Amco vs indonesia

117Investment in Indonesia1 SJICL

RECENT DEVELOPMENTS CONCERNINGINVESTMENT IN INDONESIA

(WITH SPECIAL REFERENCE TOTHE NEW COMPANY LAW 1995)1

This article examines the laws on foreign investment in Indonesia, in light of the IndonesianGovernment’s moves to make the investment climate more attractive for foreign investors.It outlines the benefits and protection made available to foreign investors and theregulations which investors need to adhere to. Specific reference is made to an arbitraldecision which involved a dispute between the Government and certain foreign investorsover the withdrawal of a hotel-operating licence. The mechanism for establishing corporateentities is then discussed, with reference to the provisions of the recently-enacted CompanyLaw of 1995.

I. LAW OF 1967 NO 1

THE Law on Foreign Investment of Indonesia (“FIL”),2 Undang-UndangPenanaman Modal Asing (“UU-PMA”, Law of 1967 No 1),3 has beenamended several times.4 The purpose of the FIL is to encourage foreigninvestment participation in Indonesia’s economy. It is intended to be inline with the international tendency to make investment “favourable”,especially in the “developing countries”. Its policy is to encourage theimport of foreign capital into the country. Foreign investment is regardedas essential for the growth of the country’s economy, particularly in theindustrial sector, where capital, advanced technology and management skillsare not yet available domestically. The Indonesian Government recognisesthat foreign capital investment has a major role to play in the developmentof the country’s economy. Foreign investment is a “must”, and the wholepolicy of the Government is to make the climate for investment by foreign

1 Paper presented at the CLE Workshop held in Singapore on 30 September 1995 on ForeignInvestment in the Region: China, India and Singapore.

2 Hereafter, “FIL”.3 SG (State Gazette) 1967 No 1, ASG (Additional State Gazette) No 2818.4 Law of 1970 No 11, SG 1970 No 46, ASG No 2943. The amendments were based primarily

on the changes introduced by the new Indonesian Corporate Tax Law, Law of 1970 No8 (SG No 43), and other tax facilities for foreign investors.

Singapore Journal of International & Comparative Law(1997) 1 pp 117 – 139

(1997)118 Singapore Journal of International & Comparative Law

capital more and more attractive. This is a continuing policy of the Governmentand it can be seen from the various amendments made recently.5 The creationof a favourable climate for foreign investment has become a continuousgovernment programme for the development of the country’s economy.

However, on the other hand, it should be kept in mind that consistentwith the Government’s policy, foreign capital investment should be lookedat as a complementary means for the acceleration of the country’s economicdevelopment.6 Self-reliance and the development of the country’s owneconomic potential are to remain the principal bases of the country’seconomic development.

II. TRADING AS A RULE CLOSED TO FOREIGNERS

Investment is only open in the field of industry. “Trading” or “doing business”in general is still closed to foreign participation. “Doing business” inIndonesia, in the sense of concluding transactions in the field of generaltrading, import and export, is in principle reserved for Indonesian nationalsonly. This is explicitly provided for in Government Regulation 1977 No367 regarding the termination of foreign activities in the trade sector, andin its implementing regulations.8

The background of this rather rigid policy of restricting trading activitiesto citizens only is the country’s history as a colonial society, where foreignrulers once dominated the economic field. In the context of its “decolonisationprocess” to attain full economic freedom after political independence wasobtained in 1945, one can see a fear of foreign economic exploitation.Therefore, the limitation of foreign participation in the field of trading should

5 Namely, the “deregulatory measures” introduced as of the end of December 1988, the Pakto27 (Government Regulation of 27 October 1988), Paknov 24 (Government Regulation of24 November 1988), and Pakdes 20 (Government Regulation of 20 December 1988). Forthese regulations, see Sudargo Gautama, ‘An Overview of the Indonesian Legal System,with Special Reference to Foreign Investments’, paper presented at the Indonesia-SingaporeLaw Seminar, February 1993, reprinted in Sudargo Gautama, Arbitrase Bank Dunia tentangPenanaman Modal Asing di Indonesia dan Jurisprudensi Indonesia dalam perkara HukumPerdata Internasional (Bandung, 1994), Chapter III. See also de Haas-Engel, RH, Investerenin Indonesie, (Investing in Indonesia), (Maastricht, 1993), p 70 ff.

6 Cf the considerations forwarded in the FIL: “d. that the surmounting of economic declineand the further development of economic resources should be based on the capability andthe willingness of the Indonesian People themselves...., f. that foreign capital should bemaximally utilised to speed up the Indonesian economic development and to be used inthe fields and sectors which within the near future cannot be executed with Indonesia’sown capital.”

7 Government Regulation of 1977, No 36. SG 1977 No 60, ASG No 3113.8 See Sudargo Gautama, supra, note 5, at 26-27.


remain as a goal, although foreign participation in the form of investmentin other fields, such as industry, is to be encouraged. Government Regulation1977 No 36 concerning the termination of foreign business activities inthe trade sector and its implementing regulations, was introduced, even afterthe FIL (which seeks the “opening of the door” to foreign capital investmentin the field of industry) was introduced.9

However, a suitable balance is needed between the aim to attract foreigncapital and the ideals to improve domestic national entrepreneurship. Here,as elsewhere, we see the “pendulum” of history swinging back and forth,depending on the respective situation and condition. At times when foreigncapital import is regarded as vital, the limitations concerning foreignparticipation in the field of economic activities in Indonesia are relaxed.At other times, the strings of limitations are tightened. We see this processin the course of our discussion on the various changes made in the FILand its implementing regulations.

