Amco vs indonesia

Singapore Journal of International & Comparative Law
1 SJICL Investment in Indonesia 117
(1997) 1 pp 117 – 139

RECENT DEVELOPMENTS CONCERNING
INVESTMENT IN INDONESIA
(WITH SPECIAL REFERENCE TO
THE NEW COMPANY LAW 1995)1

This article examines the laws on foreign investment in Indonesia, in light of the Indonesian
Government’s moves to make the investment climate more attractive for foreign investors.
It outlines the benefits and protection made available to foreign investors and the
regulations which investors need to adhere to. Specific reference is made to an arbitral
decision which involved a dispute between the Government and certain foreign investors
over the withdrawal of a hotel-operating licence. The mechanism for establishing corporate
entities is then discussed, with reference to the provisions of the recently-enacted Company
Law of 1995.

I. LAW OF 1967 NO 1

THE Law on Foreign Investment of Indonesia (“FIL”),2 Undang-Undang
Penanaman Modal Asing (“UU-PMA”, Law of 1967 No 1),3 has been
amended several times.4 The purpose of the FIL is to encourage foreign
investment participation in Indonesia’s economy. It is intended to be in
line with the international tendency to make investment “favourable”,
especially in the “developing countries”. Its policy is to encourage the
import of foreign capital into the country. Foreign investment is regarded
as essential for the growth of the country’s economy, particularly in the
industrial sector, where capital, advanced technology and management skills
are not yet available domestically. The Indonesian Government recognises
that foreign capital investment has a major role to play in the development
of the country’s economy. Foreign investment is a “must”, and the whole
policy of the Government is to make the climate for investment by foreign

1
Paper presented at the CLE Workshop held in Singapore on 30 September 1995 on Foreign
Investment in the Region: China, India and Singapore.
2
Hereafter, “FIL”.
3
SG (State Gazette) 1967 No 1, ASG (Additional State Gazette) No 2818.
4
Law of 1970 No 11, SG 1970 No 46, ASG No 2943. The amendments were based primarily
on the changes introduced by the new Indonesian Corporate Tax Law, Law of 1970 No
8 (SG No 43), and other tax facilities for foreign investors.

118 Singapore Journal of International & Comparative Law (1997)

capital more and more attractive. This is a continuing policy of the Government
and it can be seen from the various amendments made recently.5 The creation
of a favourable climate for foreign investment has become a continuous
government programme for the development of the country’s economy.
However, on the other hand, it should be kept in mind that consistent
with the Government’s policy, foreign capital investment should be looked
at as a complementary means for the acceleration of the country’s economic
development.6 Self-reliance and the development of the country’s own
economic potential are to remain the principal bases of the country’s
economic development.

II. TRADING AS A RULE CLOSED TO FOREIGNERS

Investment is only open in the field of industry. “Trading” or “doing business”
in general is still closed to foreign participation. “Doing business” in
Indonesia, in the sense of concluding transactions in the field of general
trading, import and export, is in principle reserved for Indonesian nationals
only. This is explicitly provided for in Government Regulation 1977 No
367 regarding the termination of foreign activities in the trade sector, and
in its implementing regulations.8
The background of this rather rigid policy of restricting trading activities
to citizens only is the country’s history as a colonial society, where foreign
rulers once dominated the economic field. In the context of its “decolonisation
process” to attain full economic freedom after political independence was
obtained in 1945, one can see a fear of foreign economic exploitation.
Therefore, the limitation of foreign participation in the field of trading should

