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Regulation regarding Affiliated Transactions for Public Listed Companies

Affiliated transactions tend to involved in fraud cases i.e to manipulate the financial performance of the company, therefore, the regulation and supervision of affiliate transactions is more intensive.

 

It is not surprising that Indonesia Financial Services Authority ("Otoritas Jasa Keuangan", "OJK", or "FSA") issued regulations to regulate the conditions for which an affiliate transaction can be carried out. The regulation, namely Financial Services Authority Regulation No. 42/2020 ("FSA-REG 42/2020") concerning affiliated transactions and conflicts of interest. In this discussion, we will only discuss affiliate transactions regulated by the FSA.

 

We have also discussed tax requirements for affiliate transactions (transfer pricing) (click here to read our article).

 

What is meant by affiliated transactions and conflict of interest transactions according to FSA-REG 42 of 2020?

 

Affiliated Transaction is any activity and/or transaction carried out by a publicly listed or controlled company with an affiliate of a public company or an Affiliate of a member of the board of directors, member of the board of commissioners, major shareholder, or controller, including every activity and/or transaction carried out by the company. a publicly listed or controlled company for the benefit of an affiliate of a public company or an affiliate of a member of the board of directors, a member of the board of commissioners, a major shareholder or the controlling party.

 

Conflict of Interest Transactions are transactions conducted by publicly listed companies or controlled companies with each party, either with an Affiliate or a party other than an Affiliate, which contains a Conflict of Interest.

 

Unlike the previous regulations, FSA-Regulation 42 no longer regulates the details of transaction types, but in the explanation section, there are examples of types of affiliated transactions. In addition, it is clear that conflict of interest transactions can occur either with affiliated parties or other parties.

 

Unlike the previous regulations, FSA-Regulation 42 no longer regulates the details of transaction types, but in the explanation section, there are examples of types of affiliated transactions. In addition, it is clear that conflict of interest transactions can occur either with affiliated parties or other parties.

 

What kind of transactions are required to comply with FSA-Regulation 42 of 2020?

 

Public Listed Company that conducts Affiliated Transactions in 1 (one) transaction; or a series of transactions for a specific purpose or activity, must comply with the provisions of the Financial Services Authority Regulation Number 42 of 2020 (FSA-Reg 42).

 

Examples of conditions that indicate a series of transactions for a specific purpose or activity include:

 

  1. There is dependence and / or continuity between planned transactions;

  2. Acquisition of securities of other companies in stages for control or investment purposes;

  3. Gradual release of company securities for divestment purposes resulting in loss of control; and

  4. Acquisition or disposal of an integrated asset which is carried out separately (for example, selling a factory by separating its components and selling it to different parties).

 

Examples of transactions which are 1 (one) series:

  1. The Public Listed Company buys shares of PT A from parties X, Y, and Z. This transaction is seen as interrelated because the object of the shares being purchased is the same, namely shares of PT A and indicates the purpose of the Public Listed Company to take over PT A.

  2. The Public Listed Company purchased shares of PT X, PT Y, PT Z from PT A. The purchase could not be done separately because PT A intended to sell PT X, PT Y, PT Z in one package and the business activities of PT X, PT Y, PT Z are interrelated. PT A sets one price for the package.

 

Examples of transactions that are not a series of transactions:

 

1. The Public Listed Company buys shares of PT A, PT B, and PT C from party X (the same party), whereby the respective shares of PT A, PT B, and PT C are purchased separately.

 

2. The Public Listed Company purchased PT A shares from X, PT B shares from Y, and PT C shares from Z at the same time. The two transactions are not a series of transactions because the object of the transaction is different shares.

 

What is included as affiliated transactions?

 

Affiliated Transaction is any activity and/or transaction carried out by a publicly listed or controlled company with an affiliate of a Public Listed Company or an affiliate of a member of the board of directors, member of the board of commissioners, major shareholder, or controller, including every activity and/or transaction carried out by the company. a publicly listed or controlled company for the benefit of an affiliate of a Public Listed Company or an affiliate of a member of the board of directors, a member of the board of commissioners, a major shareholder, or the controlling party.

 

Conflict of Interest Transactions are transactions conducted by publicly listed companies or controlled companies with each party, either with an Affiliate or a party other than an Affiliate, which contains a Conflict of Interest.

 

Unlike the previous regulations, FSA-Regulation 42 no longer regulates the details of transaction types, but in the explanation section there are examples of types of affiliated transactions. In addition, it is clear that conflict of interest transactions can occur either with affiliated parties or other parties.

 

What are the requirements for a public listed company to conduct affiliated transactions?

 

According to FSA regulation number 42 of 2020 article 3, public listed companies are required to have adequate procedures to ensure that affiliated transactions are carried out in accordance with generally accepted business practices. "Adequate procedures" means, among other things, procedures that compare the terms and conditions of transactions that are equivalent to transactions between parties who are not affiliated with an affiliation. But according to Article 6 and Article 7, FSA-Reg 42 of 2020 not all affiliated transactions are required to carry out the procedures, we will discuss this below.

