 133 (1) 31 3.
Time line In brief, the schedule of a Spin Off process is as follows: B. Islamic Banking Law and PBI No.11 The enactment of the Islamic Banking Law has provided a more adequate legal base to the development of Islamic banking in Indonesia and consequently will accelerate the growth of the industry.104 One of the provisions in the Law that is believed will encourage the growth of Islamic banking, is the obligation to perform Spin Off of the sharia business units from the Conventional Banks.105 Further provisions regarding Spin Off and sanction for neglecting such obligations are regulated in PBI No.11 as one of the implementing regulations of Islamic Banking Law. 104
Islamic Banking in Indonesia in Brief. Retrieved May 29, 2012, from http://www.bi.go.id/web/en/Perbankan/Perbankan+Syariah/. 105
Indonesia (b), op.cit., Art 68. 32 1.
Obligations and sanction As mentioned before, the Islamic Banking Law and PBI No.11 oblige the conventional commercial banks to Spin Off their sharia business units whenever106: a.
The sharia business units’ assets value have reached 50 % (fifty percent) of the total assets value of their parent compnies (Conventional Banks); b.
At least 15 (fifteen) years after the enactment of the Islamic Banking Law.107 However, Conventional Banks owning sharia business units are able to Spin Off their sharia units prior to meeting the above conditions.108 Any Conventional Bank that has met the requirements above and does not conduct a Spin Off shall be imposed with the revocation of their respective sharia unit’s business license.109 2.
Types and requirements The Spin Off of sharia business unit from Conventional Bank could be undertaken by: a.
Establishing a new Islamic Bank. The Conventional Bank establishes an Islamic Bank as its subsidiary with part of the assets of the spin off being calculated as the paid up capital (if possible). The minimum paid up capital is 106
Ibid., Art 68 (1) jo. Indonesia (c), op.cit., Art 40 (1). 107
Islamic Banking Law was issued on 16 July 2008. 108
Indonesia (c), op.cit. Art 40 (2). 109
Ibid., Art 43 (1). 33 Rp500,000,000,000.-‐ (five hundred billion Rupiah) and should be increased in stages to no less than Rp1,000,000,000,000.-‐ (one trillion Rupiah) by at the latest 10 (ten) years after the Islamic Bank’s business license is issued.110 In the event that the amount of paid up capital does not meet the requirement for the Spin Off, additional paid up capital should be made by the Conventional Bank in the form of cash and/or land and building that will be used for the Islamic Bank resulting from the Spin Off. 111 This type of Spin Off can be done by one (1) or more conventional commercial banks.112 If the said Spin Off performs by more than one (1) Conventional Banks, the Islamic Bank resulting from Spin Off should meet at least the ratio of minimum capital adequacy requirement of 8% (eight percent).113 The licensing for the establishment of Islamic bank as a result of Spin Off granted by Bank Indonesia shall be made in two (2) stages: (i)
Principle approval, which is approval for undertaking preparation for the establishment of the Islamic Bank resulting from Spin Off; and (ii)
Business license, which is a license provided after such Islamic Bank is ready to undertake operational activities.114 110
Ibid., Art 45 (2) and (4). 111
Ibid., Art 45 (3). 112
Ibid., Art 41 (1) a and (2). 113
Ibid., Art 41 (4). 114
Ibid., Art 46. 34 b.
Transferring the assets and liabilities of the sharia business unit to an existing Islamic Bank. This type of Spin Off can only be done to an Islamic Bank that has ownership related to the transferring Conventional Bank.115 Therefore, the common practice is for the Conventional Bank to acquire an existing Islamic Bank and subsequently transfer all of the assets and liabilities of its sharia business unit to the respective Islamic Bank. In addition, the transferee Islamic Bank should also meet at least the ratio of minimum capital adequacy requirement of 8% (eight percent).116 Further, in the event that Spin Off of sharia business units to an Islamic bank (for these two types of Spin Off) causes the transferee Islamic bank to own net Non Performing Loan of more than 5% (five percent) and/or causes the Islamic bank to exceed the Legal Lending Limit, then the respective Islamic Bank is obliged to settle the matters within a period of one (1) year.117 3.
