Indonesian Law | Hukum Indonesia - Blog

Monday, August 29, 2016

Employment Termination Issues in Indonesia

A. LEGAL BASIS

  • Law no. 13 of 2003 on Manpower (the “Manpower Law”).
  • Law no. 2 of 2004 on Industrial Relationship Dispute Settlement (the “Labour Dispute Settlement Law”).
  • Termination-at-will is not recognised in Indonesia.
  • The concept of providing a fixed number of months notice of termination or pay in lieu of notice is not applicable in Indonesia.
  • The employers must firstly obtain approval from Industrial Relation Court (the “Labour Court”) if they are going to terminate their employee. On the other hand, there are no legal restrictions on termination by mutual agreement.

B. GROUNDS FOR TERMINATION OF EMPLOYMENT

Manpower Law provides at least 12 reasons for the termination of employment, as follows:
  1. Employee's death (Art. 61 & 166 of Manpower Law); 
  2. Grave wrongdoings, i.e. fraud, stealing or embezzling the company’s money or goods, giving false or falsified testimony that causes damages to the company, etc (Art. 158 of Manpower Law). However, please note that the Indonesian Constitutional court has declared that termination of employment due to grave wrongdoings deemed to be unconstitutional, on the basis that the guilt of an employee should be decided upon by a court of law and not by the employer. Accordingly, it is recommended that any employer obtains legal advice prior to terminating an employee on grounds of grave wrongdoings; 
  3. Violation of company regulations, employment agreement and collective labour agreement (Art. 161 of Manpower Law). As required by the Manpower Law, an application to dismiss an employee based on Art. 161 of the Manpower Law should be made only after at least 3 consecutive warning letters have been given to the employee. Unless otherwise prescribed in the collective labour agreement, company regulations or the employment agreement, each warning letter is valid for no longer than 6 months. The warning letters are meant to discipline and give the employee a chance to correct their mistake/violation; 
  4. Voluntary resignation (Art. 162 of Manpower Law); 
  5. Change of company’s status, merger, consolidation and change of ownership (Art. 163 of Manpower Law); 
  6. Company’s closure for financial reasons or force majeure {Art. 164 (1) & (2) of Manpower Law}; 
  7. Efficiency / Redundancy measures (Art. 164 (3) of Manpower Law). Please note that the Indonesian Constitutional court has declared that the company must be closed down permanently before the termination can be conducted by reason of efficiency / redundancy measures; 
  8. Employer’s bankruptcy (Art. 165 of Manpower Law); 
  9. Employee’s absence for 5 (five) consecutive days without notice (Art. 168 of Manpower Law); 
  10. Employer’s inappropriate actions (Article 169 of Manpower Law); 
  11. Employee’s continuing illness for more than 12 months (Art. 153 & 172 of Manpower Law);
  12. Employee reaches retirement age (Art. 167 of Manpower Law).

C. PROCEDURES FOR TERMINATION

Under the Labour Dispute Settlement Law, general procedures for employee termination are as follows:

Bipartite Negotiations: Before dismissing an employee, the first important step is to hold "bipartite" negotiations between the employer and the employee. The bipartite negotiation must be conducted within 30 calendar days after the negotiation started. Any outcome of the bipartite negotiations should be recorded in Minutes of Meeting signed by both parties.

Mediation/Conciliation: If the bipartite negotiation process between the parties fails to reach any agreement, one or both parties can report their dispute to the local manpower office at regency level (Kabupaten/Kota):
  • The mediation/conciliation hearings should take place within 30 business days after receipt of the application.
  • The mediator/conciliator will issue a recommendation to settle the dispute to both parties. If both parties agree to the aforesaid recommendation, the parties then should sign a mutual agreement. The mutual agreement must then be registered at the Labour Court.
  • The recommendation is not binding. 
  • Any party who disagrees with the recommendation may submit the dispute to the Labour Court.

Labour Court Proceedings: The proceedings should not exceed 50 working days from the first hearing. Any lawsuit filed at the competent Labour Court must be accompanied by minutes of mediation or conciliation process. Supreme Court: Any party who disagrees with the Labour Court’s verdict may file a cassation appeal to the Supreme Court.