 

Conditions that indicate a transaction is carried out in accordance with the provisions of generally accepted business practice, among others, when an Affiliated Transaction is conducted in compliance with the arm's-length principle.

 

Apart from being required to have adequate procedures to ensure that affiliated transactions are carried out in accordance with generally accepted business practices, in article 4 paragraph 1 FSA-Regulation 42 of 2020, public listed companies are also required to:

 

a. Use an Appraiser to determine the fair value of the Affiliated Transaction object and/or the fairness of the transaction;

b. Announce the disclosure of information on each Affiliated Transaction to the public;

c. Submit disclosure of information and supporting documents (Appraisal report; and other supporting documents) to the Financial Services Authority; and

d. First obtain the approval of the Independent Shareholders at the General Meeting of Shareholders (“GMS”), in the event that:

1. The value of the Affiliated Transaction meets the limit on the value of material transactions which must be approved by the GMS;

2. Affiliated Transactions that may disrupt the business continuity of the Public Listed Company; and/or

3. The company conduct an Affiliated Transaction which, based on the consideration of the Financial Services Authority, requires the approval of the Independent Shareholders.

 

Provisions on the period of time for the execution of the transaction, the GMS, and information disclosure

 

According to Article 4 FSA-Regulation 42/2020, the period of time for the implementation of transactions by holding GMS and information disclosure is regulated as follows:

 

The period between the valuation date and the affiliate transaction date; or the date of implementation of the GMS in the event that the Affiliated Transaction must obtain GMS approval, no later than 6 (six) months.

 

Public announcements and submission of information and document disclosures to the Financial Services Authority are mandatory:

a. no later than 2 (two) working days after the Affiliated Transaction date; or

b. concurrently with the announcement of the GMS, in the event that an Affiliated Transaction is conducted by a Public Listed Company, it is required to obtain GMS approval.

 

In the event of a change or addition of information, the change or addition of such information must be announced no later than 2 (two) working days prior to the implementation of the GMS.

 

Transactions that are exempted from the obligation to carry out "adequate procedures" and calculation of the fair value of transactions by the appraisers, GMS, disclosure of information, and reports to The FSA

 

According to Article 5 FSA-Regulation Public Companies are not required to carry out the procedures as referred to in Article 3 and are not required to comply with the provisions as referred to in Article 4 paragraph (1) FSA-Regulation 42 of 2020 if conducting Affiliated Transactions as follows:

 

a. use of any facilities provided by a public company to members of the board of commissioners, members of the board of directors, and / or the main shareholder in the event that the main shareholder also serves as an employee and the facility is directly related to their responsibilities towards the public company and is in accordance with the policy of the public company, and has been approved by the GMS;

 

b. transactions with the Public Company Employees, members of the board of directors, or members of the board of commissioners of the Public Company or with the Employees, members of the board of directors, or members of the board of commissioners of a Controlled Company with the same requirements, as long as this has been approved by the GMS;

 

c. compensation, including salaries, pension fund contributions, and/or special benefits given to members of the board of directors, members of the board of commissioners, and the main shareholder in the event that the main shareholder is also an employee if the total amount of these benefits is disclosed in periodic financial reports. , as long as the matter has been approved by the GMS;

 

d. Continuous transactions that have been made before the Public Listed Company conducts its initial Public Offering or before the submission of the Registration Statement as a Public Listed Company provided that:

 

1. The transaction has been disclosed in the prospectus of the Initial Public Offering or in the disclosure of information on the Public Listed Company Registration Statement; and

2. The terms and conditions of the transaction did not change which could be detrimental to the Public Listed Company;

 

and/or

 

e. Continuous transactions made after the Public Company has conducted an Initial Public Offering or after the Registration Statement as a Public Listed Company becomes effective, provided that:

 

1. The initial transaction underlying the subsequent transactions has met FSA-Regulation 42 of 2020; and

2. The terms and conditions of the transaction did not change which could be detrimental to the Public Company.

 

Transactions that are exempted from the obligation to carry out “adequate procedures” and calculation of the fair value of the transaction by the appraisers, GMS, disclosure of information, but still obliged to report to the The FSA

 

According to Article 6 FSA-Regulation 42 of 2020, Public Companies are not obliged to carry out the procedures as referred to in Article 3 and are not obliged to comply with the provisions as referred to in Article 4 paragraph (1) FSA-Regulation 42 of 2020, but must report Affiliated Transactions that enter these types to the Authority. Financial Services if conducting Affiliate Transactions as follows:

 

a. transactions carried out as the implementation of statutory regulations or court decisions;

 

b. transactions between:

 

1. A Public Company with a Controlled Company whose shares are owned at least 99% (ninety-nine percent) of the paid-up capital of the Controlled Company;

 

2. Associate Controlled Companies whose shares are owned at least 99% (ninety-nine percent) by the said Public Company; or

 

3. A Controlled Company with a company whose shares are owned by the Controlled Company at least 99% (ninety-nine percent) of the paid-up capital of the company;

