A Legal Primer on Joint Venture Agreements in Indonesia

When forming an Indonesian joint venture the two main statutes for consideration are typically the Indonesian Civil Code and the Indonesian Company Law.

By contrast with the Civil Code, which was promulgated in the 19th century by the Dutch East Indies government and was based on the then existing Civil Code in the Netherlands, the Indonesia Company Law (Law 40 of 2007) was promulgated in 2007 and is a relatively modern form of companies’ law, drawing on a variety of contemporary international legislative models. Both laws will impact your structure and organization in Indonesia and the substance of your joint venture agreement.

A Legal Primer on Joint Venture Agreements in Indonesia

Basic contract law principles

Indonesian law recognizes the principle of freedom of contract. This principle is codified in Article 1338 of the Civil Code. Article 1338 provides that parties to a contract are free to include any provisions they wish subject only to mandatory provisions of Indonesian law. There are, however, limitations to this principle. Agreements contrary to good faith or the public order are not valid (Article 1337 of the Civil Code). In addition, in order for a contract to be legal under Indonesian law, Article 1320 of the Civil Code stipulates certain requirements must be satisfied: free consent of the parties; legal capacity of the parties to conclude an agreement; a defined object; and a lawful purpose.

Within these parameters, Indonesian law gives the contracting parties a great deal of freedom to conclude agreements embodying those terms that suit them and the subject matter of their contracts.

Typical provisions of a joint venture agreement

In the context of Indonesian joint venture companies, the agreement setting out the respective rights and obligations of the respective shareholders is normally called a ‘joint venture agreement.’ A typical joint venture agreement for an Indonesian joint venture might include the following terms:

• Interpretation

The agreement will contain certain definitions and legal ‘boilerplate’ including such matters as :

1. the governing law of the contract, which will typically, but may not necessarily, be Indonesian law.
2. provisions regarding waiver and amendment; and
3. particulars regarding the organisation and management of the joint venture company and, where applicable, its operating subsidiaries.

• Business and affairs of the company

Details concerning the management of the day-to-day business and affairs of the company should be set out in some detail and may include such matters as :

1. descriptions of the business obligations of the parties, including concerning capital contributions and the ongoing duties of the company.
2. the constitution and identity of the company’s board of directors and board of commissioners.
3. a requirement for periodic meetings of the boards.
4. a requirement for periodic meetings of the shareholders of the company.
5. the appointment of the president director of the company.
6. matters requiring special majorities of the directors, commissioners or shareholders such as amendments to the Articles of Association of the company.

These are intended as examples only and the types of such clauses that can be inserted are limited only by the creativity of those framing the agreement.

Finally, note that the roles of company director and commissioner are not to be taken lightly. By virtue of Articles 97 and 108 of the Company Law, each member of the board may be held personally liable for losses suffered by the company occasioned by negligent errors in management. A director or a commissioner may be excused from this liability where they can prove that the losses were not caused by their mistakes or negligence; that they have managed in good faith in the interests of the company; that there were no direct or indirect conflicts of interest in respect of the act of management causing the losses; and they acted to prevent the said losses from occurring and continuing.

• Matters relating to shares generally

The joint venture agreement should contain basic representations and warranties by the parties, including regarding the ownership of their shares in the capital of the company.

There should be a general prohibition on share transfer without the consent of the other parties, subject to the terms of the joint venture agreement. There may be a provision to the effect that an individual shareholder can transfer all or any shares in the capital of the company to an entity controlled by him or her subject to terms, such as prohibitions on future transfers. There should be a general prohibition against pledges or mortgages of or charges upon shares. The agreement should provide that no registration of any transfer of shares will be made unless it is made in accordance with the terms of the shareholders’ agreement.

• Disposition and acquisition of shares

The agreement should specify designated representatives of the shareholders entitled to make offers and receive notices with respect to share transfers and to execute documentation in connection therewith. The agreement may contain a ‘shot-gun’ buy-sell provision and set out its terms. The agreement may also contain rights of first refusal and set out terms under which a party can compel a sale.

• Pre-emptive rights

Existing shareholders may be given a contractual prior right to purchase new equity in the company.

• Restrictive covenants

The agreement should provide for a requirement for shareholders to refrain from engaging in activities competitive with the business of the company. There should be general confidentiality covenants regarding confidential information received by the parties in their capacity as shareholders. It is also typical for such agreements to provide for so called non-solicitation clauses, prohibiting shareholders from soliciting for their own purposes or enticing away employees or clients of the company.

• Termination

Typically the parties will wish their agreement to include a waiver of Articles 1266 and 1267 of the Civil Code. This waiver is commonly found in most contracts governed by Indonesian law. Parties traditionally waive these articles to allow termination of their agreement on its existing terms, without intervention by the Indonesian courts.

• General provisions

The joint venture agreement will contain a number of general provisions, including those relating to the binding effect of the agreement upon the parties; an indemnity by the company of its directors and shareholders for certain acts; the term of the agreement; provisions regarding notices and delivery of the same and similar general contractual terms.

This is just an outline of some of the key joint venture agreement you will need to address. There must be additional things based on the subject of the joint venture and the nature and relationship of the parties. Some advance planning and prior discussion with your professional advisor can go a long way toward avoiding or minimizing problems as a result of a joint.