III. WHAT IS FOREIGN INVESTMENT?

According to the FIL, “foreign investment” is investment of foreign capitalby foreign individuals or companies, where the capital owner directly bearsthe risk. Who “foreigners” are, is defined in the Indonesian Nationality Law1958 No 62: all persons who are not Indonesian citizens are foreigners.10

“Foreign capital” includes:11

(i) foreign exchange that does not constitute part of Indonesia’sforeign exchange reserves;

(ii) equipment and material not financed by Indonesia’s foreign exchangeresources;12 and

(iii) re-invested profits.

9 The Law on Domestic Capital Investment, 1968 No 6, SG 1968 No 33, revised Law of1970 No 12, SG 1970 No 47, taken with the Law of 1983 No 7, SG 1983 No 50, Art 6(a),state that the activities of foreign companies in Indonesia with regard to trading activitieswill be limited until 31 December 1977 only.

10 On the Indonesian Nationality Law, see Sudargo Gautama (Gouw Giok Siong), TafsiranUndang-undang Kewarganegaraan Republik Indonesia (Jakarta, 1961, 1st Ed, subsequentlyrevised).

11 FIL, Art 2.12 During the Hotel Kartika Plaza Arbitration Case (Case No ARB/81/1) before the ICSID

World Bank Arbitration Teams, it was a much debated issue between the parties as to howmuch of the equipment and material imported by the investor (eg, airconditioners for thehotel rooms), registered as new by the foreign investors but only accepted as rebuilt bythe Bank Indonesia (the Indonesian Central Bank), had to be evaluated.


13 Cf the new Government Regulation No 20 of 1994 on Share Ownership in Companiesestablished under Foreign Capital Investments.

14 Cf FIL Art 15(a), paras 1-3 and 5: facilities on corporate tax, dividend tax, corporate taxon profit which is reinvested in the enterprise concerned and capital stamp duty.

15 FIL, Art 15(a), para 4.16 FIL, Art 15(a), para 2.17 FIL, Art 19, para 1.18 FIL, Art 12.19 FIL, Art 19, para 1(a).20 FIL, Art 19, para 1(c).21 FIL, Art 22, para 1.

If a Foreign Investment Company (“PMA” or Penanaman Modal AsingCompany) has obtained a profit, which is not distributed as dividends tothe shareholders, it can be used as capital for re-investment in the respectivePMA Company, or used as capital for investment in new companies.13

IV. FACILITIES

There are several facilities and assurances made to foreign investors, includingthe following:

(1) tax holidays, variable according to in what region and what fieldof industry the investment is realised;14

(2) freedom from import duties on capital goods, equipment and basicmaterials needed for the respective enterprise;15

(3) transfer of dividends, which are paid out free after tax profitsand are attributable to foreign-owned shares, in the originalcurrency of the invested capital at the prevailing exchange rate;16

(4) transfer of funds to pay the costs of employing foreign personnelin Indonesia17 (according to the Government’s policy, only foreignpersonnel with expertise not found in Indonesia are to be allowedto obtain a work permit);18

(5) remittance of loan interest payable and making principal loanrepayments;19

(6) repatriation of capital arising from the sale of equity to Indonesiancitizens;20

(7) transfer of compensation received in the event of nationalisation;21


(8) loss carry-forward;22

(9) granting of full authority and freedom under the FIL to determinethe management of the PMA company;23

(10) availability of international arbitration where the compensationamount is to be determined as a result of nationalisation;24

(11) adherence to the Washington Convention on the Settlement ofInvestment Disputes between States and Nationals of Other States(the Washington Convention), administered by the World BankInternational Centre for the Settlement of Investment Disputes(ICSID), based on Law No 5 of 1968 pursuant to which Indonesiajoined the Convention. This means that when a case arises betweena foreign investor and the Indonesian Government, the disputemay be referred to ICSID arbitration in Washington. A concreteexample of such an investment dispute is that caused by thepremature withdrawal of an investment license in the KartikaPlaza Jakarta Hotel, the Amco vs Indonesia case (No ARB/81/1). This arbitration case has taken 12 years to conclude.

To operate and manage the investment of foreign capital, the PMAcompanies may be operated either independently, or as a joint venturecompany with an Indonesian partner. The approval from the Governmentto operate the PMA company is valid for thirty years, with the possibilityof extension of the period. Due to the development of the country’s economiccondition, since January 1974, it has been mandatory for all foreign in-vestments to be undertaken only through joint ventures with Indonesianpartners.

As it is known, the FIL requires that all investments made should takethe legal form of an Indonesian limited liability company, a PerseroanTerbatas, with its domicile or legal seat within the territory of Indonesia.Furthermore, it should be observed that it is the Government’s policy thatthe Indonesian parties, after a certain period of the companies’ operation,should be granted a majority of the shareholding.

