Joint Ventures 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
Bali@Limcharoen.com.