INDONESIA Trends and Developments Contributed by: Alvin Suryohadiprojo and Dimas Nandaraditya, KARNA
pany and its investors or the venture capital company and its target company; • a subscription agreement containing the terms for making an investment in a venture capital company or venture fund; • shareholders’ agreement that sets out the rights and obligations of the venture capital company or target company in greater detail; • a fund management agreement containing terms and conditions for engaging the fund manager (where applicable); and • side letters where preferential terms may be granted for certain investors. Minority Protection When investing in tech start-ups, investors typi - cally hold minority ownership stakes. Majority ownership is initially retained by the founders to grant them flexibility in developing their ideas and innovations for the company’s development – though their stakes get diluted over time. Con - sequently, to ensure that the authority held by the founders is exercised effectively in line with the interests of investors, investors are usually granted minority rights protection. Indonesian company law adopts a two-tier man - agement structure comprising a board of direc - tors (BOD) and a board of commissioners (BOC). The BOD serves the executive function and is responsible for the day-to-day management and operations of the company. The BOC supervises the BOD’s duties and the articles of association of the company may require the BOD to obtain prior approval from the BOC before taking cer - tain legal actions on behalf of the company. Both the BOD and BOC are accountable to the share - holders of the company for their respective roles. The investors’ minority protection can be exer - cised by regulating matters that require prior investor approval, either as BOC members or
shareholders, before they can be carried out by the BOD (commonly known as “reserved mat- ters” ). The approval threshold also differs per company as a result of negotiations between the parties. Some investors require veto on key matters (eg, new dilutive fundraising) and mostly require majority shareholders’ approval. Some of the matters typically addressed in reserved matters include changes in business activities, investment activities, company’s expenditures exceeding a certain amount, and other matters (especially those related to amendments in the company’s constitutional documents). The investors’ minority rights protections are usually stipulated under a shareholders’ agree - ment, in particular for matters that are not stipu - lated under Indonesian company law. In addition to the appointment of BOC members to super - vise the BOD and reserved matters provision, minority rights protection can be in the form of privileges in a liquidation event, protections in the event of a down round, conversion rights from preferred to ordinary shares, tag-along right, drag-along right, and other forms of pro - tections related to the investors’ shareholding, as well as the investors’ knowledge regard - ing company operations. These provisions are material inducements for investors – without which the investment may not proceed – and are at times non-negotiable. The ideal provisions are those that can be imple - mented. According to Indonesian law, agree - ments are binding as long as their contents do not contradict with the applicable laws and regu - lations. Therefore, even if minority rights protec - tion provisions originate from common law juris - dictions, they can still be enforced in Indonesia. The enforceability of a provision occurs when the right is exercised by its holder. Unfortunately, there are not many company law proceedings in
280 CHAMBERS.COM
Powered by FlippingBook