When entering a business partnership, founders and investors may assume that the Articles of Association (“AoA”) provide sufficient protection for their respective interests. In practice, however, the AoA primarily addresses corporate matters required under Indonesian law and may not fully capture the commercial arrangements agreed between shareholders, such as strategic decision-making, share transfers, deadlock resolution, minority protections, and exit arrangements. A Shareholders Agreement (“SHA”) can therefore provide an important contractual framework for regulating the relationship between shareholders.
The AoA and an SHA have different legal positions. The AoA forms part of the company’s corporate framework and must comply with the requirements of Law No. 40 of 2007 on Limited Liability Companies, as amended (“Company Law”), and is registered with the Ministry of Law. An SHA, by contrast, is a contractual arrangement governed by the principle of freedom of contract under Article 1338 of the Indonesian Civil Code and generally binds only its parties (inter partes). The company may also become a party to the SHA where it has obligations or is required to take certain actions under the agreement.
The freedom to contract under an SHA is not unlimited. Its provisions must remain consistent with mandatory provisions of Indonesian law, including applicable requirements concerning General Meeting of Shareholders (“GMS”) quorums, voting rights, and corporate authority. Where an SHA provision conflicts with mandatory provisions of the Company Law or the AoA, its enforceability may be affected. For this reason, key SHA provisions, particularly those relating to share transfers and corporate governance, should be carefully coordinated with the AoA.
An SHA can provide greater certainty in relation to share transfers and shareholder protections. Provisions such as Right of First Refusal (“ROFR”), tag-along rights, and drag-along rights can regulate how shares may be transferred and protect shareholders in the event of a proposed sale. Minority investors may also negotiate anti-dilution provisions to address certain circumstances in which new shares are issued at a lower valuation.
An SHA can also establish a framework for strategic decision-making. Reserved matters and veto rights may require the approval of particular shareholders before specified decisions can be taken, such as incurring significant debt, changing the company’s business activities, or undertaking material transactions. These provisions can be particularly relevant where shareholders have different levels of ownership or investment objectives.
Decision-making arrangements become especially important in a 50:50 ownership structure, where neither shareholder has a majority. An SHA may establish a deadlock mechanism for situations where shareholders cannot agree on a material decision. Depending on the circumstances, this may include escalation between representatives, mediation, or a buy-sell mechanism such as a shotgun or Russian roulette clause.
An SHA may further regulate the relationship between shareholders during and after their involvement in the company. Non-compete and non-solicitation provisions may impose agreed restrictions on departing shareholders, while put and call options, buy-sell arrangements, and IPO-related provisions may provide mechanisms for future exit scenarios. Minority shareholders may also negotiate information rights covering financial statements, GMS resolutions, and other material company information.
The drafting of an SHA involving an Indonesian company should also take into account Indonesian legal requirements. Agreements involving Indonesian parties are generally subject to the Indonesian language requirement under Law No. 24 of 2009, although a foreign-language version may be prepared alongside the Indonesian version. Foreign-law templates should therefore be adapted to Indonesian law and the specific corporate and commercial circumstances of the transaction.
The choice of governing law and dispute resolution should likewise be considered carefully. Parties may agree on the governing law of the SHA, subject to applicable mandatory Indonesian laws and public policy considerations. Arbitration may also be selected as a dispute resolution mechanism, particularly where confidentiality and procedural flexibility are important to the parties.
For joint ventures and foreign investment structures, additional consideration should be given to share ownership, corporate control, and foreign investment restrictions. Contractual arrangements involving voting rights, control, or rights over shares should be structured carefully to ensure compliance with applicable investment regulations, foreign ownership restrictions, and the requirements applicable to the relevant KBLI. While contractual rights do not automatically constitute a prohibited nominee arrangement, the substance and implementation of the overall arrangement should be carefully assessed.
Ultimately, an AoA may not be sufficient to address all of the commercial arrangements between shareholders. A well-drafted SHA can complement the AoA by establishing a clearer framework for shareholder rights and obligations, corporate decision-making, share transfers, deadlock resolution, minority protections, and exit arrangements. By addressing these matters at the outset, shareholders can establish greater clarity around their respective rights and provide a structured mechanism for dealing with future changes or potential disputes.
Schinder Law Firm advises Indonesian and international clients on corporate transactions, joint ventures, foreign investment, shareholder arrangements, and corporate governance matters. We assist clients in structuring and negotiating shareholder arrangements that take into account both their commercial objectives and the requirements of Indonesian law. For further consultation, please contact info@schinderlawfirm.com.
Author:
Dewi Susanti