D. COMPONENTS OF TERMINATION ENTITLEMENTS PACKAGE

The guidelines to calculate severance pay, long service pay and compensation rights pay according to the Manpower Law are as follows:

Severance Pay - Art. 156 (2) of Manpower Law:

Amount of Years Working
 Amount of Severance Pay
Less than one year
 one month salary
One year or more, but less than two years
 two months salary
Two years or more, but less than three years
 three months salary
Three years of more, but less than four years
 four months salary
Four years or more, but less than five years
 five months salary
Five years or more, but less than six years
 six months salary
Six years or more, but less than seven years
 seven months salary
Seven years or more, but less than eight years
 eight months salary
More than eight years
 nine months salary

Long Service Pay - Art. 156 (3) of Manpower Law:

Amount of Years Working
 Amount of Long Service  Pay
Three years or more, but less than six years
 two months salary
Six years or more, but less than nine years
 three months salary
Nine years or more, but less than 12 years
 four months salary
12 years of more, but less than 15 years 
 five months salary
15 years or more, but less than 18 years
 six months salary
18 years or more, but less than 21 years
 seven months salary
21 years or more, but less than 24 years
 eight months salary
24 years or more
 ten months salary

Compensation Rights Pay - Art. 156 (4) of Manpower Law
Compensation for annual leave not yet taken or not yet expired; repatriation cost; compensation for housing, medical and hospitalisation (which is stipulated in the amount of 15% of severance pay and/or long service pay to which the employee is entitled).

Separation Pay
The amount of separation pay shall be determined and regulated in the employment agreement, company regulation or collective labour agreement.

E. EXAMPLES OF TERMINATION ENTITLEMENTS PACKAGE

Please note only permanent employee is entitled to the termination entitlements package. The following table shows termination entitlements package under the Manpower Law, however, we strongly recommend the employer seek legal advice before terminating an employee to avoid violation to the Manpower Law.

Ground for Termination                
Entitlements Package
Employee's death
(2 X Severance Pay) + Long Service Pay + Compensation Rights Pay (Art. 166 of Manpower Law)
Voluntary resignation
Compensation Rights Pay {Art. 162 (1) of Manpower Law}
Violation of company regulations, employment agreement and collective labour agreement
Severance Pay + Long Service Pay + Compensation Rights Pay {Art. 161 (3) of Manpower Law}
Criminal indictment against employee - termination may be conducted after 6 months detainment or termination may be conducted when the guilty verdict is passed before 6 months detainment
Long Service Pay + Compensation Rights Pay {Art. 160 (7) of Manpower Law}
Change of company’s status, merger, consolidation and change of ownership – the employee terminates
Severance Pay + Long Service Pay + Compensation Rights Pay {Art. 163 (1) of Manpower Law}
Change of company’s status, merger, consolidation and change of ownership – the employer terminates
(2 X Severance Pay) + Long Service Pay + Compensation Rights Pay {Art. 163 (2) of Manpower Law}
Efficiency/redundancy
(2 X Severance Pay) + Long Service Pay + Compensation Rights Pay {Art. 164 (3) of Manpower Law}
Employer closed due to continuous losses or force majeure
Severance Pay + Long Service Pay + Compensation Rights Pay {Art. 164 (1) of Manpower Law}
Employer’s bankruptcy
Severance Pay + Long Service Pay + Compensation Rights Pay (Art. 165 of Manpower Law)
Absent of employee for 5 days consecutively
Separation Pay + Compensation Rights Pay {Art. 168 (3) of Manpower Law}
Long-term illness of employee
(2 X Severance Pay) + (2 x Long Service Pay) + Compensation Rights Pay (Art. 172 of Manpower Law)
Employer’s actions {the Labour Court holds the employer guilty of violating Art. 169 (1) of Manpower Law}
(2 X Severance Pay) + Long Service Pay + Compensation Rights Pay {Art. 169 (2) of Manpower Law}
Employer’s actions {the Labour Court holds the employer not guilty of violating Art. 169 (1) of Manpower Law}
Compensation Rights Pay {Art. 169 (3) of Manpower Law}
Employee’s retirement (the employer includes the employee in a pension plan)
Compensation Rights Pay {Art. 167 (1) of Manpower Law}
Employee’s retirement (the employer does not include the employee in a pension plan)
(2 X Severance Pay) + Long Service Pay + Compensation Rights Pay {Art. 167 (5) of Manpower Law}

F. IMPORTANCE OF MITIGATING EXPOSURE FOR EMPLOYER

The Indonesian Manpower Law provides a clear mandatory minimum entitlements package for virtually every possible type of employment termination, therefore, it is important for the employer to mitigate their exposure to the termination liability.