Procedures and time lines Based on Article 42 of PBI No.11, the Spin Off of a sharia business unit must also fulfill other provisions of the applicable legislations, including the Company Law. a.
Spin Off of sharia business unit by establishing an Islamic Bank The following is the steps in performing Spin Off of a sharia business unit by establishing an Islamic Bank according to PBI No.11: 115
Ibid., Art 41 (1) b and (3). 116
Ibid., Art 41 (4). 117
Ibid., Art 41 (5). 35 No. Steps to be completed 1. Submission of the application for a principle approval by the Conventional Bank that owns the sharia business unit, supplemented with, among others, a draft of the deed of establishment of the Islamic Bank resulting from the Spin Off. Remarks Legal Basis Such application shall contain at Art 47 (1) least: (i)
name and domicile of the Islamic Bank resulting from the Spin Off; (ii)
business activities of the Islamic Bank in accordance with the prevailing legislations; (iii) paid up capital of no less than Rp500,000,000,000 (five hundred billion Rupiah); (iv) provisions concerning the BoC, BoD and Sharia Supervision Board (“SSB”) of the Islamic Bank in accordance with the prevailing legislations (including the requirements, number of persons, tasks, authorities, responsibilities); (v)
provisions concerning the appointments of members of BoD, BoC and SSB for the Islamic Bank in accordance with the prevailing legislations, which required prior approval from Bank Indonesia; (vi) provisions concerning the GMS for the Islamic Bank, which determines the tasks of management, remunerations of BoC, BoD, annual accountability report, appointment and fee for public accountant firm, the use of profits; (vii) provisions concerning the head of the GMS, which is either the President Commissioner or President Director. 2. The Conventional Bank should Art 47 (2) present the entire plan for the establishment of an Islamic Bank as a result of the Spin Off. 36 3. The Conventional Bank owning the sharia business unit is obliged to publish an announcement of the plan for transferring the sharia business unit’s assets and liabilities in a newspaper with national circulation no later than 10 (ten) days after the date of the principle approval is granted. 4. Submission of the business license for the Islamic Bank resulting from Spin Off by the Conventional Bank no later than 6 (six) months after the principle approval is granted, supplemented by, among others, the deed of establishment of the Islamic Bank. 5. The Islamic Bank resulting from Spin Off is obliged to conduct business activities no later than 30 (thirty) days from the date of the business license is granted. In practice, such announcement can be combined with the announcement of the plan of Spin Off based on the Company Law or publish separately (depends on each case). Art 48 (2) The Spin Off of the sharia business unit can only be done after the business license for the Islamic Bank is granted. If within six (6) months after the issuance of the principle approval the Conventional Bank has not submitted the application of business license, the principle approval shall become no longer valid. If after 30 (thirty) days as of the date of the business license granted, the Islamic bank has not conducted any business activities, the business license shall be reviewed. In the event that such business license is annulled, all the sharia business unit’s liabilities shall be settled by the Conventional Bank that owns it no later than one (1) year after the annulment of the business license. Art 48 (1) and (3) jo. Art 49 6. The execution of business activities of the Islamic Bank should be reported to Bank Indonesia no later than 10 (ten) days after the execution date. 7. The Conventional Bank than owns the sharia business unit is obliged to submit application for revocation of the said sharia business unit’s business license no later than 10 Art 50 (1), (2). (4) Art 50 (3) Art 51 37 (ten) days after the Spin Off. In brief, the schedule for Spin Off of a sharia business unit by establishing an Islamic Bank is as follows: 38 b.
