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In recent years, Indonesia has become a hotspot for Chinese outbound investment. Article 5 of Indonesia¡¯s Investment Law stipulates that foreign investment must be in the form of a limited liability company. Under Indonesia¡¯s Company Law, a minimum of two shareholders are required to form a company. Due to these regulations and other restrictions on foreign investment in specific sectors, foreign investors tend to establish limited liability companies through joint ventures with Indonesian shareholders.

This article discusses key considerations for Chinese enterprises when designing the equity structure of a joint venture with Indonesian shareholders, aiming to provide a reference for Chinese companies planning to invest in Indonesia.

In addition to economic factors and China¡¯s laws and regulations on outbound investment, Chinese enterprises should also consider the following aspects when designing the equity structure of their joint ventures:

1. Indonesia¡¯s restrictions on the percentage of foreign investment in the industry targeted by the joint venture;
2. Regulatory limits imposed by relevant industry authorities on foreign investors¡¯ equity ratio; and
3. Legal provisions and restrictions on shareholders¡¯ rights related to company operations.

Investment access

Indonesia regulates joint ventures between Chinese enterprises and Indonesian shareholders primarily through the Investment Law (2007), the Company Law (2007), the Job Creation Law (2020), and the Presidential Regulation on Business Fields Open to Investment (2021), also known as the positive investment list.

Article 2 of the positive investment list stipulates that all sectors are open to foreign investment except those explicitly closed to foreign investors or reserved for central government investment. Article 3 categorises the open sectors into:

1. Priority sectors;
2. Business fields that stipulate specific requirements or limitations;
3. Businesses fields that are assigned or subject to compulsory partnerships with co-operatives; and
4. Other business fields not covered in the above-mentioned three.

Circumventing foreign investment restrictions through a nominee shareholding by Indonesian shareholders carries significant risks. Article 33 of the Investment Law prohibits investors from confirming the shareholding on behalf of others through agreements or declarations, rendering such agreements or declarations invalid.

Consequently, nominee shareholding risks are being deemed invalid. In addition, it may lead to situations where the district court may dissolve the company under article 146 of the Company Law. Therefore, before investing in Indonesia, Chinese enterprises should have a grasp of Indonesia¡¯s access requirements relating to foreign investment and the local court¡¯s stance on common circumvention.

Article 1.8 of the Investment Law defines capital held by Indonesian legal entities, whether wholly or partially foreign-owned, as foreign capital. Therefore, Chinese enterprises establishing joint ventures with their wholly-owned or joint venture subsidiaries in Indonesia still risk not meeting local equity ratio requirements.

Equity ratio

In addition to investment-related laws and regulations, the authorities of specific sectors also impose restrictions on the equity ratio of foreign investment. For instance, Bank Indonesia has enacted Regulation No.23/7/PBI/2021 to limit foreign ownership in non-bank payment service providers to below 80%. Also, Regulation No.23/6/PBI/2021 mandates that Indonesian shareholders must hold at least 51% of voting rights, while foreign shareholders are limited to a maximum of 49%.

Shareholders¡¯ rights

Article 53 of the Company Law mandates that the types of shares must be specified in the company¡¯s articles of association. Different types of shares confer different rights, but shares of the same type must have equal rights. Therefore, it is advisable to specify in the joint venture¡¯s articles of association the types of shares and corresponding shareholders¡¯ rights.

Article 86 of the Company Law stipulates that a quorum for a shareholders¡¯ meeting is 50% of voting shares, although the articles of association may set a higher threshold. Article 88 requires a quorum of 66.67% of voting shares for amending the articles of association.

Article 89 mandates a quorum of 75% of voting shares for decisions on mergers, splits, acquisitions, bankruptcy and liquidation, a requirement echoed in article 102. Articles 97.6 and 114.6 allow shareholders representing 10% of voting rights to sue board members and request a company audit under article 138. Therefore, well-funded Chinese enterprises may, within legal limits, aim to keep Indonesian shareholders¡¯ equity below 10% to secure greater control over the company.

With limited rights, shareholders holding less than 10% equity can still exercise their rights to information, litigation and claims under articles 61, 62, 80, 100 and 146. To mitigate the risk of these rights being abused by Indonesian shareholders, Chinese enterprises should, before establishing a joint venture, engage local intermediaries in thorough background checks on their targeted partners.

In conclusion, Chinese enterprises investing in Indonesia should design their equity structures with a comprehensive understanding of Chinese and Indonesian laws, regulations and other key factors to minimise risks to investment and compliance.

Gloria Hu is an associate at Zhilin Law Firm.