In corporate practice, it is not uncommon for shareholders to decide to relinquish their ownership in a company, whether for business reasons, ownership restructuring, investment realignment, or differences of opinion among shareholders. In such circumstances, one of the options often considered is for the company itself to repurchase the shares held by the exiting shareholder, a mechanism commonly referred to as a share buyback.
While a share buyback may appear to be a straightforward transaction, companies must carefully consider the legal requirements imposed under Indonesian law before proceeding. One aspect that is frequently overlooked is the statutory limitation on the number of shares that may be repurchased by a company under Law Number 40 of 2007 concerning Limited Liability Companies (the “Company Law”). Failure to comply with these requirements may result in the transaction being deemed null and void by operation of law.
A share buyback refers to the repurchase by a company of shares that it has previously issued to its shareholders. Under this mechanism, the repurchased shares are not automatically cancelled. Instead, they are temporarily held by the company and may subsequently be resold or otherwise dealt with in accordance with applicable laws and regulations. The Company Law essentially provides two separate mechanisms through which a company may reacquire shares from its shareholders: a share buyback under Articles 37 and 38, and a capital reduction through the withdrawal and cancellation of shares under Articles 44 through 47. Although both mechanisms involve the reacquisition of shares by the company, they serve different purposes and are subject to different legal requirements.
Article 37 paragraph (1) of the Company Law permits a company to repurchase issued shares, provided that certain conditions are satisfied. First, the repurchase must not cause the company’s net assets to fall below the amount of its issued capital and mandatory reserves. Second, the aggregate nominal value of all shares repurchased by the company may not exceed 10% (ten percent) of the company’s issued capital, unless otherwise permitted under applicable capital market regulations. Pursuant to Article 37 paragraph (2), any share buyback conducted in violation of these requirements is null and void by operation of law. Furthermore, shares acquired through a buyback may only be held by the company for a maximum period of 3 (three) years, and the buyback itself must be approved in advance by the General Meeting of Shareholders (GMS) as required under Article 38 of the Company Law.
It is important to note that the 10% threshold is calculated based on the company’s total issued capital rather than the number of shares held by a particular shareholder. Consequently, where the shares proposed to be repurchased exceed the statutory threshold, the company cannot simply acquire the entire block of shares through a buyback under Article 37. In such circumstances, the more appropriate mechanism may be a reduction of the company’s issued and paid-up capital through the withdrawal and cancellation of shares pursuant to Articles 44 through 47 of the Company Law. Unlike a share buyback, this mechanism is not subject to the 10% limitation because its purpose is not to hold the shares as treasury stock for future resale, but rather to permanently cancel the shares and reduce the company’s capital structure.
As a capital reduction constitutes an amendment to a company’s articles of association, the relevant resolution must be adopted through a GMS attended by shareholders representing at least 2/3 (two-thirds) of the total voting shares and approved by at least 2/3 (two-thirds) of the votes cast, unless the articles of association stipulate a higher quorum requirement. Following the adoption of the resolution, the Board of Directors must announce the capital reduction to the company’s creditors through one or more newspapers within 7 (seven) days from the date of the GMS resolution. Creditors are then entitled to submit written objections within 60 (sixty) days from the publication date, and the company must respond to such objections within 30 (thirty) days after receiving them. In addition, because the capital reduction constitutes an amendment to the articles of association, approval from the Minister of Law is required before the amendment can take effect.
The Company Law also recognizes a separate right of shareholders to request that the company purchase their shares at a fair value under Article 62. This right applies only in specific circumstances where a shareholder objects to certain corporate actions that may adversely affect its interests, such as amendments to the articles of association, transfers or encumbrances of company assets exceeding 50% (fifty percent) of the company’s net assets, mergers, consolidations, acquisitions, or spin-offs. However, where the transfer of shares back to the company is based on a voluntary arrangement between the parties rather than the exercise of a statutory exit right, Article 62 is generally not applicable. In such cases, the relevant legal framework remains Article 37 concerning share buybacks and/or Articles 44 through 47 concerning capital reductions.
Determining the correct legal mechanism is not merely an administrative exercise. It is a crucial step in ensuring the validity and enforceability of the transaction while minimizing the risk of future disputes among shareholders, creditors, and other stakeholders. The return of shares from a shareholder to a company involves more than a simple agreement between the parties; it requires careful consideration of the legal limitations, procedural requirements, and corporate approvals prescribed under the Company Law.
Schinder Law Firm regularly advises domestic and foreign clients on a broad range of corporate restructuring, shareholder arrangements, capital reductions, mergers and acquisitions, and other corporate governance matters in Indonesia. Our team has extensive experience assisting companies and investors in navigating complex corporate transactions while ensuring compliance with applicable laws and regulatory requirements. By combining practical commercial understanding with comprehensive legal expertise, we help clients structure transactions efficiently while safeguarding their legal interests. For further information regarding share buybacks, capital reductions, or other corporate law matters in Indonesia, please contact Schinder Law Firm at info@schinderlawfirm.com.
Author:
Dewi Susanti