Spin Off of sharia business unit by transferring the rights and liabilities to an existing Islamic Bank The following is the steps in performing Spin Off of sharia business unit to an existing Islamic bank based on PBI No.11: No. Steps to be completed 1. Submission of the application for Bank Indonesia’s approval by the Conventional Bank. Remarks Approval of such application shall be granted based on, among others: (i)
fulfillment of the legal aspect regarding the Spin Off; (ii)
analysis on the plan of the transfer of sharia business unit’s assets and liabilities; (iii) analysis on the pro-‐forma financial report of the transferee Islamic Bank. In practice, such announcement can be combined with the announcement of the plan of Spin Off based on the Company Law or publish separately (depends on each case). Legal Basis Art 51 (1) In the event that after 30 (thirty) days after the approval is granted, the Spin Off has not yet been executed, the approval shall be reviewed. In the event that such approval is annulled, all the sharia business unit’s liabilities shall be settled by the Conventional Bank that owns it no later than one (1) years after the annulment of the approval. 4. The execution of Spin Off should be reported no later than 10 (ten) days after the execution date. 5. The transferee Islamic Bank is obliged to report its financial Art 53 (1), (4) and (5) 2. The Conventional Bank that owns the sharia business unit is obliged to publish an announcement of the plan for transferring the sharia business unit’s assets and liabilities in a newspaper with national circulation no later than 10 (ten) days from the date the principle approval is granted. 3. The Conventional Bank that owns the sharia business unit is obliged to Spin Off its sharia business unit no later than 30 (thirty) days from the date the approval is granted. Art 52 (2) Art 53 (2) Art 53 (3) 39 condition after the Spin Off no later than 10 (ten) days after the execution date. 6. The Conventional Bank than owns the sharia business unit is obliged to submit application for revocation of the said sharia business unit’s business license no later than 10 (ten) days after the Spin Off. Art 54 In brief, the schedule of the Spin Off of a sharia business unit to an existing Islamic bank based on PBI No.11 is as follows: 40 Other related regulations for public companies C. As outlined in the Introduction, Bapepam-‐LK has been encouraging the Spin Off of (i) sharia insurance business units of conventional insurance companies118 and (ii) investment management units of securities companies119. As of the writing and completion of this paper, both Bapepam-‐LK and Indonesia Stock Exchange (“IDX”) have not yet issued regulations regarding Spin Off. However, there are certain Bapepam-‐LK and IDX’s regulations that need to be taken into consideration by the public companies in order to conduct Spin Off: 1.
Material transaction Public companies planning to perform Spin Offs should first analyze whether such plans are deemed as material transactions or not. Based on Bapepam-‐LK Rule No. IX.E.2 dated 28 November 2011 regarding Material Transaction and Changes in Main Business Activity (“Rule No.IX.E.2”), the definition of Material transaction is as follows: a.
Participation in a business entity, project, and/or certain business activity; b.
Purchasing, selling, transferring, or exchanging assets or business segment; c.
Leasing assets; d.
Borrowing or lending funds; 118
Agus & Antara, loc.cit. 119
Indra Haryono, loc.cit. 41 e.
Encumbering assets, and/or: f.
Providing corporate guarantees, with value of 20 % (twenty percent) or more of the public company’s equity, whether conducted in one transaction or a series of transactions per purpose or activity.120 Spin Off, based on the Company Law, is a legal action to transfer part of company’s assets and liabilities to one or more companies, which can be included into the category of transferring assets or business segment according to the Material Transactions definition above. A public company which performs Spin Off with a transaction value from 20 % (twenty percent) to 50 % (fifty percent) of the said public company’s equity does not require EGMS approval based on Rule No. IX.E.2, if the public company publishes an announcement regarding the Spin Off on a complying newspaper and submits the required supporting documents to Bapepam-‐LK within two (2) days of the signing of the deed of Spin Off.121 Previously, evidence of an announcement had to be submitted to Bapepam-‐LK by the end of the second business day after the Spin Off occurred. If the Spin Off value is more than 50% (fifty percent) of the public company’s equity, the public company also requires EGMS approval with requirements and procedure based on Rule No.IX.E.2.122 However, there are exemptions from the requirements under Rule IX.E.2 whereby Spin Offs conducted, among others: 120
Indonesia (e), Rule No. IX.E.2 regarding Material Transaction and Changes in Main Business Activity as the attachment of the Decree of the Head of Bapepam-‐LK No. KEP-‐614/BL/2011 dated 28 November 2011, No. 1.a.2). 121
Ibid., No. 2.a. 122
Ibid., No. 2.b. 42 a.
