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Indonesia – Impact Of Competition And Merger Control Regulation On M&A Transactions.

14 January, 2014

 

 

The growing relevance of competition or merger control analysis and filing obligations in Indonesia, in the context of Indonesia-related M&A transactions, has been a consistent theme in the last 3 years or so. Whilst achieving the level of legal certainty common in developed markets remains difficult as the Indonesian law and practice in this area continue to develop, there is a growing body of knowledge and practice as the Indonesian Business Competition Supervisory Commission (better known by its Indonesian acronym, “KPPU”) and practitioners in Jakarta gain more practical experience in merger control analysis and the procedural and timing aspects of merger control filings.

 

It has now reached the stage where it is essential to undertake a competition or merger control analysis at an early stage of relevant Indonesia-related M&A transactions. This is particularly so as KPPU has, in December 2012, imposed a fine of IDR4.6b (c.US$377,000) on an acquiror for delay in complying with the compulsory notification requirement. This exemplifies the importance of carrying out such analysis early on in order to determine whether a filing with KPPU is required, as this may affect the M&A transaction structure and timetable. This is important because, in our experience a merger filing may in fact be required under the Indonesian rules in cases where there would not, at first blush, appear to be any anti-competitive effect in Indonesia.

 

The trend of merger control fillings being made to KPPU for offshore foreign-to-foreign mergers, consolidation or acquisition transactions (causing a change of control) has also become more apparent in the last two years or so. An example of the growing number of offshore foreign-to-foreign transactions being notified to KPPU is the recent filing in March 2013 of the acquisition of Wyeth (Hongkong) Holding Company Limited by Nestlé S.A., both of which have subsidiaries in Indonesia that produce infant formula milk. Such offshore transactions are notifiable to KPPU if they satisfy the relevant Indonesian assets or sales thresholds and are deemed to affect the condition of domestic market in Indonesia – for instance, if all parties involved in the transaction undertake business activities in Indonesia, as in the Nestlé/Wyeth case.

 

The Nestlé case not only demonstrates the need for parties to assess the relevance of the Indonesian merger control even in offshore transactions, but it also demonstrates the type of remedies that may be imposed by KPPU in circumstances where higher market concentration is likely to arise as a result of the transaction in question. In this particular case, KPPU decided to adopt a pragmatic approach and imposed an ongoing post-completion reporting obligation on the merged Indonesian subsidiaries of Wyeth and Nestlé to submit monthly pricing and sales data for certain products for a specific period of time.

 

Set out below are some key questions and answers regarding the merger control regime in Indonesia.

 

1. Are There Merger Control Regulations In Indonesia? If So, Who Is The Regulator?

 

Articles 28 and 29 of Anti-­Monopoly Law No.5 of 1999 (“Law No.5/1999”) form the corner stone of the merger control regime for M&A transaction in Indonesia. The regulator is known as the Business Competition Supervisory Commission (“KPPU”). The merger control rules have been in existence since 1999 but were not implemented until 2010, when the Government of Indonesia finally issued the necessary implementing regulation, i.e. Government Regulation No.57 of 2010 regarding merger control (“GR 57/2010“). GR 57/2010 sets out details of the mandatory post­-merger notification procedure required by KPPU and certain principles regarding a voluntary pre-merger consultation procedure. It is now essential in Indonesia-­related M&A transactions to consider merger control issues at an early stage, as this may affect the M&A transaction structure and timetable.

 

2. What Transactions Need To Be Notified To KPPU? What Are The Notification Threshold Tests?

 

Mergers, consolidations or acquisitions (causing a change in control), where the value of the relevant businesses is above certain specific Indonesian assets or sales thresholds, must be notified to KPPU. GR 57/2010 introduces the procedure for a compulsory post-merger notification requirement for any merger, consolidation or acquisition (causing a change in control) which results in the following thresholds for the resulting post-transaction business being exceeded:

 

  • an assets value of IDR2.5tn (c.US$205m); and/or
  • a sales value of IDR5tn (c.US$409m).
 
Transactions in the banking sector are subject to a higher threshold and need only be notified to KPPU if the value of the relevant assets exceeds IDR 20tn (c.US$1.6b).
 3. When Applying The Assets Or Sales Threshold Tests Do Group Assets Or Sales Have To Be Aggregated?