Monday, May 9, 2016

Mergers & Acquisitions in Indonesia – The Basic

mergers & acquisition in Indonesia
INTRODUCTION

Mergers and acquisitions (M&A) in Indonesia sometimes could be simple but they also have the potential to involve complex regulations and approvals. In general, mergers and acquisitions in Indonesia are governed by the following laws and regulations:

  1. Law No. 40 of 2007 regarding Limited Liability Company (“Company Law”) and its implementing regulation, i.e. Government Regulation No. 27 of 1998 regarding Mergers, Consolidations, and Acquisitions of Limited Liability Companies (“PP 27”). 
  2. Law No. 1999 regarding Prohibition of Monopoly and Unfair Business Competition (“Anti-Monopoly Law”) and its implementing regulation. 
  3. Law No. 25 of 2007 regarding Capital Investment and its implementing regulation, i.e. Presidential Regulation No. 39 of 2014 regarding List of Business Fields that are Closed to Investment and Business Fields that are Conditionally Open for Investment, Regulations from Investment Coordinating Board (Badan Koordinasi Penanaman ModalBKPM) (if the mergers and acquisitions involve foreign investment). 
  4. Law No. 8 of 1995 regarding the Capital Market, and Regulations from Financial Services Authority (Otoritas Jasa KeuanganOJK) (if the mergers and acquisitions involve public listed company). 
  5. Law No. 13 of 2003 regarding Manpower (“Labor Law”). 
  6. Tax laws and regulations. 
  7. Industry-specific laws and regulations, particularly in regulated industries such as banking, insurance, plantation, mining, and telecommunications.

MERGERS

Company Law defines a merger as a legal act executed by one or more companies to merge with another company which has existed previously and the merging company will then be dissolved.


The Company Law provides the following general procedures concerning the merger of companies:
  1. The Boards of Directors of the merging and surviving companies must prepare a merger plan.
  2. The merger plan then must be approved by the Board of Commissioners of each of the merging companies.
  3. Each of the merging companies, no later than 30 days prior to the date of the General Meeting of Shareholders (“GMS”), must:
    • announce the merger plan summary in one Indonesian national newspaper (the announcement shall also contain a notification that relevant party may obtain the plan of merger in the company’s office, as of the announcement date to the date of the GMS); and
    • announce the merger in writing to the employees of each company.
  4. Following the announcement in newspaper, creditors of each merging companies may submit an objection to each of the merging companies within 14 days after the announcement. The merger cannot be completed until the objections of the creditors have been resolved.
  5. Execution of GMS to approve the merger plan.
  6. The merger plan which has been approved by the GMS then must be restated in a Deed of Merger drawn up by a public notary.
  7. Obtain Ministry of Law and Human Rights approval or notification regarding the amendments to the Articles of Association of the company (as the case may be).
  8. In the event the Merger is not followed with the amendment of articles of association, the copy of Deed of Merger shall be submitted to the Minister to be registered in the Company Registry.
  9. The surviving company shall announce the result of the merger in one national newspaper or more, within the latest period of 30 (thirty) days as of the effective date of the merger.

ACQUISITIONS

There are two types of acquisitions in Indonesia, i.e. (i) shares acquisitions; and (ii) asset acquisitions.

This article only elaborates the shares acquisition. Company Law defines shares acquisition as a legal act conducted by a legal entity or individuals to acquire all or a majority of a company’s shares, whether existing or newly issued, which may result in change of control to such company.

I. General procedures for an acquisition of existing shares conducted through the Board of Directors of the target company or acquisition of new shares:
  1. The Boards of Directors of the target company and the acquiring company must prepare an acquisition plan.
  2. The acquisition plan then must be approved by the Board of Commissioners of each of the target company and the acquiring company.
  3. The target company and the acquiring company, no later than 30 days prior to the date of the General Meeting of Shareholders (“GMS”), must:
    • announce the acquisition plan summary in one Indonesian national newspaper (the announcement shall also contain a notification that relevant party may obtain the plan of acquisition in the company’s office, as of the announcement date to the date of the GMS); and
    • announce the acquisition in writing to the employees of each company.
  4. Following the announcement in newspaper, creditors of the target company and the acquiring company may submit an objection to each company respectively within 14 days after the announcement. The acquisition cannot be completed until the objections of the creditors have been resolved.
  5. Execution of GMS to approve the acquisition plan.
  6. The acquisition plan which has been approved by the GMS then must be restated in a Deed of Acquisition drawn up by a public notary.
  7. Obtain Ministry of Law and Human Rights approval or notification regarding the amendments to the Articles of Association of the company (as the case may be).
  8. The acquired company shall announce the result of the acquisition in one national newspaper or more, within the latest period of 30 (thirty) days as of the effective date of the acquisition.
II. General procedures for an acquisition of existing shares conducted directly by the shareholders (the most commonly used – without the need for an acquisition plan):
  1. The target company and the acquiring company, no later than 30 days prior to the date of the General Meeting of Shareholders (“GMS”), must:
    • announce the acquisition summary in one Indonesian national newspaper; and
    • announce the acquisition in writing to the employees of each company.
  2. Following the announcement in newspaper, creditors of the target company and the acquiring company may submit an objection to each company respectively within 14 days after the announcement. The acquisition cannot be completed until the objections of the creditors have been resolved.
  3. Execution of GMS to approve the acquisition.
  4. Execution of Shares Sales and Purchase Agreement (in the form of notary deed).
  5. The GMS then must be restated in a Deed of Acquisition drawn up by a public notary.
  6. Obtain Ministry of Law and Human Rights approval or notification regarding the amendments to the Articles of Association of the company (as the case may be).
  7. The acquired company shall announce the result of the acquisition in one national newspaper or more, within the latest period of 30 (thirty) days as of the effective date of the acquisition.