between controlling companies (parent and subsidiary companies) with 99 % (ninety nine percent) of the shares owned by the public company; b.
towards the public company’s main business activity; c.
by banks with loans from Bank Indonesia or other government entities worth up to 100% (one hundred percent) of their total issued and paid up capital or any other conditions which may cause a bank to require restructuring by the authority; d.
based on a court order; or e.
to fulfill the public company’s obligations under the applicable laws and regulations, are exempted from the requirements of material transactions under Rule No.IX.E.2.123 2.
Disclosure of Information that must be immediately announced to the public In the event that a Spin Off is not a material transaction or exempted from Rule IX.E.2, the public company must still comply with the disclosure obligation imposed under Bapepam-‐LK Rule No. X.K.1. regarding Disclosure of Information that must be Immediately Announced to the Public.124 123
Ibid., No. 3.a. 124
Ibid., No. 3.b. jo. Indonesia (f), Rule No. X.K.1. regarding Disclosure of Information that must be Immediately Announce to Public as the attachment of the Decree of the Head of Bapepam-‐LK No. KEP-‐
86/PM/1996 dated 24 January 1996. 43 3.
Obligation to report information The IDX also require listed companies to report information, in this case, the plan for Spin Off based on the IDX Rule No. I-‐E regarding the Obligation to Report Information. Such report shall be supplemented with the announcement of an abridged Spin Off plan, which has been published in the complying newspaper based on the applicable laws and regulations by the listed company.125 125
Indonesia (g), The Decree of the Board of Directors of Jakarta Stock Exchange (Now, Indonesia Stock Exchange) No. Kep-‐306/BEJ/07-‐2004 dated 19 July 2004 regarding Rule No. I-‐E regarding the Obligation to Report Information. 44 CHAPTER IV ANALYSIS OF THE ISSUES IN SPIN OFF PROCESS IN INDONESIA As mentioned before, the provisions regarding Spin Off in the Company Law are not yet sufficient. Further, the Government Regulation or other specific regulations related to the implementation of Division (including Spin Off) of limited liability companies, in sectors other than the banking sector, have not yet been issued as of the writing and completion of this paper. Moreover, as Spin Off is relatively a “new” transaction in Indonesia, many government institutions are not yet aware of the concept of Spin Off, let alone issuing supporting regulations. There are many issues and problems arising from such condition. This paper only addresses three (3) problems that are most often encountered during the Spin Off process. A. Spin Off plan and the announcement of an abridged Spin Off plan According to the Company Law, one of the obligations of the company conducting a Spin Off is to publish an announcement of abridged Spin Off plan in the complying newspaper.126 However, in contrast to Merger, Acquisition and Consolidation, the Company Law does not regulate the provisions regarding the minimum content of the Spin Off plan, much less the announcement of an abridged Spin Off plan. Until the implementation regulations regarding Spin Off mandated by the Company Law have been issued, there is no standard regarding the types of information that have to be included in the Spin Off plan or disclosed in the abridged Spin Off plan published in newspapers. This condition can be fatal since the companies can basically publish anything they deem important or need to be published. If companies plan for a Spin Off not in good faith, they can deliberately 126
Indonesia (a), op.cit., Art 127 (2). 45 omit important information that should be disclosed and known by the parties concerned. To circumvent these negative possibilities, in practice, disclosures in the abridged Spin Off plan are adopted from the Merger plan, because in both transactions, the assets and liabilities of a company will be transferred by the operation of law. Therefore, by using Merger plan based on Article 123 (2) of the Company Law as a reference, the following is the common content of a Spin Off plan: a.
The name and domicile of each company in the Spin Off (both transferring and the transferee companies); b.