22 FIL, Art 15, para 2(b).23 FIL, Art 9.24 FIL, Art 22.


V. PRESERVATION OF INDONESIAN INTEREST

As mentioned above, the FIL has also as an aim, the preservation anddevelopment of Indonesian interests. The following should be mentioned:

(1) Indonesians should be employed wherever possible;25

(2) training programmes for Indonesian personnel is required;26

(3) transfer of technology should be effected;

(4) companies fully controlled by foreigners may not operate inimportant areas which are vital to the daily necessities of thepeople, such as in the distribution of electricity and drinkingwater.27 Some changes were recently made in regard to PMAjoint ventures, which are allowed to operate in providing elec-tricity;28

(5) prohibition of foreign investment in industries vital to nationaldefence, such as the production of firearms and war equipment;29

(6) in the field of mining, including oil and gas, foreign investmentmust be in the form of a “work contract” or “kontrak karya”with the Government (Pertamina – the state oil company) – theGovernment has supervisory control over these resources;30

(7) foreign investment permits are limited to 30 years, but there isa possibility of renewal by the Government.31 Under the Com-mercial Code, limited liability companies (“PTs”) are incorpo-rated for 75 years.

(8) a part of the foreign enterprise (PMA) should be transferred toIndonesian shareholders, by direct sale or sale at the public market.

25 FIL, Art 10.26 FIL, Art 12.27 FIL, Art 6.28 Cf. eg, Government Regulation 1994 No 20, and its implementing regulations.29 FIL, Art 6, para 2.30 FIL, Art 8.31 FIL, Art 18.


This process of “Indonesianisasi” is ever changing, along withthe Government’s policy to make foreign investments moreattractive.32

As mentioned, according to the FIL, the Foreign Investment Companyshould take the form of an Indonesian Limited Liability Company, a “PerseroanTerbatas” (“PT”). It should be incorporated according to the laws of Indonesiaand should have its legal seat in Indonesia.33 The enterprise should be entirelyor for the most part, operated in Indonesia as a separate enterprise unit.The Indonesian Government shall determine whether an enterprise is entirelyor for the most past operated in Indonesia as a separate enterprise unit.34

VI. INVESTMENT PROTECTION AGREEMENTS

With the aim to render protection to and to promote investments, Indonesiahas signed several multilateral and bilateral agreements. These include:

(1) the Convention establishing the Multilateral Investment Guar-antee Agency (“MIGA”);35

(2) with the United Kingdom, the Protection of Investment Agree-ment of 27 April 1976; Presidential Decree No 3 of 1977;

(3) with France, the Agreement on the Encouragement and Protectionof French Investments in Indonesia of 14 June 1973; PresidentialDecree No 10 of 1975;

(4) with Belgium, the Agreement on the Encouragement and Re-ciprocal Protection of Investments of 15 January 1970, and Protocol;Presidential Decree No 42 of 1972;

(5) with the Netherlands, the Overeenkomst inzake EconomischeSamenwerking and Protocol, signed on 7 July 1968; Presidential

32 See eg, Government Regulation 1994 No 20, and its implementing regulations.33 FIL, Art 3, para 1.34 FIL, Art 3, para 2.35 Apart from Indonesia, members of MIGA include countries in Asia, Africa, South America,

Europe, USA, Canada, Australia, New Zealand and Japan. See also Shihata, ‘IFE, MIGAand the Standards Applicable to Foreign Investments’ (1986) ICSID Review, ForeignInvestment Law Journal.


Decree No 303 of 1968;

(6) with Norway, the Agreement Concerning the Encouragement andReciprocal Protection of Investments of 21 January 1970 andProtocol; Presidential Decree No 90 of 1968;

(7) with Switzerland, the Agreement Concerning the Encouragementand Reciprocal Protection of Investments, and Protocol; Presi-dential Decree No 9 of 1976;

(8) with West Germany, the Agreement Concerning the Encourage-ment and Reciprocal Protection of Investments of 8 November1968; Presidential Decree No 7 of 1969;

(9) with South Korea, the Agreement Regarding Economic andTechnical Cooperation and Trade Promotion; Presidential DecreeNo 53 of 1971;

(10) with the ASEAN countries, the Agreement for the Promotionand Protection of Investments; Presidential Decree No 22 of 1988.

There are several basic principles which are common to the aboveInvestment Agreements concluded between Indonesia and the othercountries mentioned above. These include the following:

(i) The principle of reciprocity and mutual benefit

The parties involved undertake to guarantee that their respective subjectswill obtain “fair and equitable treatment” in connection with their in-vestments. They will not get a lesser treatment than given to nationals ofother parties. This is the so-called “most favoured nation clause”. With regardto the possibility of “national treatment”, it is presumed that this shouldbe made dependent upon the favourable development of Indonesia’s economy.The same protection will be given in respect of the nationals of other Statesas is effected to one’s own nationals. This protection should also not beless than what has been provided for in the FIL.

In the Agreement with Belgium, it is additionally stipulated that theprotection to Belgian investors will not be less than what is recognisedin international law. There is also a provision in the Agreement with theGerman Federal Republic to the effect, that each respective party “shallgrant national treatment within the framework of the present Agreement,in consideration of the fact that national treatment in like matters is alsogranted by the other Contracting Party.” We see here that the “most favoured


nation” clause, the “national treatment” clause, and the principle of reci-procity are used interactively. This principle of reciprocity and mutual benefitis consistently used in the above-mentioned bilateral agreements with therespective States. The Agreement of 1988 between the ASEAN countriesand Indonesia for the protection and promotion of investments containssimilar provisions as mentioned above in the bilateral agreements.