 

The thresholds set out above are calculated by reference to the aggregate assets or, as the case may be, sales value of the relevant Indonesian business(es) of:

 

  • the entity resulting from the merger or consolidation, or (in the case of an acquisition) the acquiror and the target being acquired; and
  • the entities which, directly or indirectly, control or are controlled by the entity resulting from the merger or consolidation, or (in the case of an acquisition) the acquiror and the target being acquired.

 

When applying this test in the context of an acquisition, the Indonesian assets or sales values of the acquiror, the target and their respective controlled and controlling entities must be aggregated, even if the relevant controlled and/or controlling entities are not Indonesian entities. The relevant assets value for the purpose of the assets threshold test relates to assets located within Indonesia. Likewise, the relevant sales value for the purpose of the sales threshold test relate to sales in Indonesia (excluding exports), irrespective of whether the sales originate from within or outside Indonesia.

 

4. Do Asset Acquisitions Need To Be Notified to KPPU?

 

Our current view and experience is that, based on the definitions in the relevant regulations, asset sale and purchase transactions do not currently fall within KPPU’s merger control jurisdiction. This remains an area where a case-­‐by-­‐case approach is advisable.

 

5. Do Transactions Between Affiliated Parties Need To Be Notified To KPPU?

 

Transactions between certain affiliated parties are exempted.

 

6. When does KPPU need to be notified and who needs to submit the notification to KPPU?

 

Indonesia has a post-­acquisition compulsory notification regime and hence notification to KPPU is done after completion of the relevant transaction (within 30 business days of the transaction becoming legally effective). There is also a voluntary procedure for consulting with KPPU prior to entering into the relevant agreements for, or prior to completion of, the transaction (see answer to Question 8 below for further details).

 

In light of this, and coupled with the fact that at least in theory KPPU has the powers to unwind a completed transaction (see Question 10 below), in practice it is often the case that the parties to the transaction will need to come to a view early on in the transaction process whether to undertake a voluntary pre-­acquisition consultation with

 

KPPU (or, to skip this step, and proceed with completion of the transaction and a post-­‐ acquisition notification only). This decision requires careful thought and is likely to have an impact on the M&A transaction structure and timetable (see paragraph 7 below).

 

The party that is obliged to submit the notification to KPPU is the surviving company in a merger transaction, the company resulting from the consolidation in a consolidation transaction and the acquiror in an acquisition transaction.

 

 

7. How Long Will It Take KPPU To Make A Decision?

 

KPPU will assess notified transactions to determine whether the transaction may result in monopolistic practices and/or unfair business competition and is meant to provide its determination within 90 business days of receipt of the duly completed written notification (together with all required supporting documents). The 90 business days time frame will not begin until KPPU considers that all required supporting documents have been provided. In our experience, delays are not uncommon and further information is typically required to be provided.

 

 KPPU has also recently further clarified certain procedural aspects of merger control filings in KPPU Regulation Number 2 of 2013 (“Regulation No.2/2013”). In particular, as part of the documents to be filed with KPPU, the relevant party is required to also submit: (a) a business plan which contains the policies of the relevant parties for the next 3 years and information regarding the industry of the parties; (b) data on the market structure of the industry the relevant parties operate in (including the market share of the relevant parties and that of their competitors). These additional requirements are in fact not new as KPPU has, in our experience, been requiring these documents in any event in recent filings. The only difference is that these requirements have now been clarified in writing by KPPU and KPPU has also clarified that it will not proceed to evaluate the transaction if the parties fail to provide the relevant information.

 

8. Is It Possible To Consult With KPPU On The Competition Effect Of A Proposed Transaction Prior To Signing The Acquisition Documents Or Before Completion Of The Acquisition?

 

Yes, it is possible to formerly consult with KPPU on a proposed transaction on a voluntary basis, although an evaluation by KPPU pursuant to such voluntary consultation does not negate KPPU’s powers to further evaluate the merger, consolidation or acquisition in question, following completion of the transaction. KPPU has, however, committed to only evaluate once any particular merger, consolidation or acquisition, so long as there is no material change in the data provided to KPPU or market conditions. If there is any such change, KPPU may use its powers to undertake a repeat evaluation of the merger, consolidation or acquisition.