The reasons and explanations of the BoD of the companies in the Spin Off and the Spin Off requirements; c.
The draft for any amendment of the AoAs of the companies (if any); d.
The financial statement consisting of at least the balance sheet, income statement, cash flow report and report on changes in equity as well as the notes on the financial report, covering the last 3 (three) financial years from each companies in the Spin Off with the latest for the financial year just ended; e.
The financial statement of the division/business unit to be spun off in accordance with the generally accepted accounting principles in Indonesia (if possible); f.
A pro-‐forma financial statement of the transferee company after the Spin Off, in accordance with the generally accepted accounting principles in Indonesia; 46 g.
The plans for the transferring and transferee companies after the Spin Off; h.
Method of settlement of the status, rights and obligations of the BoD and employees of the Spin Off division/business unit; i.
Method of settlement of the rights and obligations of the transferee company against third parties after the Spin Off; j.
Method of settlement of the rights of shareholders who do not agree to the Spin Off of the companies; k.
Names of the members of the BoD and BoC and the wages, honoraria and allowances for the member of the BoD and BoC of the transferee company after the Spin Off; l.
Estimated period for the implementation of the Spin Off; m.
Report on the circumstances, development and results achieved of each of the companies in the Spin Off; n.
Main activities of each company in the Spin Off and changes which occurred in the current financial year; and o.
Details of problems arising during the current financial year which affect activities of the companies in Spin Off. B. The transfer of employees Law Number 13 Year of 2003 regarding Manpower (“Manpower Law”) regulates the basic provisions concerning manpower in Indonesia. As provisions on Spin Off 47 were regulated for the first time in 2007, there are not yet regulations regarding Spin Off in the Manpower Law. Although the Manpower Law regulates the termination of employees as a result of Merger, such provisions can hardly be used since the effect on employees from the terminating company in Merger is different from the effect on employees of the spun off division/business unit. In Merger, the employees basically have no option on staying in the terminating company since the company shall expire by law after the Merger. On the other hand, the company conducting the Spin Off shall remain to exist after the Spin Off, thus the employees have a choice to remain in the transferring company or move to the transferee company. This condition could be a problem since the Company Law only regulates the transfer by operation of law for the assets and liabilities in Spin Off; while employees of the related division/business unit being spun off cannot be transferred automatically following the movement of said assets and liabilities. The termination of employees may also cause additional problems for the company. For example, in the case if there are employees with bad faith who deliberately refuse to move to the transferee company so they can be terminated by the transferring company and obtain severance pay, will cost the transferring company substantial amount of funds and time for the severance payment and effort to find new employees to carry on its business activity. Further, if the employees insist on staying at the transferring company, they may have no work or become idle since their jobs had been ‘eliminated’ with the transfer of the business unit. The dilemma of the transfer of employees must be handled very carefully since the Company Law also explicitly require that Spin Off cannot be done if it will harm the interests of the parties concerned, including the companies themselves and their employees.127 Consequently, it is best to avoid any termination of employees. 127
Ibid., 126 (1) 48 In practice there are three alternatives in handling the employees in accordance with the prevailing laws and regulations: a.
