INDONESIA Law and Practice Contributed by: Alvin Suryohadiprojo and Dimas Nandaraditya, KARNA
make sure that their paid-up capital meets the applicable requirement. In light of this, the structure commonly used is the issuance of a convertible loan by a tar - get company to be subscribed by the foreign individual, foreign entities and/or FDI Co. With this structure, there are no shares issued for the receipt of fresh funding. Therefore, early-stage target companies are not required to become an FDI Co and the minimum capital requirement is not triggered. The loan can be converted into shares once the start-up company is ready to become an FDI Co. 3.4 Documentation For shares issuance, the typical key documents are: • term sheet, which outlines the financing structure including the exclusivity period dur - ing the due diligence process; • shares subscription agreement, which gov - erns the issuance of shares including the conditions that must be met before and after the disbursement of the funding, as well as warranties given by the company and the founders regarding the company; and • shareholders’ agreement, which essentially provides the investors with minority protec - tion in the event the investors choose to maintain the founders’ majority shareholding position. For convertible loan structure, the typical key documents are: • term sheet; • convertible loan agreement, which governs the requirements for the disbursement of the funding, key aspects of the loan (such as
maturity and interest) and loan conversion mechanism; • securities documents, which are a set of doc - uments provided by the founders to secure the company’s and founders’ performances based on the convertible loan agreement with regard to the number of shares that can be obtained by the investors in the intended convertible loan, including shares pledge agreement, call option agreement and power of attorney to sell shares and vote on the founders’ behalf; and • pre-agreed shareholders’ agreement, which will be applicable upon the conversion of the loan into shares and the investors becoming a shareholder in the company. 3.5 Investor Safeguards More venture capital investors are asking for broad-based weighted average anti-dilution in the form of a certain type of compensation for existing investors in the event of a down round in venture capital-funded companies’ sharehold - ers’ agreements. This was not the norm prior to the COVID-19 pandemic. Some even started asking for full ratchet protection. The use of broad-based weighted average mechanism is more favourable, as a full ratchet mechanism is more draconian in nature. More stringent pre-emption and subscription rights have also become more prevalent. In terms of winding up or the liquidation process, venture capital investors are usually protected with some liquidation preferences pursuant to the preferred shares held by them. These privi - leges include the right to receive the liquidation proceeds prior to any payments to the holder of ordinary shares. In a general liquidation process, when a liquidator is appointed to manage the company’s assets, the appointed liquidator is under obligation to apply for bankruptcy in the
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