5
Namely, the “deregulatory measures” introduced as of the end of December 1988, the Pakto
27 (Government Regulation of 27 October 1988), Paknov 24 (Government Regulation of
24 November 1988), and Pakdes 20 (Government Regulation of 20 December 1988). For
these regulations, see Sudargo Gautama, ‘An Overview of the Indonesian Legal System,
with Special Reference to Foreign Investments’, paper presented at the Indonesia-Singapore
Law Seminar, February 1993, reprinted in Sudargo Gautama, Arbitrase Bank Dunia tentang
Penanaman Modal Asing di Indonesia dan Jurisprudensi Indonesia dalam perkara Hukum
Perdata Internasional (Bandung, 1994), Chapter III. See also de Haas-Engel, RH, Investeren
in Indonesie, (Investing in Indonesia), (Maastricht, 1993), p 70 ff.
6
Cf the considerations forwarded in the FIL: “d. that the surmounting of economic decline
and the further development of economic resources should be based on the capability and
the willingness of the Indonesian People themselves...., f. that foreign capital should be
maximally utilised to speed up the Indonesian economic development and to be used in
the fields and sectors which within the near future cannot be executed with Indonesia’s
own capital.”
7
Government Regulation of 1977, No 36. SG 1977 No 60, ASG No 3113.
8
See Sudargo Gautama, supra, note 5, at 26-27.


remain as a goal, although foreign participation in the form of investment
in other fields, such as industry, is to be encouraged. Government Regulation
1977 No 36 concerning the termination of foreign business activities in
the trade sector and its implementing regulations, was introduced, even after
the FIL (which seeks the “opening of the door” to foreign capital investment
in the field of industry) was introduced.9
However, a suitable balance is needed between the aim to attract foreign
capital and the ideals to improve domestic national entrepreneurship. Here,
as elsewhere, we see the “pendulum” of history swinging back and forth,
depending on the respective situation and condition. At times when foreign
capital import is regarded as vital, the limitations concerning foreign
participation in the field of economic activities in Indonesia are relaxed.
At other times, the strings of limitations are tightened. We see this process
in the course of our discussion on the various changes made in the FIL
and its implementing regulations.

III. WHAT IS FOREIGN INVESTMENT?

According to the FIL, “foreign investment” is investment of foreign capital
by foreign individuals or companies, where the capital owner directly bears
the risk. Who “foreigners” are, is defined in the Indonesian Nationality Law
1958 No 62: all persons who are not Indonesian citizens are foreigners.10
“Foreign capital” includes:11
(i) foreign exchange that does not constitute part of Indonesia’s
foreign exchange reserves;
(ii) equipment and material not financed by Indonesia’s foreign exchange
resources;12 and
(iii) re-invested profits.

9
The Law on Domestic Capital Investment, 1968 No 6, SG 1968 No 33, revised Law of
1970 No 12, SG 1970 No 47, taken with the Law of 1983 No 7, SG 1983 No 50, Art 6(a),
state that the activities of foreign companies in Indonesia with regard to trading activities
will be limited until 31 December 1977 only.
10
On the Indonesian Nationality Law, see Sudargo Gautama (Gouw Giok Siong), Tafsiran
Undang-undang Kewarganegaraan Republik Indonesia (Jakarta, 1961, 1st Ed, subsequently
revised).
11
FIL, Art 2.
12
During the Hotel Kartika Plaza Arbitration Case (Case No ARB/81/1) before the ICSID
World Bank Arbitration Teams, it was a much debated issue between the parties as to how
much of the equipment and material imported by the investor (eg, airconditioners for the
hotel rooms), registered as new by the foreign investors but only accepted as rebuilt by
the Bank Indonesia (the Indonesian Central Bank), had to be evaluated.


If a Foreign Investment Company (“PMA” or Penanaman Modal Asing
Company) has obtained a profit, which is not distributed as dividends to
the shareholders, it can be used as capital for re-investment in the respective
PMA Company, or used as capital for investment in new companies.13

IV. FACILITIES

There are several facilities and assurances made to foreign investors, including
the following:

(1) tax holidays, variable according to in what region and what field
of industry the investment is realised;14

(2) freedom from import duties on capital goods, equipment and basic
materials needed for the respective enterprise;15

(3) transfer of dividends, which are paid out free after tax profits
and are attributable to foreign-owned shares, in the original
currency of the invested capital at the prevailing exchange rate;16

(4) transfer of funds to pay the costs of employing foreign personnel
in Indonesia17 (according to the Government’s policy, only foreign
personnel with expertise not found in Indonesia are to be allowed
to obtain a work permit);18

(5) remittance of loan interest payable and making principal loan
repayments;19

(6) repatriation of capital arising from the sale of equity to Indonesian
citizens;20