Alternative 1: The termination of employment for employees of the spun off division/business unit, which is followed by the signing of employment agreements by the former employees of the spun off division/business unit and the transferee company. Article 164 (3) of Manpower Law stipulated: “The employers may terminate the employment of its employees because the company has to be closed down and the closing down of the company is caused neither by continual losses for two (2) years consecutively nor force majeure but because of the company’s action to improve efficiency. The employees shall be entitled to severance pay twice the amount of severance pay stipulated under Article 156 (2), reward period of employment pay amounting to one (1) time the amount stipulated under Article 156 (3) and compensation pay for entitlements according to Article 156 (4).”128 Further, Article 156 of the Manpower Law provides guidance for the financial benefits for the employees from the employers in the event of termination of the employment: 128
Indonesia (h), Law No. 13 Year of 2003 regarding Manpower, Art 164 (3). 49 (i)
Severance Pay129 Years of employment Less than 1 year More than 1 year and less than 2 years More than 2 years and less than 3 years More than 3 years and less than 4 years More than 4 years and less than 5 years More than 5 years and less than 6 years More than 6 years and less than 7 years More than 7 years and less than 8 years More than 8 years Severance payment (minimum) One month wage Two months wages Three months wages Four months wages Five months wages Six months wages Seven months wages Eight months wages Nine months wages (ii)
Reward period of employment130 Years of employment Three years until six years Six years until nine years Nine years until twelve years Twelve years until fifteen years Fifteen years eighteen years Eighteen years until twenty one years Twenty one years until twenty four years Twenty four years or more Reward period of employment (minimum) Two months wages Three months wages Four months wages Five months wages Six months wages Seven months wages Eight months wages Ten months wages (iii)
Compensation Pay a)
Paid annual leave which is still unused; b)
Transportation cost for the employee and his/her family to the place where he/she was recruited; c)
Housing and medical allowance, determined at 15% of the severance pay and/or reward period of employment for those entitled to receive; d)
Other benefits that are stipulated in the employment agreement, company regulations, or the collective labor agreement. 131 129
Ibid., Art 156 (2). 130
Ibid., Art 156 (3). 50 In accordance to the provisions above, Spin Off can be categorized as an act of restructuring to improve efficiency. In the event of termination of employment as a result of Spin Off, the transferring company shall pay the employees all payments as stipulated in Article 164 (3) jo. Article 156 of the Manpower Law. By signing the new employment agreement with the transferee company, the former employees of the spun off division/business unit formally become the employees of the transferee company with working period starting from zero. b.
Alternative 2: Assignment or movement of the former employees of the spun off division/business unit to the transferee company. This alternative depends on the policies of each company. The most common arrangement is for the BoD of the transferring company to issue a decree as legal basis for such movement from the transferring company to the transferee company, which should explicitly mention the terms of conditions in relation to the payment of wages, position and the working period of the particular employee being moved. In the event of an assignment, since the employees who shall work in the transferee company still have the status as the employees of the transferring company, the financial benefits of the said employees shall remain similar to that given by the transferring company. Such assignment or movement can be done as long as it is done without violating or reducing the rights of the employees who are to be assigned in the transferee company. 131
Ibid., Art 156 (4). 51 c.
Alternative 3: Signing an agreement between the transferring company, the transferee company and the former employees of the spun off division/business unit (tripartite agreement). With this alternative, the transferring company, the transferee company and the former employees of the spun off division/business unit shall sign an agreement before the Spin Off occurs which in principle states: (i)
All the parties agree that the employment relationship between the former employees of the spun off division/business unit shall be ended by the time of such division/business unit is closed. (ii)
The former employees of the spun off division/business unit are officially listed as the employees of the transferee company with cumulative working period (by taking into account the period of employment from the transferring company) at the time when the Spin Off becomes effective. (iii)
