As highlighted in PwC Indonesia’s recent publication, Maximising M&A success with enhanced integration strategies, a moderate increase in mergers and acquisitions (M&A) activities is expected from 2025 onwards. This is likely driven by regional elections, the formation of a new government and interest rate cuts by both the US Federal Reserve and Bank Indonesia. Additionally, the recently established Indonesian sovereign wealth fund, "Danantara," and consequential changes to the regulatory framework for the supervision and management of Indonesian state-owned enterprises (SOEs) may further contribute to this potential increase.
In the realm of business restructuring, particularly concerning business transfers, multiple legal frameworks are available. In recent years, there has been a notable rise in the use of spin-offs as a method for business transfers in Indonesia. This trend spans multiple sectors, including property and banking, and involves transitions from private to public companies, as well as from SOEs to non-SOEs.
Within the framework of limited liability companies, a spin-off is one of two types of separations—a corporate action first recognised in the Indonesian Company Law of 2007, which was absent in the previous 1995 legislation.
There are two types of separations: spin-offs (pemisahan tidak murni) and split-offs (pemisahan murni), each carrying distinct legal implications. While spin-offs have gained popularity in M&A transactions in Indonesia, split-offs have yet to see similar use since their introduction in 2007.
Despite the growing prevalence of spin-offs, the overarching legal framework remains inadequate, leading to open interpretations regarding the use of book versus fair value, compensation and other critical areas. Although the Indonesian Company Law of 2007 mandates an implementing government regulation for spin-offs, this regulation has yet to be issued, and its progress or status remains unclear. However, in certain sectors, such as banking and insurance, a more robust legal framework for spin-offs exists for specific purposes like sharia unit carve-outs. Unfortunately, this framework is not generally applicable across all sectors.
This paper outlines the key legal implications of spin-offs, identifies areas not governed by the Indonesian Company Law of 2007 and discusses practical approaches adopted to address these regulatory gaps.
Key implications
In contrast to a merger, where the merging company is dissolved afterward, a spin-off does not result in the dissolution of the company executing it. The company continues to exist and must maintain its business operations after the spin-off.
A spin-off is designed to facilitate the transfer of a specific business unit or project. Similar to mergers, the assets and liabilities of the transferring company are automatically transferred by operation of law to the receiving company. However, unlike mergers, where all assets and liabilities of the merging or dissolving company are transferred, spin-offs involve only selected assets and liabilities related to the specific business unit or project being transferred.
The clear identification and selection of these ring-fenced assets and liabilities are required from the company’s financial statement. If the transferring company does not have isolated financial records for the specific business unit or project, along with the relevant assets and liabilities—such as the general obligation for state-owned or regional-owned companies to maintain separate financial records for government-assigned projects (penugasan)—the process of identification can be challenging.
The automatic transfer of selected assets and liabilities to the receiving company means that, from a regulatory standpoint, no additional agreements are required beyond a single spin-off deed. For instance, if the business unit being transferred includes assets such as two plots of land and shares in other companies, separate sale and purchase agreements (Akta Jual Beli) for each plot and the shares are unnecessary; the spin-off deed alone should be sufficient. This understanding should also eliminate any interpretation that shares transferred as part of the spin-off are akin to an in-kind capital injection (inbreng) and thus require a deed of in-kind capital contribution (akta inbreng).
In 2021, the National Land Office finally recognised the transfer of land ownership via a spin-off deed through its 2021 amendment regulation. We participated in focus group discussions and contributed to a position paper that facilitated this recognition.
However, certain liabilities with third parties may require additional instruments. For example, a liability in the form of a bank loan secured by collateral typically requires a novation agreement to transfer the loan, and the security documents may also need to be perfected to record the new creditor, depending on the type of security involved.
Other key implications and challenges of spin-offs include potential severance payments to employees, potential creditor objections, licensing adjustments and potential blackout periods, and post-spin-off filings with the Indonesian Business Competition Supervisory Commission (KPPU).
Regulatory gaps and practical approaches
Spin-off consideration
The Indonesian Company Law of 2007 is silent regarding spin-off consideration, prompting questions about whether compensation for a spin-off is mandatory, who should receive the compensation and what form it should take.
In spin-offs involving SOEs, compensation requirements may not pose major concerns because these entities are generally restricted from transferring assets without compensation. In contrast, for spin-offs used for internal corporate restructuring within a non-SOE group or among companies under common control, a minimal or zero compensation scheme may be pursued to minimise potential financial exposure. Additionally, the financial performance of the specific business unit or project being transferred may not always be positive, which can raise financial concerns if compensation is mandatory
The question of who should receive compensation is equally important. Unlike in certain jurisdictions, such as the United States, United Kingdom or Australia, where, to our knowledge, compensation is typically distributed to the shareholders of the transferring company, in Indonesia, compensation for a spin-off is typically paid by the receiving company to the transferring company.
The type of compensation is not strictly regulated; however, in practice, the transferring company typically receives newly issued shares in the receiving company in exchange for the equity (assets and liabilities) of the transferred business. If a share compensation scheme is chosen, the Indonesian Company Law of 2007 stipulates that the shareholders' pre-emptive rights in the receiving company do not apply to the issuance of shares as compensation in spin-offs. However, share compensation in a spin-off from a subsidiary to its parent company is not feasible due to the share cross-ownership restrictions under the Indonesian Company Law of 2007. This necessitates exploring alternative compensation schemes, such as cash payments or the recently considered capital reduction scheme.
Tax and valuation considerations may also play a significant role in addressing this matter.
Fair value
Unlike mergers, where using fair value to determine the share conversion ratio is mandatory, the Indonesian Company Law of 2007 does not specify whether compensation in spin-offs (such as share or cash consideration) must be based on the fair value of the equity of both the transferred and receiving businesses.
The requirement for fair value in spin-offs involving SOEs seems to be generally acknowledged. However, for spin-offs involving non-SOE companies or those under common control, using book value might be preferred.
In practice, due to this lack of regulatory clarity, the fair value requirement seen in mergers has been adopted in spin-offs, especially those involving listed companies (besides the requirements under the Financial Services Authority (OJK) affiliated party or material transaction regulations). This adoption is largely driven by the desire to ensure the spin-off is fair and accountable to shareholders of both the transferring and receiving companies. Additionally, shareholders of the transferring company may request their shares be bought back at fair value if they do not approve of the spin-off.
However, this approach should be applied with caution in spin-offs involving government-assigned projects transferred from the assigned entity to its affiliate. In these cases, subsidies and/or government capital contributions are the primary elements involved and may significantly influence value determination.
Similar to spin-off consideration, tax and valuation considerations may also play a significant role in addressing this matter.
Spin-off plan
The Indonesian Company Law requires the boards of directors of the transferring and receiving companies in spin-offs to announce a summarised version of the spin-off plan in a newspaper and to state the shareholder-approved spin-off plan in a notarial spin-off deed. However, the law lacks guidance on the required content of the plan.
This has led to the practice of benchmarking the required content of merger plans when preparing a spin-off plan, with necessary adjustments to account for the differences in implications and technicalities between mergers and spin-offs.
Conclusions
In conclusion, while spin-offs have become a popular alternative for business restructuring in Indonesia, the lack of a comprehensive legal framework presents challenges that require careful navigation. As you consider your spin-off plans, it is crucial to prepare meticulously and ensure compliance with existing laws and regulations. At PwC, we are committed to helping you navigate the complexities and legal uncertainties of your spin-off plans, providing expert guidance and support from all line of services every step of the way.
