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Merger and Acquisition: Legal Perspective in Corporate Actions

In Indonesia, companies are entitled to endure company restructuration, including Merger and Acquisition. While these corporate actions may solely derive from a business strategy, there are multiple legal aspects that must not be overlooked.

Pursuant to the Law No. 40 of 2007 concerning Limited Liability Company (“Company Law”), Merger is defined as a legal action taken by one or more companies to merge into another existing company. On the other hand, Acquisition is defined as a legal action taken by a legal entity or an individual to acquire the majority shares of a company, which results in a transfer of control of the said company.

Concluding from the mentioned definitions, Merger and Acquisition can be differentiated by the following variables:

SubjectMerger can only be conducted an entity or more than one entity in the form of a limited liability company.Acquisition can be conducted by an entity, either a legal entity or an individual (natural person).
Legal PurposeMerger is conducted in order to merge with another existing company which then becomes the only surviving company.Acquisition is conducted in order to gain control of a company.
ResultMerger results in a transfer of assets and liabilities of the merging company to the surviving company, therefore causing the merging company to dissolve.Acquisition results in a transfer of control of a company, marked by the transfer majority of shares (with voting rights) to a new party.

Purposes of Merger and Acquisition

Considering the legal purpose and results of Merger and Acquisition, these corporate actions are mostly taken to implement business purposes of the subjects. Generally, such business purposes are driven by the competitive nature in the industry.

In the event of a Merger, the merging company and the surviving company are joining forces to increase its business scale by the increase of assets. Furthermore, Merger can also serve as means for diversification. This diversification can be realized in the event the merging company and the surviving company have each carried out their respective businesses in different fields.

Aside from seeking business growth, there have been select cases wherein companies who were facing crisis period perform Merger as a solution to prevent any downfall to their companies. This is in line with the main purpose of Merger, which is to strengthen the position of the companies in the industry.

Similar with the business purpose of Merger, Acquisition can be conducted in order to expand the company’s market share and customer segments. This expansion is usually implemented by purchase of shares of a smaller company by a bigger company, therefore making the smaller company a subsidiary of the bigger company.

According to the Company Law, there are two methods of Acquisition based on the conducting party, namely:

  1. Acquisition by the Board of Directors of another company; and
  2. Direct Acquisition by the shareholder.

In the event the Acquisition is conducted by the Board of Directors of another company, both the acquiring company and the acquired company shall each prepare an Acquisition plan which would be liaised between the Boards of Directors. By contrast, a direct Acquisition by the shareholder is not obligated by law to be preceded with an Acquisition plan.

Considering how the main goal of an Acquisition is to gain control of the acquired company, the conducting party must only purchase shares which would grant voting rights to the holders. These voting rights come into play in General Meetings of Shareholders, where the majority shareholder would be empowered to have the greatest number of votes. By inference, the majority shareholder is empowered to have most control over the company’s decisions in conducting its business activity.

What Becomes of the Shareholders

According to the Company Law, in case of a Merger, the shareholders of the merging company shall become the shareholders of the surviving company. Following the Merger, the shares owned by shareholders of the merging company shall be transformed into shares of the surviving company. Therefore, despite the dissolution of the merging company, the shareholders of the merging company must not be deprived of their existing entitlements.

In case of an Acquisition, there is a transfer of control of a company, which is marked by the change of composition of shares ownership (with voting rights). Therefore, the party conducting the Acquisition, either a legal entity or an individual, either an existing shareholder or an outside party, shall have the most power in deciding the company’s business operations or strategy through General Meetings of Shareholders.

What Becomes of the Employees

Setting the differences aside, both Merger and Acquisition constitute legal actions which are related with employees of the company. Considering how Merger or Acquisition may result in a marginal or radical change internally within the company, the employees may be affected by such restructuration. Pursuant to the Law No. 13 of 2003 concerning Manpower (“Manpower Law”), termination of employees in the event of Merger or Acquisition may result from either of the following possibilities:

  1. the workers are not willing to continue their employment in the company; or
  2. the company is not willing to continue the employment of the workers.

The difference of the subject initiating the termination of employees entail the difference of employment entitlements of the terminated workers. In the event the termination is initiated by the workers, the workers are entitled for a lesser amount of compensation in comparison to the event where the termination is initiated by the company. However, the type of the corporate action (either Merger or Acquisition) does not bear any significance to this matter.

Author: Yohana Veronica Tanjung

Gaffar & Co., Indonesian Boutique Law Firm which specializing and focus on commercial law areas include Merger & Acquisition.

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