The former employees of the spun off division/business unit agree to waive their rights of severance pay since such rights are already compensated with the cumulative working period from the spun off division/business unit into the transferee company. The following is the analysis of the pros and cons of the above three (3) alternatives: 52 Pros Alternative 1 Termination of employment which is followed by the singing of the new employment agreements (i) The employees should feel safer since the transferring company has fulfilled their rights before they move to the transferee company. (ii) The transferee company can conduct new recruitment of employees, thus the transferee company can actually hire only the competent employees. Alternative 2 Assignment/mutation Alternative 3 Signing of the tripartite agreement (i)
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Cons (i)
Severance pay shall (i)
cost a lot of money for the transferring company. (ii) New recruitment No severance pay that needs to be paid at the assignment period since the absence of termination of employment. The employees and management of the transferee company are able to explore the conditions of each during the mutation. The employees who are being assigned shall not have to worry to think about their employment status and facilities. The recruitment for new employees only to fulfill few positions. To ease the burden of the transferee company for finding additional employees. It is one of the forms of assistance from the transferring company. The former employees of the spun off division/business unit shall still No severance pay that needs to be paid since the absence of termination of employment. (ii) The procedure of transition is easier and simpler. (iii) Give a good image to the transferring company since there is no termination of employment as a result of Spin Off. (iv) The working period of the former employees of the spun off is being accumulated to the transferee company. Thus, the rights of the employees are being protected. (i)
If there are some employees that refuse to be transferred to the transferee company, 53 from zero shall spend a lot of time. (iii) The termination of employment might be interpreted negatively. (ii)
registered as the such employees transferring need to be located company instead in available positions of the transferee in the transferring company. company. The (ii) The recruitment assignment/mutati
process for new on is only a employees in the temporary transferee company solution. Thus at is more limited. the end of their assignment, the assigned employees have to move back to the transferring company. Given the above analysis, in the case that explanation of the Spin Off plan in the transferring company is well conducted and all the former employees of the spun off division/business unit agree to be transferred to the transferee company, then the best alternative for all parties, the transferring company, the transferee company and the employees, is the third alternative. C. Mismatch between the MOLHR Regulation and PBI No.11 In the event that a sharia business unit is to be spun off by establishing a new Islamic bank, PBI No.11 regulates that one of the requirements for obtaining Bank Indonesia business license is the Deed of Establishment of the new Islamic bank which has been approved by the MOLHR. Only after obtaining such license that the spin off can be conducted.132 However, the Regulation of MOLHR No. M-‐01-‐10 Year 2007 regarding the Procedure of Submission Application of ratification of Legal Entity and Approval of the Amendments Articles of Associations, Notification of the Amendments of 132
Indonesia (c), op.cit., Art 48 (3) jo. Art 49. 54 Articles of Association and Changes of the Company’s Data (“MOLHR Regulation”) requires evidence of payment of the Company’s subscribed and paid up capital in order to grant the MOLHR approval for the Company’s Deed of Establishment.133 In this case, however the evidence of payment is the balance sheet of the sharia business unit that has been spun off into the new Islamic bank, which means that the Islamic bank has to be spun off before MOLHR grants its approval to the Deed of Establishment of the new Islamic bank. As compromise, in practice, the transferring company shall need to sign the deed of Spin Off with provision that the effective date will be after obtaining Bank Indonesia business license, followed by the signing of the deed of establishment of the new Islamic bank as a result of Spin Off with the provision that states the part of the capital injections is from the spun off sharia business unit (if there is a difference between the assets and liabilities that are being transferred, and the value of assets is greater than the value of the liabilities). Further, the deed of establishment of the Islamic bank submitted to the MOLHR to obtain MOLHR approval, supplement by the deed of Spin Off as one of the evidence of payments. After the issuance of the MOLHR approval, the deed of Spin Off, the deed of establishment and the MOLHR approval submitted to the bank Indonesia as the supplements of business license application. 133