 

For a voluntary pre-­‐acquisition notification, the initial review period is 30 business days from the receipt of duly completed forms and supporting documents. In its initial review, KPPU will evaluate the concentration levels of the relevant market resulting from the proposed transaction. KPPU will proceed to a full assessment should it consider there to be a risk of anti-­‐competitive behaviour. KPPU will complete its full assessment, at the latest, within 60 business days of completing its initial review.

 

9. Are Offshore Foreign-­To-­Foreign M&A Transactions Caught By KPPU’s Merger Control Regulations?

 

Under KPPU’s practice guidelines, KPPU emphasizes that it has jurisdiction if the foreign-­‐ to-­‐foreign merger, consolidation or acquisition (causing a change of control) may affect the competitive condition of Indonesia’s domestic market, even if the transaction is occurring outside Indonesia. This is borne out in practice, as there is a steadily growing number of published KPPU cases where filings relating to foreign to foreign transactions have been made.

 

In particular, KPPU has indicated that it has jurisdiction over any foreign merger, consolidation or acquisition (causing a change of control) which satisfies, the following factors:

 

  • The merger, consolidation or acquisition (causing a change of control) is carried out outside Indonesia’s jurisdiction.
  • It has a direct impact on the Indonesian market, that is:
    • All parties involved in the merger, consolidation or acquisition (causing a change of control) undertake business activities in Indonesia either directly or indirectly, for example, through a subsidiary in Indonesia; or
    • Only one party involved in the merger, consolidation or acquisition (causing a change of control) undertakes business activities in Indonesia, but the other parties to merger, consolidation or acquisition (causing a change of control) have sales in Indonesia; or
    • Only one party involved in the merger, consolidation or acquisition (causing a change of control) undertakes business activities in Indonesia, and the other parties to the merger, consolidation or acquisition do not undertake business activities in Indonesia, but have sister companies that undertake activities in Indonesia.
  • The merger, consolidation or acquisition (causing a change of control) satisfies the assets/sales threshold tests (set out in Question 2 above).
  • The merger, consolidation or acquisition (causing a change of control) is not between affiliated parties.

 

 10. What Are The Sanctions For Failing To Comply With The Compulsory Notification Requirement?

 

Failure to make a post-­‐acquisition notification within 30 business days of the merger, consolidation or acquisition (causing a change of control) becoming effective can result in a fine of IDR1b (c.US$82,000) per day after the deadline has elapsed, up to a maximum of IDR25b (c.US$2.1m) in total. KPPU, for the first time in December 2012, imposed a fine of IDR4.6b (c.US$377,000) on the acquiror in a M&A transaction for delays in complying with the compulsory notification requirement. This exemplifies the importance of carrying out a merger control analysis, at an early stage of a Indonesia-­‐related M&A transaction, to determine whether a filing with KPPU is required as it may affect the M&A transaction structure and timetable.

 

Note also that, under Law No. 5/1999, KPPU has broader powers to impose various administrative sanctions for breach of Law No. 5/1999, including cancelling the merger, consolidation or acquisition (although, to date, we are not aware of KPPU having exercised this power). KPPU also has the power to impose either structural remedies (e.g. assets or share divestments) or behavioral remedies (e.g. removing barriers which lessen competition).

 

HBT

 

For further information, please contact:

 

David Dawborn, Partner, Herbert Smith Freehills

david.dawborn@hsf.com

 

Mark Jephcott, Partner, Herbert Smith Freehills

mark.jephcott@hsf.com

 

Sakurayuki, Partner, Hiswara Bunjamin & Tundjang

sakurayuki@hbtlaw.com

 

Vik Tang, Hiswara Bunjamin & Tundjang

vik.tang@hbtlaw.com

 

Nadia Harto, Hiswara Bunjamin & Tundjang

nadia.harto@hbtlaw.com

 

Hiswara Bunjamin & Tundjang Corporate/M&A Practice Profile in Indonesia

 

Corporate/M&A Law Firms in Indonesia

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