(ii) Protection with regard to nationalisation

The Agreements also mention protection measures for the investors ofthe respective States, in case of a nationalisation being carried out. It isexpressly stated that the parties will not undertake measures to deprivenationals of their investment, directly or indirectly. Compensation shouldbe “prompt, adequate and effective”.36 This term is expressly used in severalof the above agreements.37 It is further stipulated that the expropriation shouldbe non-discriminatory.38 Another trend is to provide that “the legality ofany such expropriation shall be subject to review by due process of law.”39

In the FIL, some safeguards in case of nationalisation have been explicitlymentioned. The Indonesian Government shall not nationalise by way ofdirectly revoking the property right in a foreign enterprise, or take measureswhich curtail the right to administer or to manage the enterprises, exceptin so far as it is in conformity with, or by act is declared as, measuresrequired “for the public interest of the State”.40 In such a case, it is obligatoryto give compensation. The amount and kind of payment should be “approvedby the two parties, in accordance with the effective principles of international

36 Cordel Hull, in Sudargo Gautama (Gouw Giok Siong), Segi-segi Hukum Internasional padaNasionalisasi di Indonesia (International Law Aspects of Nationalisation in Indonesia),(Jakarta, 1960).

37 See the Agreements with France (Art 6, para 1), Switzerland (Art 6, para 1), Norway (ArtIV, para 2), and Denmark (Art IV, para 2). There are similar provisions in the Agreementswith the Netherlands (Art 7), West Germany (Art 3, para 2), South Korea (Art 6), and theASEAN countries (Art VI).

38 This issue has been much debated in the context of the past nationalisation of Dutchenterprises, see Segi-segi Hukum Internasional pada Nasionalisasi di Indonesia, supra, note36.

39 This requirement of “due process” has also been a matter of conflicting opinion in the ICSIDarbitration case (ARB 81/1/1) regarding the Kartika Plaza Hotel (Amco et al v Indonesia).The first arbitration team (the Goldman team) used this notion of due process in the propersense. The Higgins re-submission team used the term “denial of justice”, while accordingto the fourth stage Sompong Sucharitkul team, it meant in fact, as with the Goldman team,lack of “due process” in the revocation of foreign investment procedure against Amco.

40 FIL, Art 21.


law.”In case no agreement is reached between the parties regarding the amount,

kind and manner of paying the compensation, arbitration shall take place.The award shall be binding on the two parties.41 The arbitration tribunalshall consist of three persons: two respectively chosen by the Governmentand the investor, and the third person acting as chairman shall be jointlyelected by the Indonesian Government and the foreign investor.42

It is evident that the provisions for nationalisation of Dutch enterprisesin the sixties was a bad experience which could influence the opinion offoreign investors.43 Therefore, the FIL stresses the provision of guaranteeswith regard to nationalisation and arbitration. On another occasion, thepresent writer had expressed his view that the guarantee of “prompt, adequateand effective compensation”44 (although in practice no longer strictly upheldby the majority of leading international scholars) has been upheld by theIndonesian Government in the sphere of creating a favourable climate forforeign investment flow into the country.45

(iii) The ICSID Convention

Another safeguard for the foreign investor is the Convention for theSettlement of Investment Disputes between States and Nationals of otherStates (ICSID), to which Indonesia is a party. This Convention has becomepositive law in Indonesia.

An illustration of the operation of this Convention is the renowned ICSIDarbitration case regarding the Hotel Kartika Plaza in Jakarta.46 The foreigninvestors, AMCO Asia, submitted a request for arbitration as theirinvestment in the hotel, which originally was intended for a period of 30years, was prematurely withdrawn, after operation for only 9 years. Theyclaimed compensation of more than US$16 million. In the first stage of

41 FIL, Art 22, para 2.42 FIL, Art 22, para 3.43 But from Indonesia’s side, seen as a process of “decolonisation” making itself “economically

free” after obtaining “political independence”, supra, note 36.44 For the difference between these terms, see supra, note 36. On the effect of nationalisation

and the transfer of title, see also M Sornarajah, The Pursuit of Nationalized Property,(Dordrecht, 1986).

45 See Sudargo Gautama, ‘Perjanjian-perjanjian Internasional Indonesia mengenai PerlindunganPenanaman Modal (International Agreements of Indonesia concerning Protection of ForeignInvestments)’, in Hukum dan Pembangunan (1991) 3 Law Review of the Law Faculty,University of Indonesia, Jakarta.

46 24 ILM 365 (1985), (1986) 1 Int’l Arb Rep 601. See also Sudargo Gautama, Indonesiadan Arbitrase Internasional (Indonesia and International Arbitration), Alumni, (2nd Ed,1992).


arbitration, the ICSID Arbitration Team chaired by Professor BertholdGoldman granted the investor a compensation of US$3,200,000 plus interestas of the day of filing of the arbitration claim on 27 February 1981 (Awardof 29 November 1984). Upon Indonesia’s request in annulment proceedings,this First Award was annulled “as a whole but with qualifications” by thead-hoc ICSID team, chaired by Professor Ignaz Seidl Hohenveldern ofVienna.47

A re-submission procedure was filed and heard by a Review Tribunalchaired by Professor Rosalyn Higgins of London. A decision on jurisdictionwas rendered in May 1988, outlining the points to be considered and therelation between Indonesian law (as law of the host State) and internationallaw, according to Article 42 para 1 of the ICSID Convention. The issuewas whether international law was “supplemental and corrective” to In-donesian law. In the words of the ad-hoc Seidl Hohenveldern AnnulmentCommittee: “Article 42 para 1 of the ICSID Convention authorises an ICSIDtribunal to apply rules of international law only to fill up lacunae in theapplicable domestic law and to assume precedence to international law norms,where rules of the applicable law are in collision with such norms.”48

The Higgins Tribunal was of another opinion. International law wasregarded as “fully applicable”, and to classify its rule as “only supplementaland corrective” seemed to be a distinction without a difference. The Tribunalbelieved that its task was to test every claim of law in this case “first againstIndonesian law, and then against international law”.