 

c. transactions with a transaction value not exceeding 0.5% (zero point five percent) of the paid-up capital of the Public Company or not exceeding the amount of IDR 5,000,000,000.00 (five billion rupiah), the lower value is used;

 

d. loan transactions received directly from banks, venture capital companies, finance companies, or infrastructure financing companies, both domestic and foreign;

 

e. transaction of providing guarantees to banks, venture capital companies, financing companies, or infrastructure financing companies, both domestic and foreign for loans received directly by the Public Company or Controlled Company;

 

f. transactions for addition or reduction of equity participation to maintain the percentage of ownership after such participation have been made for at least 1 (one) year;

 

g. transactions conducted by a Public Company which is a financial service institution with a Controlled Company which is a sharia financial service institution in the framework of developing the said Islamic financial service institution; and/or

 

h. transactions for restructuring carried out by Public Companies that are controlled either directly or indirectly by the government.

 

Affiliated Transactions for Financial Services Institutions

 

According to Article 7 FSA-Regulation 42 of 2020, in the event that the Public Company is a financial service institution under certain conditions, Affiliated Transactions conducted by the Public Company are not required to carry out the procedures as referred to in Article 3 and are not required to comply with the provisions referred to in Article 4 paragraph (1) FSA-Regulation 42 of 2020.

 

Financial services institutions under certain conditions are determined by the Financial Services Authority.

 

The Public Company is required to report the Affiliated Transaction to the Financial Services Authority no later than the end of the 2nd (second) working day after the Affiliated Transaction date.

 

Regular, recurring, and/or ongoing affiliate transactions

 

According to article 8 of FSA-Regulation 42 of 2020, Public Companies are not required to meet the requirements (assessment, disclosure of information, documents to The FSA, and/or approval by the GMS) if they carry out an Affiliated Transaction which is a business activity carried out in order to generate business income and is carried out routinely, recurring, and/or ongoing.

 

In carrying out these transactions, adequate procedures in accordance with Article 3 of FSA-Regulation 42/2020 are only carried out at the beginning of the transaction.

 

In the event that there is a change in the terms and conditions of an Affiliated Transaction which is a routine, recurring and/or continuous business activity and such changes have the potential to harm the Public Company, the Public Company is obliged to re-implement adequate procedures as referred to in Article 3 FSA-Regulation 42 of 2020.

 

Disclosure of Affiliated Transactions in the Company's Financial Statements

 

According to Article 9 FSA-Regulation 42 of 2020, affiliated transactions must be disclosed in the annual report or annual financial report of the Public Company.

 

Disclosures in the financial statements must include information: a. type of Affiliated Transaction; b. transacting parties; c. the nature of the Affiliate relationship; d. transaction value; and e. statement of the board of directors that the Affiliated Transaction has gone through the procedure as referred to in Article 3 FSA-Regulation 42 of 2020.

 

In the event that the disclosure of the information is contained in the annual financial report of the Public Company, the Public Company must provide a reference for the disclosure in the annual financial report in the annual report.

 

The type of information included in information disclosure is in accordance with the obligations of Article 4 of FSA-Regulation 42 of 2020

 

Based on Article 10 FSA-Regulation 42 of 2020, information disclosure as referred to in Article 4 paragraph (1) FSA-Regulation 42 of 2020 letter b contains at least:

 

A. a description of the Affiliated Transaction, containing at least: 1. date of the transaction; 2. the object of the transaction; 3. transaction value; 4. names of parties conducting transactions and relationships with the Public Company; and 5. the nature of the affiliated relationship of the transacting parties with the Public Company;

 

b. in the event that a Public Company uses an appraiser to evaluate the object of the transaction, the appraiser's report summary should at least contain: 1. the appraiser's identity; 2. the object of assessment; 3. the purpose of the assessment; 4. limit assumptions and conditions; 5. approaches and methods of assessment; and 6. value conclusions;

 

c. Summary of the Appraiser's report regarding the fairness of the transaction, at least: 1. the identity of the party; 2. the object of assessment; 3. the purpose of the assessment; 4. limit assumptions and conditions; 5. approaches and methods of assessment; and 6. fairness opinion on transactions;

 

d. the impact of the pro forma transaction on the financial condition of the Public Company which is prepared based on at least the financial statements with limited review provided that the date of the financial statements is the same as the date of the appraisal report, in the event that the transaction has the potential to interfere with the survival of the Public Company;

 

e. explanation, considerations, and reasons for conducting an Affiliated Transaction, compared to other similar transactions not conducted with an Affiliated Party;

 

f. plans to take over company data, company data, and other related information if the Affiliated Transaction is a company takeover transaction;

 

g. summary report of an independent expert or consultant, if there is a report from an independent expert or consultant;

 

h. statement of the board of directors that the Affiliated Transaction has gone through the procedure as referred to in Article 3 FSA-Regulation 42 of 2020; and

 

i. a statement from the board of commissioners and directors that the Affiliated Transaction:

1. Does not contain a Conflict of Interest; and

2. All material information has been disclosed and the information is not misleading.