Recently Indonesia has been through rapid development in almost every sector. The country has transformed into a key player in the global economy. Special purpose vehicle Indonesia could play a large part in this.
This has stimulated a massive foreign investment flow in recent years. Many investors view Indonesia as a promising place to expand their businesses. Although the forging democracy has also helped the growing investment climate, nevertheless Indonesia is not so liberal in terms of investment regulation.
By setting up a business in Indonesia, you will need to follow local rules. Local law in Indonesia regulates and restricts the establishment of a foreign company in Indonesia. The Indonesian Government determines which industries are closed to foreign investment through the Positive Investment List, which in theory is issued every three years unless revised before then.
The Positive Investment List contains specific business sectors and fields that are entirely closed to foreign investment and those which are conditionally open for foreign investment. It means that if you are a foreign investor who wants to establish a company in a business field that is closed to foreign investment, you will need to establish a local company in form of PT with 100% local shareholders. Meanwhile, if you want to invest in business fields that are conditionally open for foreign investment, you will find some restrictions, particularly in shareholding. In this case, you can establish a PT PMA/PT Penanaman Modal Asing (Foreign Capital Limited Liability Company). The specific limitations on foreign shareholders depend upon the business field you desire to enter.
For instance, if you want to establish a distribution company in Indonesia, as a foreign shareholder you will only be allowed to hold 67% of the shares. For the remaining 33% of shares, you will have to find a professional shareholder from Indonesia.
Using professional shareholder/director/commissioner services also known as special purpose vehicles in Indonesia is a standard procedure, but not always safe practice.
It’s commonly used when foreign investors wish to invest in business sectors that are either closed or conditionally open to foreign investment (see the Positive Investment List).
The idea of a special purpose agreement is that the foreign investor obtains as much control as possible and is put in a position — insofar as is possible — comparable to that of a registered shareholder.
In this article, Cekindo will try to explain to you what are the usual risks and mistakes of using local special purpose vehicles, how to minimize these risks and mistakes, and finally how to operate your company in Indonesia by using local professional shareholder/director/commissioner services in a safe way through special-purpose agreements.
What Are the Risks If You Use Local Special Purpose Vehicle in an Incorrect Way in Indonesia?
1. The special purpose vehicle Indonesia could fully claim the ownership rights of their share and leave the foreign investor without giving him the opportunity to pursue legal action against them. This could happen because the foreign investor (if they are investing in a closed business sector and have established a Local Limited Liability Company/PT) is not listed as a shareholder in the company’s structure. This means his rights in the Company won’t be protected by local law, since based on article 33 of Foreign Investment Law in Indonesia are prohibited any agreements whereby one party declares that it holds shares on behalf of another. This is clearly an attempt to abolish special purpose vehicle structures.
2. In the event of a dispute between the foreign shareholder and local counterpart, the confidential structure of the special purpose vehicle will be exposed and come under government attention.
3. If you are investing in a conditionally open business sector that only allows a minority share for foreign shareholders, the special purpose vehicle as the majority shareholder will have full rights of ownership and run the decision-making process in the company, particularly if they are acting as directors.
4. Another common practice in a lot of small agencies is to establish the company under different business classification to obtain bigger foreign share and make all registration process easier however this way will bring you problems later on once you apply for some licenses such as business license or import license.
What are the ways to make the special purpose vehicle practice safer without breaking the law?
If you are a foreign investor who wishes to invest in Indonesia and use a special purpose vehicle, we suggest you combine some of these solutions:
1. Make a reliable, notarized set of agreements with the special purpose vehicle to cover all your rights. Cekindo provides you a professional shareholder service using individual and corporate shareholders and an appropriate set of agreements to protect your own without no breaking any Indonesian laws.
2. You may prefer to establish a Representative Office with 100% of ownership with no requirement for minimal capital however you can only perform research, marketing, and promotion activities. You are not allowed to generate revenue in Indonesia and all revenue has to go directly to the head office.
3. Have more local professional shareholders from Indonesia to avoid one person from owning a majority share (with minimum 2 shareholders based on Indonesian regulation)
4. Withdraw money from the company on a regular basis
Cekindo will help you to combine the above-mentioned options and prepare for you several agreements that will ensure the security of the investor’s rights over the company. Read more about our package for Local Special Purpose Vehicle in Indonesia
These should be signed by the investors and the special purpose vehicle to limit the authority of the local counterpart over the company as well as to give more authority for the genuine owner over the company.
What will be part of the Cekindo safe package of agreements to protect your ownership?
1. Call Option Agreement
The call option agreement is a legally binding agreement between two parties, the special purpose vehicle/buyer and the Seller Company, governing the terms of a call option. The buyers have the right (but not the obligation) to buy an agreed quantity of a particular commodity or security, for example, shares in a company, from the Seller Company of the option within a certain time frame, for a certain price. The buyers are obligated to sell the predefined commodities or securities when they decide to exercise the call option.
This call options agreement covers the standard terms of a call option, for example, the option period, quantity and price of shares or security, and consideration for the call option, as well as a number of detailed additional clauses including but not limited to Representation and Warranties, Covenants and Settlement of Disputes.
As per the call option agreement:
- The buyers grant to the Seller Company exclusive, irrevocable and unconditional rights to the Seller Company to purchase all, but not less than all of, the Options Shares (Call Option) at any time during the Exercise Period.