What do we see here? There has been a graduation of difference inappreciation between the role of Indonesian law and international law. Thetwo Teams adhered to different opinions. The Seidl Hohenveldern Teamwished to apply “host State law first”, ie, only in case of a lacuna wouldit apply international law. The Higgins Team applied international law first,such law being of “superior value”. The Higgins Tribunal ultimately concludedthat “rather, the issue that must be determined is whether there exists agenerally tainted background that necessarily renders a decision unlawful,even if substantive grounds may exist for such a decision.” This background

47 (1980) 25 ILM 1991. Cf also the discussion of this annulment decision in David Caron,‘Reputation and Reality in the ICSID Annulment Process – Understanding the Distinctionbetween Annulment and Appeal’ (1992) 7 ICSID Review, Foreign Investment Law Journal,at 21. See also Stephen I Pogany, ‘Economic Development Agreements’ (1992) 7 ICSIDReview, Foreign Investment Law Journal, at 14.

48 Arbitration Award, at para 20.49 The point at issue was whether the investor had fulfilled its obligation to invest fresh capital

of US$3 million. The Goldman team confirmed that there was a shortage of US$600,000,which amount was regarded as too small (“not material”) by the team to justify withdrawalof the investment license, given that the project had been in operation for not less than


includes, but is not limited to, the question of procedural irregularities”.49

The Higgins Tribunal further concluded: “rather, the international lawtest is (applicable), whether there has been a denial of justice.”50 It wasbecause of this accusation of “a denial of justice” and a “generally taintedbackground” of the investment license withdrawal,51 that Indonesia feltobliged to submit another annulment request. Amco, on the other handthought it necessary to also file an annulment request, as the Higgins Awarddrastically reduced the original compensation amount of the Goldman Team,ie, from US$3,200,000 plus 6% interest per annum from the date of filingof the claim (15 January 1981) to US$2,567,966.20 with 6% interest perannum as from the date of the Award (5 June 1990).

In the “fourth round” of arbitration proceedings, the Tribunal chairedby Professor Sompong Sucharitkul of Thailand upheld the Higgins Award,rejecting both Indonesia’s and Amco’s requests for annulment (dated 3December 1992 in San Francisco). Although this Tribunal found that theHiggins Team had not used the legal term “denial of justice” as properlyunderstood in international law, what the Higgins Team really intended topoint out was that the withdrawal procedure of Amco’s license showedlack of “due process”, as the Goldman team had remarked. However, accordingto the Sucharitkul Team, there was no serious departure from the rule ofprocedure, and the rule was not fundamental. It is submitted that in orderto uphold ICSID’s role in dispute settlement, the Sucharitkul award hasupheld the Higgins award. Otherwise, the “annulments” could have goneon and on forever, rendering the ICSID dispute-solving system unworkable.52

VII. THE NEW PT LAW 1995 NO 1

As the legal form to be used for a PMA company is prescribed by theIndonesian Limited Liability Company Law, we should in this surveyelaborate on the new Indonesian PT Law 1995 No 153 which was introduced

nine years. This exercise by the Goldman team has been regarded as giving a decision exaequo et bono, whereas according to the ICSID Convention, Indonesian law as “law ofthe host state” should be used.

50 Arbitration Award, supra, note 46, at para 136.51 Cf the consideration: “it thus is necessary to decide whether the procedural irregularities

and other background factors in this case amounted to a “denial of justice”, that would taintthe decision of BKPM, regardless of whether BKPM might have had substantive groundsfor its action against AMCO, Arbitration Award, para 137.

52 For a recent criticism of the awards seen from the view of less developed nations, see MSornarajah, ‘ICSID Involvement in Asian Foreign Investment Disputes: The Amco andAAPL Cases’, 4 Asian YIL (1994), at 69 ff.

53 SG 1995 No 13, Elucidation in ASG No 3587.


on 7 March 1995 by the President of the Republic of Indonesia. In particular,the new provisions which are different from the old Commercial Codeprovisions on PTs, will be further discussed.

The new PT Law has now become positive law. It came into operationone year after its promulgation, ie, on 7 March 1996.54 It was the resultof a long procedure and efforts to reform the old provisions concerninglimited liability companies, as contained in Articles 36 to 56 of the Com-mercial Code.55 These articles had long since been felt to be no longer fittinginto the current world economic structure, which has shown remarkabledevelopment, nationally as well as internationally. The dualism of PTsaccording to the Commercial Code and the so-called “Indonesian Companywith Shares” (Indonesische Maatschappij op Aandelen, “IMA”)56 has beenabolished. A new uniform PT law is now in force with UU-PT 1995 No 1.

