Joint ventures in Indonesia must be conducted through a foreign investment company (PMA) established with government approval. While Indonesian law provides freedom of contract, a joint venture agreement typically addresses key issues like governance, management, share transfers, and dispute resolution. It regulates matters such as capital contributions, board composition, decision making procedures, lock-in periods, and restrictive covenants. The agreement also includes provisions around confidentiality, non-solicitation, termination, and indemnification to help ensure commitment between partners and success of the joint venture. Careful advance planning and negotiation of potential issues is important given partners' legal responsibilities and resolving disputes in Indonesia.
Joint ventures in Indonesia must be conducted through a foreign investment company (PMA) established with government approval. While Indonesian law provides freedom of contract, a joint venture agreement typically addresses key issues like governance, management, share transfers, and dispute resolution. It regulates matters such as capital contributions, board composition, decision making procedures, lock-in periods, and restrictive covenants. The agreement also includes provisions around confidentiality, non-solicitation, termination, and indemnification to help ensure commitment between partners and success of the joint venture. Careful advance planning and negotiation of potential issues is important given partners' legal responsibilities and resolving disputes in Indonesia.
Joint ventures in Indonesia must be conducted through a foreign investment company (PMA) established with government approval. While Indonesian law provides freedom of contract, a joint venture agreement typically addresses key issues like governance, management, share transfers, and dispute resolution. It regulates matters such as capital contributions, board composition, decision making procedures, lock-in periods, and restrictive covenants. The agreement also includes provisions around confidentiality, non-solicitation, termination, and indemnification to help ensure commitment between partners and success of the joint venture. Careful advance planning and negotiation of potential issues is important given partners' legal responsibilities and resolving disputes in Indonesia.
Joint ventures in Indonesia must be conducted through a foreign investment company (PMA) established with government approval. While Indonesian law provides freedom of contract, a joint venture agreement typically addresses key issues like governance, management, share transfers, and dispute resolution. It regulates matters such as capital contributions, board composition, decision making procedures, lock-in periods, and restrictive covenants. The agreement also includes provisions around confidentiality, non-solicitation, termination, and indemnification to help ensure commitment between partners and success of the joint venture. Careful advance planning and negotiation of potential issues is important given partners' legal responsibilities and resolving disputes in Indonesia.
In business, parties, who can contribute different skill sets, assets,
funding or special expertise to a project, often would join forces in order to leverage their respective qualities, i.e. the parties would enter into a joint venture. With regard to any business undertaken by foreigners in Indonesia, including a joint venture, it must be noted that strictly under law, any business activity should be conducted through a foreign investment company (Penanaman Modal Asing or PMA), which is a limited liability company established with approval by the Investment Coordinating Board (BKPM) in Jakarta. Like every Indonesian company a PMA is generally regulated under the Indonesian Company Law (Law No. 40 of 2007), which stipulates a general prohibition to use nominee shareholders as Indonesian corporate law does not recognize the concept of beneficial ownership or trust, where there is a separation of legal and beneficial ownership. For a PMA such prohibition is explicitly regulated under Article 33 of Investment Law No. 25 of 2007. Having said that, Indonesian law recognizes the principle of freedom of contract (Article 1338 of the Indonesian Civil Code) within the boundaries of good faith, public order and lawful purposes, so that the partners of a joint venture agreement, i.e. the shareholders of a PMA, are generally free to include and agree on any provisions they wish in relation to their joint venture. Typical provisions of a joint venture agreement The agreement setting out the respective rights and obligations of the partners and shareholders is typically called a joint venture agreement (JVA) and would commonly include and regulate the following matters: Governing law of the JVA: The governing law would typically be Indonesian law, although the parties may agree that the law of another jurisdiction may apply to (parts of) the JVA. There is a general risk - in relation to dealings with Indonesian corporate matters or assets located in Indonesia, in particular land to agree that another law than Indonesian law shall apply as this may not be enforceable or seen in contravention with public order when it comes to enforcing such an agreement. Particulars regarding the organization and management of the joint venture: It is important to clearly discuss and agree on organizational matters of the joint venture company at the outset as this will determine the role and control mechanisms by the