Indonesia (i), Regulation of the Minister of Law and Human Rights No. M-‐01-‐10 Year 2007 regarding the Procedure of Submission Application of ratification of Legal Entity and Approval of the Amendments Articles of Associations, Notification of the Amendments of Articles of Association and Changes of the Company’s Data, Art 33 (2). 55 CHAPTER V CONCLUSIONS This paper has outlined the potential of Spin Off in Indonesia with theoretical overview of the Spin Offs in Indonesia and its applicable laws and regulations, as well as the mechanism of Spin Offs and factual Spin Off cases in Indonesia as examples. The paper also elaborates the main issues that are most often encountered during a Spin Off process. Considering the goal of the study, which is to analyze the legal tools and problems that arise in the Spin Off process due to limitation of relevant regulations, an analysis of the regulations of Spin Off and problems have been provided. The analysis observes the current statutory framework relevant in the Spin Off act in Indonesia and its shortcomings. The number of corporate Spin Offs which has accelerated following the establishment of Company Law serves to prove that the potential of Spin Off in Indonesia is, indeed, huge. We have chosen the specific definition of Spin Off, among other definitions, as the legal action taken by a company to separate its business that results in part of the assets and liabilities of the company being transferred by operation of law to 1 (one) or more transferee companies with the company conducting such separation remains in existence. The definition is based on the Company Law, which is the first regulation dealing with Spin Offs in Indonesia. I understand that the action of Spin off brings numerous benefits or advantages, especially for startup companies, considering that the role of parent companies being one of the key success factors for their ‘going concern’. Spin Offs come in two forms, either by a voluntary act or mandatory. The key motivations of Spin Offs can be broadly categorized as, to achieve improvements organizationally and in terms of capital market access, to promote better corporate governance and benefit from the resultant tax advantages. 56 Although the Company Law and PBI No. 11, in general, have provided the mechanism and requirements for Spin Offs, Government Regulations or other specific regulations related to the implementation of Division (including Spin Off) of limited liability companies in Indonesia have yet to be issued. These legislative gaps, as a result, pose problems in the process of Spin Offs. The main issues are the unregulated contents of the abridged Spin Off plan to be announced to the public, the unregulated transfer of employees as a result of the Spin Off and the mismatch between current regulations, which is the MOLHR Regulations, and the Spin Off regulations, particularly PBI No.11. The abovementioned flaws or issues are temporarily resolved by Indonesia’s legal practitioners and governments’ institutions. Some of these temporary resolutions are (i) the contents of the announcement of the abridged Spin Off plan are to be adopted from the Merger plan; (ii) the transfer of employees can be resolved through three alternatives, including the termination of employment for employees of the spun off business unit, followed by the signing of new agreements with the company resulting from Spin Off, temporary assignment by the transferring company to the transferee company and a tripartite agreement; and (iii) the mismatch between the MOLHR regulation and PBI No. 11 can be overcome by the wording in the deed of establishment of the new company resulting from Spin Off and/or the deed of Spin Off itself. The Government of the Republic of Indonesia must act quickly to overcome these problems by issuing Government Regulation as the implementation regulation of Spin Off, giving specific directions to the related institutions and providing new regulations that serve Spin Off transactions. In conclusion, it is evident that Indonesia’s business environment has been more than ready to undertake Spin Off transactions. Considering that support from the State is currently still insufficient, this condition must be offset with a set of laws and regulations conducive for the undertaking of such a process, as well as to achieve legal certainty for all parties involved in the Spin Off transaction. 57 REFERENCES A. Literatures Bernardt, Yonne, Kerste, Richard & Meijaard, Joris. Spin-‐off start-‐ups in the Netherlands: At First Glance, EIM Business & Policy Research, Zoetermeer: May 2002. Retrieved June 20, 2012 from http://www.entrepreneurship-‐
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companies-‐spin-‐off Agus & Antara. Bapepam-‐LK Desak Pemisahan MI. Retrieved March 5, 2012, from http://www.suarakarya-‐online.com/news.html?id=270530 Bangun, Astri Karina. Peraturan Spin Off Bapepam – Masih ada 11 perusahaan yang belum penuhi aturan manajer investasi. Retrieved March 5, 2012, from http://investasi.kontan.co.id/news/masih-‐ada-‐11-‐perusahaan-‐yang-‐
belum-‐penuhi-‐aturan-‐manajer-‐investasi-‐1 Firlana, Fransiska. Bapepam Dorong Spin Off Unit Usaha Syariah. Retrieved March 5, 2021, from http://keuangan.kontan.co.id/news/bapepam-‐dorong-‐
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Manajer-‐Investasi-‐Diatur-‐Undang-‐Undang Restrukturisasi Pusri Holding mulai 2011. Retrieved, May 9, 2012, from http://www.pusri.co.id/50publikasi01.php?tipeid=DD&pubid=pub2010119
39 Soft Opening Bank Jabar Banten Syariah Hasil Spin Off Unit. Retrieved March 3, 2012, from http://www.bandungwebs.com/2010/05/bandung-‐akhirnya-‐
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Master Thesis_R.A.Sabrina Stamboel

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