A. Transitory Provisions

With the application of this new law, the old provisions in articles 36 to56 and the IMA Ordinance 1939 No 569 will no longer be valid. All PTsare to be covered by the new PT law, which stipulates that after 3 yearsfrom the promulgation of this new law,57 the Ordinance on IMA will nolonger be valid. The existing IMAs must be converted and its Articles ofIncorporation approved by the Minister of Justice as PTs under the newlaw.58

The old PTs which were incorporated and having had its Articles ofIncorporation approved by the Minister of Justice before the new law cameinto operation on 7 March 1996, will continue to be valid in so far as theyare not inconsistent with the new law.59 However, Articles of Incorporationnot yet approved by the Minister of Justice at the date when this new lawcame into force, must be made in accordance with the provisions of thenew law.60 Within two years after the coming into force of the new law,ie, on 7 March 1998, all the PTs incorporated and approved under the oldCommercial Code provisions have to be made in accordance with the newlaw.61

54 Art 129.55 SG 1847 No 23.56 SG 1939 No 569 Juncto 717.57 Art 28, paras 1-3.58 Art 126.59 Art 125, para 1.60 Art 125, para 2.61 Art 125, para 3.


B. End of Old Commercial Code Provisions

For almost 150 years, the old Commercial Code PT provisions have beenfollowed in practice. Now, the validity of these articles will come to anend and the new PT provisions will replace them.

C. Result of Globalisation Process

The official Elucidation on the new PT Law 1995 No 1 explicitly statesthat seen within the framework of the “globalisation” process, the new PTLaw is a must. Indonesia’s economy is interwoven with the world economy.Indonesia cannot shut off its economy from the rest of the world’s, norfrom the globalisation process. However, the new regulation on PTs shouldremain based on the economic principles as set forth in the Constitutionof 1945, ie, the principle of familiarity (“asas kekeluargaan”).

The aims of the nation’s General Principle of State Policy (Garis-garisBesar Haluan Negara) and of the Second Long Development Plan(“Pembangunan Jangka Panjang Kedua”) is the creation of human quality,an Indonesian Society which is progressive, self-efficient in a climate ofwelfare, physical, as well as spiritual aspects, and the social life of thenation and people based on the State philosophy of Pancasila. The livesof the Indonesian people should be in balance and in line with other peopleand society; emphasising man and his natural surroundings, as well as manwith the Almighty God. The PT is regarded as one of the pillars of economicdevelopment based on “asas kekeluargaan” in accordance with democracyfounded on Pancasila and the 1945 Constitution.

The old Commercial Code PT provisions, enacted nearly 150 years ago,are no longer appropriate for the changed economic situation. A new policyis needed in all fields connected with the economy, eg, in matters of foreigncurrency, world aid, foreign investment, enhanced international cooperation,the banking system, the capital market etc. This is elaborated upon in theofficial Elucidation of the new law.62

D. Features of the New PT Law 1995 No 1

The PT is a legal entity, of which the capital is embodied in shares; theshares are a collection of capital. Therefore the new law requires that thewhole capital issued should be paid up by the shareholders, in order thatthe company can become more effective and succeed in its functional efforts.

62 ASG No 3587, preamble.


Besides, the new law would protect the interests of the shareholder, creditorand other involved parties, including the interests of the PT itself. Thisis important as it turns out in practice that within a PT, conflicts can arisebetween the interests of the shareholder and those of the PT, or betweenthe interests of the minority shareholders and those of the majorityshareholders.

The minority shareholders get some special protection, eg, the right tocall a shareholders meeting ( “Rapat Umum Pemegang Saham” or “RUPS”)and to request for an investigation into the course of management of thecompany after obtaining a Court’s authorisation. In order to avoid unfaircompetition caused by the building up of economic strength through monopolyby a few, the new law imposes certain requirements in cases of merger,consolidation or acquisition. Similarly, in order to protect the creditor andthird parties, special requirements are made regarding capital lowering,company purchase of own shares and the dissolution of the PT. Withoutdiminishing the protection of the minority shareholder just mentioned,the protection of public interest and the company’s own interests itself arepreserved by clear descriptions and limitations of the tasks, authority andresponsibilities of the company’s organs, ie, the Directors, Commissionersand the General Shareholders’ Meeting (RUPS).

E. Other Differences Between the Old and New PT Laws

We will further discuss other important differences between the old andnew laws, after giving a short summary of the new law’s systematic framework.

The new Law 1995 No 1 contains 129 articles. It is divided into 12Chapters, ie:

I. General Provisions (articles 1-6);

II. Incorporation, Articles of Association, Registration and Publi-cation (articles 7-23);

First part: Incorporation (articles 7-11),

Second part: Articles of Incorporation (articles 12-33);

III. Capital and Shares (articles 24-55);

First part: Capital (articles 24-29),

Second part : Protection of capital and company’s assets (articles30-33),

Third part: Increase of Capital (articles 34-36),


Fourth part: Decrease of Capital (articles 37-41),

Fifth part: Shares (articles 42-55);

IV. Yearly Report and Use of Profit (articles 56-62);

First part: Yearly Report (articles 56-60),

Second Part: Use of Profit (articles 61-62);

V. General Shareholders Meeting (Rapat Umum Pemegang Saham– RUPS) (articles 63-78);

VI. Directors and Commissioners (articles 79-101);

First Part: Directors (articles 79-93),

Second Part: Commissioners (articles 94-101);

VII. Merger, Consolidation, Acquisition (articles 102-109);

VIII. Investigation against the company (articles 110-113);

IX. Dissolution of the Company and Liquidation (articles 114-124);

X. Transitory Provisions (articles 125-126);

XI. Other Provisions (article 127);

XII. Concluding Provisions (articles 128-129).

Article 1 gives an authentic interpretation of what is understood by theterms Perseroan Terbatas (PT), Limited Liability Company, “Organs” ofthe Company (the RUPS, Directors and Commissioners), the RUPS (GeneralShareholders’ Meeting), Directors (Direksi, managers of the company andCommissioners, as general controllers and advisers to the Directors), andPublic PT (Perseroan Terbuka), a company of which the shares are publiclyoffered in the share market. The Minister concerned is the Minister of Justice.

