JOINT VENTURE AGREEMENT IN INDONESIA PART II: ARTICLES OF ASSOCIATION & TRANSFER OF SHARES

Previously, we have talked generally about what is Joint Venture and the reasons behind it. This part will be talking about the standing of a Joint Venture Agreement in the context of Joint Venture Limited Liability Company (“PT JV”) and its shareholders or shareholding matters.

As a refresher, Joint Venture is a business term that is used to define an activity of two or more parties to form a partnership among them in order to achieve a certain goal. In practice, Joint Venture will usually lead to an establishment of a PT JV.

PT under (“UUPT”) means alegal entity which initiate an alliance of capital established pursuantto a contract in order to carry on business activities with an authorisedcapital all of which is divided into shares and which fulfils therequirements stipulated in this UUPT and its implementing regulations.Thus, looking up to the definition of PT provided by the law, if we talk about ‘PT’ or Perseroan Terbatas (Limited Liability Company), there will be important matters that have to be understood beside the definition of PT itself, such as the articles of association and the shareholding matters.

First of all, it has to be understood that PT is established pursuant to a contract or agreement. Referring to, as long as the contract or agreement, which in this context is the Joint Venture Agreement, is not against the prevailing laws and regulations, it will be valid and binding for the parties. Practically. Within the scope of foreign investment, the agreement may be made in two or more languages, in which one of them has to be the Indonesian language. This matter is by regarding the Use of Indonesian Language and Symbols. In case of disputes that may arise among the parties regarding the agreement, the party which feels his/her rights are violated may file a law suit with the basis of tort or breach of contract depending the violation that is done by the other party, this agreement is treated just as any common agreement in Indonesia.

A Joint Venture Agreement stands as a reference for the involving parties in forming the articles of association of the PT JV that they are going to establish (or restructure). In short, articles of association is the playing rule of the PT, hence it will be very important to make sure that the articles of association comprehends the important points stipulated in the Joint Venture Agreement. Although the parties are usually involved in the drafting of the articles of association , the possibility of  discrepancy regarding the interpretation of the articles of association itself still exist in practice. The establishing parties will obviously be the shareholders of the established PT JV, that is why the Joint Venture Agreement may be referred as the Shareholders’ Agreement too.

Ownership of shares shows the ownership of PT. It has to be noted that shares could be transferred to other parties. Due to that fact, terms regarding transfer of shares is important to be stipulated under the Joint Venture Agreement. Below are the common examples of the terms of transfer of shares in the context of a Joint Venture Agreement:

1. Rights of First Offer or First Refusal Rights (Article 58 UUPT)

A shareholder who wants to transfer his/her/its shares has the obligation to offer the other shareholders within 30 days, the offer only valid for one time.

• Agreement of the Company’s Organs (Article 59 UUPT)

All PT supposedly has organs, which are the Board of Directors, Board of Commissioners, and General Meeting of Shareholders. In this term, the transferee is able to transfer the shares that he/she/it has under the agreement of the organs. Usually it is the agreement of the General Meeting of Shareholders.

• Tag Along Rights

Under this term, if a majority shareholder would like to transfer his/her/its shares to a third party, then the minority shareholders have the right to ask for his/her/its shares to bought as well by the third party under the same terms and conditions of the share transfer agreement among the majority shareholder and the third party. This is for the sake of protecting the minority shareholders’ concerns.

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• Drag Along Rights

This one is used to protect the concerns of the majority shareholder. Under this term, if a majority shareholder would like to transfer all of his/her/its shares to a third party, then the majority shareholder has the right to ask the minority shareholders to sell their shares as well to the third party under the same terms and conditions of the share transfer agreement among the majority shareholder and the third party.

• Lock-Up

A lock-up term will stipulate a fixed transfer of certain shares in a certain time from and to certain shareholder or party under the Joint Venture Agreement.

• Call/Put Option

This term will stipulate an option fortransferring (buy or sell) of certain shares in a certain time from and to certain shareholder or party under the Joint Venture Agreement.

• Compulsory Transfer

A transfer of share will be done if a certain condition occurs.

• Permitted Transfer

This kind of term will make limitations/restrictions regarding transfer of shares to a third party. Transfer of share means that there will be a change in the shareholding composition of a PT. If a Joint Venture Agreement exists, then it is important for the original owners to make sure the new share owner would like to be bound to the existing Joint Venture Agreement in order to secure the original owners’ concerns. This can be done through the amendment of the existing Joint Venture Agreement or through execution of an Adherence Agreement which both will make sure the compliance of the existing Joint Venture Agreement by the new share owner.

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