partners, such as:
Business obligations by the parties, such as capital
contribution, provision of services and ongoing duties Determining the companys board of directors and board of commissioners Requirements for periodic meetings of shareholders, board of directors and commissioners, including a quorum for such meetings Defining special or reserved matters, which would require certain majority decisions of directors, commissioners and/or shareholders
On the topic of management obligations, it should be noted that
the role of company director and commissioner are not to be taken lightly. Each member of the board may be held personally liable for losses suffered by the company due to negligent errors in management (Article 97 and 108 of Law No. 40 of 2007). It is important to note that there is no limitation of such responsibility to gross negligence. A director or commissioner may be excused from this liability only where they can prove that the losses were not caused by their mistakes or negligence, which in practice might be a difficult task to accomplish and which would require them to prove that
They have managed the company affairs in good faith
and in the interest of the company; That there were no direct or indirect conflicts of interest in respect of the act causing the losses; and That they acted to prevent the losses from occurring and continuing
Matters relating to shares: A JVA would also regulate general
matters with regard to dealing with shares by the partners.
The partners may agree a lock-in period, i.e. a certain time
within which no partner shall transfer his/her interest and shares in order to allow an initial set-up and establishment phase for the joint venture The partners may agree on a general prohibition on share transfers without the consent of the other partner(s) with the exception of a transfer of shares to a subsidiary owned by the same partner. Often a prohibition to pledge or mortgage shares is agreed to prevent encumbrances of the shares, which may negatively effect the status and standing of the PMA and joint venture
The JVA may also contain a share buy-sell provision and
clearly set out its terms and procedures, such as notification requirements, right of first refusal or terms under which a partner can compel a sale of shares.
Specific Restrictions: In order to ensure the success of a joint
venture and full commitment by the partners, the JVA may provide for restrictive covenants such as:
Partners must refrain from engaging directly or indirectly in
activities competitive with the joint venture business unless with prior approval by the other partner(s) Partners must keep confidential any matters relating to the joint venture The JVA may also provide for a non-solicitation clause prohibiting a partner from recruiting or enticing away employees or customers of the joint venture.
The above matters may be combined with a clause regulating a
fixed contract penalty and liquidated damages in the event of breach, which may serve as a deterrent. General provisions: Besides the above, a JVA will typically contain certain general provisions such as:
Waiver of court decision as termination requirement (Article
1266 and 1267 of Indonesian Civil Code) An indemnity by the company of its directors or commissioners for certain acts. Force Majeure provisions Dispute resolution provisions. Regarding disputes there is the general option between litigation in court and arbitration. A common choice for foreign investors with joint venture operations in Indonesia is to stipulate for arbitration in a neutral forum such as Singapore (SIAC). Indonesia is a signatory to the New York Convention and enforcement of arbitration awards can be executed in Indonesia. With regard to stipulating that a dispute would be settled before a court outside of Indonesia, it must be noted that in practice it is not possible to enforce a foreign judgment in Indonesia so that any partner seeking to enforce a decision in Indonesia would have to start a new action before the Indonesian courts.
In summary, it is strongly advisable to spend considerable time to do some
advance planning and negotiations with regard to any proposed joint venture at the outset, taking into account the nature of the joint venture and the partners involved. It is commercially worthwhile to discuss
potential conflicts, including worst case scenarios and to agree on certain
mechanisms at a time when the partners are on good terms, willing to cooperate and to find mutually beneficial solutions. This article was co-written by Ingo Mller (Partner) and Gerry Purba (Senior Associate), who are based in our Bali office. For further information, please contact our Bali office at +62 (0) 361727114 or email to [email protected].