A PT should be formed by at least two persons as founders,63 (similarto what is stated in the old Commercial Code provisions), as it is an agreementbetween the parties. However, unlike the Commercial Code, the new PT

63 Art 7.


law retains the requirement of a minimum of two persons as shareholders,even after the PT has been incorporated.64

F. Liability of Directors

A matter which is not so clear is when in fact the company becomes alegal entity (badan hukum). Article 7 para 6 clearly states that the companyobtains the status of legal entity after the Minister of Justice approves itsArticles of Incorporation. However, article 23 states that as long as theregistration in the Companies Register and the publication in the AdditionalState Journal (Tambahan Berita Negara Republik Indonesia) have not yetbeen effected, the Directors will be jointly and severally responsible forall the acts the company has done (“Direksi secara tanggung renteng bertanggungjawab atas segala perbuatan hukum yang dilakukan perseroan”). What doesthis mean? Is this not contrary to what is stated in article 7 para 6, thatthe company has become a body corporate (legal entity) after obtainingthe Minister of Justice’s approval on its Articles of Incorporation?

G. Buying Back Own Shares

The company is prohibited from issuing shares to be owned by itself.65

The company is however, in a position to buy back its shares in certainlimited cases, ie, if the shares are paid from the profits of the companyand the total nominal value of the shares owned by the company and itssister companies is not more than 10 per cent of all the shares issued.66

The RUPS should also approve this transfer and further transfers.67 Thequorum for this RUPS is a minimum of two-thirds of all issued shares,and approved by at least two-thirds of the votes present.68 The shares boughtback by the company do not have voting rights69 and cannot be used tofulfil the quorum requirements for an RUPS.

Where an increase of capital is done with the approval of the RUPS,the additional shares to be issued should first be offered to the othershareholders pro rata to what they already own, and in the same shareclassification.70 If the other shareholders do not make use of this priorityoffer within 14 days, the company has to offer them to the employees, before

64 Art 7, para 3.65 Art 29, para 1.66 Art 30, para 1(a) and (b).67 Art 31, para 1.68 Art 31, para 2.69 Art 33, para 1.70 Art 36, para 1.


offering them to other parties.71 An implementing Regulation from theGovernment will regulate this matter further.72

H. Decrease of Capital

Decrease of capital is also only possible with approval of the RUPS.73 Within60 days after this planned decrease is made public via two newspapers andthe Additional State Journal (Tambahan Berita Negara Republik Indonesia),the creditors may in reasoned writing, raise objections. A copy of theobjections is to be sent to the Minister of Justice.74 Where the companyrejects the creditors’ objections, the latter can bring the matter before theCourt of First Instance within the company’s territory.75 The Minister ofJustice has to approve the decrease of capital.76 The approval will be givenif the following requirements are complied with:

a) no objection from the side of the creditors has been filed;

b) a solution has been reached upon the creditor’s objection; or

c) the creditor’s claim has been decided by the Court with an enforceablejudgment.77

The decrease of capital with Ministerial approval should be registeredin the Register of Companies and published in the Additional StateJournal.78 The decrease of capital is effected upon each share or all theshares or parts with legal classification.79

I. Register of Shareholders

The company must maintain a Register of Shareholders.80 In addition, aspecial Shareholder Register is to be kept. This Register contains in-formation about the shares owned by the Directors and Commissionersin the company concerned and in other companies.81

71 Art 36, para 2.72 Art 36, para 3(a).73 Art 37.74 Art 38, para 1.75 Art 38, para 3.76 Art 39, para 1.77 Art 39, para 2.78 Art 40.79 Art 41.80 Art 43, para 1.81 Art 43, para 2.


J. Shares Indivisible

The right on shares given to the owners is indivisible.82 If one share becomesowned by more than one person, the right in the share can only be usedby a representative appointed by the co-owners.83

K. Classification of Shares

It should be noted that the shares could be in one or more classifications.84

Each share in the same classification gives the owner equal rights.85 Wheremore than one classification is made, the Articles of Incorporation willidentify one classification as ordinary shares.

The classification of shares can be regulated in the Articles of Incor-poration as follows:

a) shares with special voting rights, with requirements, limited, orwithout voting rights (eg, the shares bought back by the companyas outlined above);

b) shares which within a certain period, can be withdrawn or changedinto another classification;

c) shares which give the owner the right to receive dividends, cumula-tive or otherwise; and/or

d) shares which give the owner the right of prior receipt over sharesin other classifications, over the remaining dividends and overthe rest of the company’s assets in case of liquidation.86

L. Transfer of Shares

The transfer of shares is stipulated in the Articles of Incorporation.87A specialdeed of transfer (notarial or private) is required.88 The transfer is notifiedin writing to the company.89 The transfer is noted by the Directors in the

82 Art 45, para 1.83 Art 45, para 2.84 Art 46, para 1.85 Art 46, para 2.86 Art 46, para 4.87 Art 48.88 Art 49, para 1.89 Art 49, para 2.