GOVERNMENT APPROVALS 

I. Investment Coordinating Board (Badan Koordinasi Penanaman Modal – “BKPM”) 

Approvals are required from BKPM in relation to shareholders composition change in a foreign investment company in Indonesia or when a foreign company is going to acquire shares in a local Indonesian company. In general, if the mergers and acquisitions involve foreign parties, accordingly BKPM’s approval is required.

Not all business fields are ‘open’ to foreign investment. Under the Presidential Regulation No. 39 of 2014 (the "Negative List") (and may, at the time of writing, be revised again) business sectors are either completely ‘closed to’ investment or ‘conditionally open’ (meaning that they are subject to foreign ownership limits or require special arrangements).

Business sectors that are not mentioned in the Negative List are, in theory, considered completely open to investment from non-Indonesian investors (can be owned 100% by foreigners). However, we consider that it would be prudent to re-confirm this with BKPM.

II. Financial Services Authority (Otoritas Jasa Keuangan – “OJK”)

Approvals are required from OJK if the mergers and acquisitions involve public listed company, insurance company, bank, finance company or any other company which is regulated by the OJK.

If a company is, by law, regulated by the OJK, and such company ‘s shareholder involves foreign investment, accordingly BKPM approval is not required.

III. Ministry of Law and Human Rights.

Limited liability companies wishing to amend their articles of association need to notify or obtain the approval of the Ministry of Law and Human Rights (depending on the amendments made).

Please note that all shareholders resolution must be restated into a notary deed within 30 days of the shareholders resolution date and be filed with the Ministry of Law and Human Rights within a further period of 30 days (otherwise, the shareholders resolution is deemed invalid by virtue the Company Law).

IV. Other Government Agencies

Approvals or recommendation from the industry regulator or local government may also be relevant, depending on the nature of the target’s business, e.g., telecommunications, broadcasting, plantation, mining, oil & gas.

EMPLOYMENT ISSUES

In general, employees do not have a direct say in a merger or an acquisition. However, an underlying policy of the Labor Law is that employees in Indonesia should have a choice of which employer they work for, therefore, if the merger and/or acquisition results in the change of control in the target company, the employees will be entitled to request for a termination and receive severance package from the company. The components of the severance package are severance payment, long service payment, and compensation rights payment, which amounts are regulated under the Labor Law or the Company Regulation or the Collective Labor Agreement.

Please note that article 61 (3) of Labor Law provides: “In the event of a transfer of ownership of an enterprise, the new entrepreneur [who now owns the enterprise] shall bear the responsibility of fulfilling the entitlements of the worker affected by the transfer unless otherwise stated in the transfer agreement, which must not reduce the entitlements of the worker”.

ANTI-MONOPOLY & UNFAIR BUSINESS COMPETITION ISSUES 

In Indonesia, the government agency that supervises, scrutinizes, monitor and regulates anti-monopoly & unfair business competition issues is called the Business Competition Supervisory Commission (Komisi Pengawas Persaingan Usaha or “KPPU”).

Notification to KPPU regarding merger or acquisition transaction is only mandatory when the transaction is not conducted between affiliated companies and the value of assets or the value of sales of the companies involving in the merger or acquisition transaction exceeds a certain amount:

  1. if the consolidated national assets of the companies are more than Rp. 2.5 trillion; 
  2. if the consolidated national turnover (sales) of the companies are more than Rp. 5 trillion; and/or 
  3. if the consolidated national assets of the companies are more than Rp. 20 trillion, for banking corporations. 
The before mentioned notification must be submitted to the KPPU no later than 30 business days as of the date on which a merger or acquisition becomes effective. Failing to comply with this requirement may result in a sanction of an administrative fine of Rp. 1 billion per day of delay, provided that the maximum amount of the total administrative fine is Rp. 25 billion.

The KPPU also provides a chance for the business entities to conduct a pre-consultation to the KPPU prior to performing merger or acquisition if the transaction is complex and may potentially result in breach of the Anti-Monopoly Law and its implementing regulations.