- The Seller Company shall exercise the Call Option at any time during the Exercise Period by serving a Call Option Notice to the special purpose vehicle.
2. Letter of Indemnity
Letter of Indemnity is a legally binding letter between two parties; Seller Company and the buyers, whereas the Seller Company pursuant to the execution of the Loan Agreement, cooperation agreement, pledge of share agreement, hereby agrees to indemnify, defend and hold harmless buyers, his spouse and/or heirs (hereinafter collectively referred to as the “Indemnitees”)
- from and against any and all liabilities including environmental liabilities, losses, damages, penalties, judgments, claims, costs, and expenses of any kind of nature whatsoever (including attorneys’ fees, including allocated costs of in-house counsel, and
- from disbursements in connection with any actual or threatened investigative, administrative, or judicial proceeding, whether or not such Indemnitee shall be designated a party thereto) that may be imposed on, incurred by or asserted against such Indemnitee, in any manner relating to, arising out of, or as a result of the buyers being the shareholder of the Company, including but not limited to the tax payment obligations, save for the willful default and/or negligence of buyers.
3. PoA to Vote and Sell
Through the POA to Vote and Sell the buyers grants an irrevocable Power of Attorney to the Seller Company to Vote and Sell Shares with the right of substitution to:
- act on behalf of and in the name of the buyers to sell and/or transfer the Shares which is hereafter owned or acquired in whatever form to any party or person whomsoever
- to receive the sale proceeds/selling price and give receipt, therefore, to represent the buyers wherever and towards any party or person whomsoever in any matter and act as a shareholder,
- do everything necessary or considered necessary by the Authorized concerning the Shares without any exception.
4. Cooperation Agreement
Through the Co-operation Agreement Seller Company and the Buyers agrees and acknowledge to co-operate in running the company, including the cooperation between the Seller Company and the Buyers for the purchase and management and selling of shares. Buyers and the Seller Company agree and acknowledge in the cooperation agreement among others the following key factors:
- that the Seller Company shall have the beneficial interests in the shares
- that the Purchase price of the shares paid by the Buyers shall be a debt to the Seller Company
- that in the event of issuance of new share by Seller Company, the Buyers shall have the sole right for subscription
- that the Buyers shall designate the Seller Company as his representative/proxy in exercising his rights on the shares.
5) Loan Agreement between Local Shareholder and Investor
Through Loan Agreement the Lender (Seller Company) has made available to the Borrower/local partner a facility of borrowing for the sole purpose of enabling the Borrower to fund the purchase of Shares.
In the agreement, both the Lender (Seller Company) and the borrower acknowledge and agree that this Loan Agreement shall be a limited recourse loan agreement under which the Lender’s claim in respect of payment of the Loan hereunder shall be restricted to (i) net proceeds received by the Borrower from the sale of all or any of the Shares, (ii) dividends on the Shares actually received by the Borrower and (iii) net proceeds received by the Borrower as a result of the liquidation of the Company.
The Lender (Seller Company) and borrower further acknowledge and agree through this agreement that the Borrower may satisfy the Loan hereunder by tendering the Shares to the Lender. In such an event, the Lender may accept such tender or designate a qualified party to do so. All net proceeds of the transfer of the Shares received by the Borrower shall be paid over to the Lender upon which the Loan shall be deemed satisfied and the obligations of the Borrower hereunder extinguished.
6) Pledge of Shares Agreement
Through the Pledge of Share Agreement, a special purpose vehicle that acts as Pledger has entered into a Loan Agreement pursuant with the Pledgee (Seller Company), where the Pledgee has an advanced loan to the Pledger for the purpose of acquiring shares. The loan agreement stipulates that the Pledger shall pledge the Shares in favor of the Pledgee (Seller Company) to secure repayment of the Loan and the Pledger’s performance of his other obligations under the Loan Agreement.
To secure the due, punctual and complete satisfaction of the Pledger’s obligations to the Pledgee under the Loan Agreement, the Pledger through this Pledge of Share Agreement:
- Pledgee (Seller Company) who hereby accepts the pledge from the Pledger, all of the Pledger’s rights, title, and interest in the Shares representing the issued and paid-up share capital of the Company shares and any supplement thereto (the “Pledged Shares”); and
- undertakes to the Pledgee (Seller Company) to pledge any other shares of the Company which the Pledger may at any time in the future own, including but not limited to any shares issued by virtue of shares dividends, bonus shares, created upon any option or otherwise (the “Additional Pledged Shares”), and as soon as the Additional Pledged Shares have been pledged, they shall be deemed to be Pledged Shares.
7) Director Appointment Letter
The Seller Company enumerates through the Letter of Appointment to the special purpose vehicles the following key factors among others:
- Appointment Period of the special purpose vehicle
- Remuneration of the special purpose vehicle
- Termination of the special purpose vehicle
- Maintaining the confidentiality between Seller Company and the special purpose vehicle
- Dispute Resolution methodologies between the Seller Company and the special purpose vehicle
As a Market Entry Consultancy firm, Cekindo will provide you set of appropriate special purpose agreements include our individual and corporate shareholders to make sure you choose the safest way to engage a local special purpose vehicle in Indonesia, you can also check our article about step by step start a company and complete business overview about our services. This service is annually (except the set of special purpose agreements) and will be extended as long as needed by our client.