Over the past year or so, the regulatory regime for merger control in Indonesia has seen significant changes. In October 2019, the Indonesian Business Competition Supervisory Commission (“KPPU“) issued a new rule on assessments of M&A transactions (“2019 Rule“), which was further clarified by the guidelines issued in October 2020 (“2020 Merger Guide“).
We discussed these issues in the webinar on “Navigating Merger Control Rules in Cross-Border M&A Transactions” broadcasted on 17 December 2020.
Similar to competition authorities in other jurisdictions, KPPU’s goal is to scrutinize the effects of various types of behaviors and transactions in order to prevent unfair competition in the domestic market. The key changes introduced by the 2019 Rule and the 2020 Merger Guide are as follows:
- Stricter standard for local nexus. At least one party must have sales in Indonesia and another with operations in Indonesia.
- Asset-based transactions and its exemptions. Asset-based transactions are now subject to merger control rules. Non-bank assets valued at less than IDR 250 billion; bank assets less than IDR 2.5 billion; transactions in ordinary course of business; and transactions not related to the business are exempt.
- Looser market concentration standard. Previously the standard for highly concentrated market requiring a comprehensive review was HHI 1800, now it is set at HHI 2500.
- Expedited review of non-problematic transactions. Maximum 14-day review for transactions with no or minimal impact on competition is available on application.
- Relaxation of enforcement against late merger filing. Extra 30 days to file.
- Higher potential penalty for late filing. Maximum fine limit of IDR 25 billion abolished, but will be further regulated.
In the discussion, we focused on two key changes that are likely to materially impact M&A transactions in Indonesia going forward, namely (i) the stricter standard for local nexus and (ii) the inclusion of asset transactions as a merger control subject.
It is possible for a merger between two foreign entities that does not directly involve an Indonesian entity to trigger local merger control issues. The key in determining whether an Indonesian merger filing is required is in assessing whether or not the “local nexus” threshold is fulfilled.
Under the 2020 Merger Guide, a transaction must have a sufficient domestic impact for it to be notifiable in Indonesia. Domestic impact is defined as “including” a situation where one party has business operations in Indonesia and the other does not, but has either a sister company in operation in Indonesia or sales in Indonesia. This appears to be a retreat from the overly wide position under the 2019 Rule where only one party was required to have either operations or sales in Indonesia for a transaction to be regarded as having sufficient local nexus.
The local nexus principle applies also when it is an Indonesian entity that is acquiring an offshore asset. There may be no local nexus as the asset is not in Indonesia, unless the nature of the acquired asset has a local impact (e.g., a patent that is widely used in Indonesia, or shares in a foreign entity with substantial Indonesian subsidiaries). This means that Indonesian companies engaged in offshore M&A do need to factor in the possibility of having to do an Indonesian merger filing.
This local nexus principle is not unique to Indonesia and can be found in other jurisdictions’ competition law/ regulations as well.
Asset Transactions and Asset Test
Parties can no longer avoid merger filings by structuring their transactions as an asset deal. While the 2019 Rule was very general in that generally all asset transactions were subject to merger control rules, the 2020 Merger Guide introduces a clear threshold below which asset deals are not notifiable and a set of exempted transactions. We have seen a number of asset transactions notified to KPPU since the introduction of the 2019 Rule. One example of this is the purchase of communication towers by telco companies, which makes sense given the asset value and impact on the telco industry in Indonesia as a whole.
There is also now an expansions of the “asset test”, where the 2019 Rule and the 2020 Merger Guide calculates the asset threshold based on a group of company’s worldwide assets instead of just assets held in Indonesia. Consequently, it is possible that even if the value of the shares or assets being acquired in Indonesia is very small, the transaction would be subject to KPPU notification requirement if the acquirer has significant assets in other jurisdictions. This clearly impacts many clients, including private equity funds and MNCs that have substantial offshore assets, and means that change of control deals by such clients will almost by definition trigger a merger filing.
It must be noted that a notification/filing to the KPPU does not in itself mean there are substantive concerns and that remedies are likely. It does mean that engaging in transactions will require additional effort from the side of the client and creates additional legal (compliance) and business costs.
Impact on Transactions
Merger filings in Indonesia may differ from those in other jurisdictions in that Indonesia operates a mandatory post-closing regime. Unlike in other jurisdictions where merger filings are made as conditions precedent and hence are more of a shared cost/risk between seller and purchaser, in Indonesia it often is really the purchaser’s issue and risk.
To date, KPPU has not demanded nullification of a transaction for merger control reasons. They prefer to impose relatively light remedies such as requesting more information or commitments from the parties to not discriminate in its business. Given this, it is rare to see merger control extensively discussed in Indonesian transaction documents, unless applicable for transactions where both parties anticipate KPPU push-back (e.g., a transaction where the resulting market share is projected to be very high).
The following are some ways that a transaction document can be drafted to take into account merger control risks:
- A cooperation undertaking from the seller to deliver all documents and information of the company that the purchaser requires to prepare the merger filing.
- A requirement, as a condition precedent, to conduct a pre-closing consultation with KPPU; though this would delay closing significantly.
- Price adjustment provisions if KPPU requests a post-closing divestment.
- Walk-away rights, formulated as a condition subsequent, if the KPPU imposes remedies that exceed a certain threshold.
We should note that items 2 to 4 above are not typical and would likely require special circumstances to be acceptable for a seller.
In terms of future regulatory developments on competition law in Indonesia, we note that the Omnibus Law mandates the issuance of government regulations on the criteria and formula for applying administrative sanctions (e.g. KPPU fines, including for failure to submit merger filing), within January 2021, though there may be delays.