Register of Shareholders.90 Bearer shares are transferred by way of handingover the shares.91 This is in accordance with the general provisions ofcontract law as known in the Civil Code. Transfer of shares in publiccompanies is to be effected in accordance with the special regulations ofthe share market.92

For the transfer of shares, the following limitations can be stipulatedin the company’s Articles of Incorporation:

a) the requirement of prior offer to other shareholders; and/or

b) the requirement to have the prior approval of the company’s Organs.

If the offer is made to parties without the owner’s choice, the companymust guarantee that the seller will receive payment in a reasonable valueand in cash.93 In case of non-fulfilment of this guarantee by the company,the shareholder may offer his shares to the company’s employees beforeoffering them to others.94 A special implementing Government Regulationis to be issued on this matter.95

M. Pledge of Shares

Bearer shares may be pledged as security (“digadaikan”).96 Shares in namecan only be pledged if this is provided for in the Articles of Incorporation.97

N. Share is a Movable

A share is qualified as a movable thing (“benda bergerak”).98

O. Financial Accounting Standard/ Standard Akuntansi Keuangan

Article 58 of the new law is important for accounting in Indonesia. “Annualfinancial statements” (“perhitungan tahunan”) should be drawn up according

90 Art 49, para 3.91 Art 49, para 4.92 Art 49, para 5.93 Art 51, para 1.94 Art 51, para 2.95 Art 51, para 5.96 Art 53, para 1.97 Art 53, para 2.98 Art 54, para 1.


to the “Standard Akuntansi Keuangan” (“SAK”) or the Financial AccountingStandard.

The new PT Law provisions, concerning the RUPS, Directors andCommissioners have been elaborated above in the course of our comparisonbetween the old and new PT Laws.

P. Merger, Consolidation and Acquisition

Another topic which is wholly new and not regulated at all in the oldCommercial Code provisions is Chapter VII concerning “Merger, Consoli-dation and Acquisition”. Articles 102-108 regulate “Statutory Merger, StatutoryConsolidation and Stock Acquisition”. According to article 109, the matterwill be further regulated in an implementing Government Regulation. Itshould be noted that in general, what is regulated in Chapter VII followsclosely the situation in the United States of America, where the problemsof business combinations had been raised almost a century ago.

A company can merge, becoming one with another company which isalready existing, or be united with another company to form a new company.99

For this purpose, the Directors of the companies who intend to carry outthe statutory merger and statutory consolidation must prepare a plan forthe merger, consolidation or acquisition. All companies involved mustmake the plan together, so that the problem of “unfriendly take-overs” willbe avoided. Thus, the power of big companies over smaller companies hasbeen curtailed.

The plan should contain several relevant matters, such as the explanationwhy the Directors of the respective companies intend to carry out the mergeror consolidation. The plan should also lay out its requirements, the procedurefor the conversion of the shares, the scheme of changes on the Articlesof Incorporation in case of a merger, or the plan for the Articles of In-corporation of the new company in case of a consolidation.100 The RUPSof each company involved should approve the plan.101 The minimum quorumfor the respective RUPS is three-quarters of all shares with voting rightsand approved by a minimum of three-quarters of the votes cast.102 Thus,only serious intentions backed up by a majority of shareholders are con-sidered.

99 Art 102, para 1.100 Art 102, para 2.101 Art 102, para 3.102 Art 76.


Acquisition can be carried out by a body corporate or an individual.103

The acquisition can be effected by taking over all or a substantial part ofthe shares so that control over the company will be transferred.104

In the context of merger, consolidation and acquisition, the followingshould be noted: the interests of the company, the minority shareholderand the employees. Also to be taken into consideration are the interestsof society and of fair competition.105 Monopoly is to be constrained. Theminority shareholder is not to be diminished in his right to sell his sharesfor an equitable price.106

The plan of the RUPS to carry out a merger, consolidation or acquisitionshould be published in at least two newspapers.107 The issue of merger,consolidation or acquisition will be further regulated in a GovernmentRegulation.108

Q. Implementing Regulations Still Required

As we have seen, a number of Government Regulations have still to beissued to implement the new PT Law of 1995 No 1. The new law itselfcontains only the basic provisions. Many implementing regulations in theform of Government Regulations are still needed in order to have the newLaw on PTs realised in practice.109

Meanwhile, the Minister of Justice has, on 11 March 1996, issuedimplementing Regulations on the procedure to file a request to obtainapproval of the PT’s Articles of Association,110 the amendments to the

103 Art 103, para 1.104 Art 103, para 2.105 Art 104, para 1.106 Art 104, para 2.107 Art 105.108 Art 109.109 For a more detailed discussion of the new PT Law of 1995 and the Foreign Investment

Law, see Sudargo Gautama, Komentar Atas Undang-undang Perseroan Terbatas (baru)tahun 1995 No 1 – Perbandingan dengan Peraturan Lama (Commentary on the Law of1995 No 1 concerning Limited Liability Companies – A Comparison with the Old Regulations),(Bandung: Citra Aditya Bakti Publishers, 1995).

110 Decree No M.01-PR.08.01 of 1996.


111 Decree No M.02-PR.08.01 of 1996.112 Decree No M.03-PR.08.01 of 1996.* Professor, Faculty of Law, University of Indonesia; Military Law School; Pajajaran State

University, Bandung; Visiting Professor, Faculty of Law, National University of Singapore.

Articles of Association,111 the procedure of submitting a Report regardingthe Amendment to the Articles of Association,112 and Standard Model I,II and III for the Deed of Incorporation drawn up by the Notary underthe new PT Law of 1995 No 1.

PROF MR DR SUDARGO GAUTAMA*



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