(7) transfer of compensation received in the event of nationalisation;21

13
Cf the new Government Regulation No 20 of 1994 on Share Ownership in Companies
established under Foreign Capital Investments.
14
Cf FIL Art 15(a), paras 1-3 and 5: facilities on corporate tax, dividend tax, corporate tax
on profit which is reinvested in the enterprise concerned and capital stamp duty.
15
FIL, Art 15(a), para 4.
16
FIL, Art 15(a), para 2.
17
FIL, Art 19, para 1.
18
FIL, Art 12.
19
FIL, Art 19, para 1(a).
20
FIL, Art 19, para 1(c).
21


(8) loss carry-forward;22

(9) granting of full authority and freedom under the FIL to determine
the management of the PMA company;23

(10) availability of international arbitration where the compensation
amount is to be determined as a result of nationalisation;24

(11) adherence to the Washington Convention on the Settlement of
Investment Disputes between States and Nationals of Other States
(the Washington Convention), administered by the World Bank
International Centre for the Settlement of Investment Disputes
(ICSID), based on Law No 5 of 1968 pursuant to which Indonesia
joined the Convention. This means that when a case arises between
a foreign investor and the Indonesian Government, the dispute
may be referred to ICSID arbitration in Washington. A concrete
example of such an investment dispute is that caused by the
premature withdrawal of an investment license in the Kartika
Plaza Jakarta Hotel, the Amco vs Indonesia case (No ARB/81/
1). This arbitration case has taken 12 years to conclude.

To operate and manage the investment of foreign capital, the PMA
companies may be operated either independently, or as a joint venture
company with an Indonesian partner. The approval from the Government
to operate the PMA company is valid for thirty years, with the possibility
of extension of the period. Due to the development of the country’s economic
condition, since January 1974, it has been mandatory for all foreign in-
vestments to be undertaken only through joint ventures with Indonesian
partners.
As it is known, the FIL requires that all investments made should take
the legal form of an Indonesian limited liability company, a Perseroan
Terbatas, with its domicile or legal seat within the territory of Indonesia.
Furthermore, it should be observed that it is the Government’s policy that
the Indonesian parties, after a certain period of the companies’ operation,
should be granted a majority of the shareholding.

22
FIL, Art 15, para 2(b).
23
FIL, Art 9.
24
FIL, Art 22.


V. PRESERVATION OF INDONESIAN INTEREST

As mentioned above, the FIL has also as an aim, the preservation and
development of Indonesian interests. The following should be mentioned:

(1) Indonesians should be employed wherever possible;25

(2) training programmes for Indonesian personnel is required;26

(3) transfer of technology should be effected;

(4) companies fully controlled by foreigners may not operate in
important areas which are vital to the daily necessities of the
people, such as in the distribution of electricity and drinking
water.27 Some changes were recently made in regard to PMA
joint ventures, which are allowed to operate in providing elec-
tricity;28

(5) prohibition of foreign investment in industries vital to national
defence, such as the production of firearms and war equipment;29

(6) in the field of mining, including oil and gas, foreign investment
must be in the form of a “work contract” or “kontrak karya”
with the Government (Pertamina – the state oil company) – the
Government has supervisory control over these resources;30

(7) foreign investment permits are limited to 30 years, but there is
a possibility of renewal by the Government.31 Under the Com-
mercial Code, limited liability companies (“PTs”) are incorpo-
rated for 75 years.

(8) a part of the foreign enterprise (PMA) should be transferred to
Indonesian shareholders, by direct sale or sale at the public market.

25
FIL, Art 10.
26
FIL, Art 12.
27
FIL, Art 6.
28
Cf. eg, Government Regulation 1994 No 20, and its implementing regulations.
29
FIL, Art 6, para 2.
30
FIL, Art 8.
31
FIL, Art 18.


This process of “Indonesianisasi” is ever changing, along with
the Government’s policy to make foreign investments more
attractive.32

As mentioned, according to the FIL, the Foreign Investment Company
should take the form of an Indonesian Limited Liability Company, a “Perseroan
Terbatas” (“PT”). It should be incorporated according to the laws of Indonesia
and should have its legal seat in Indonesia.33 The enterprise should be entirely
or for the most part, operated in Indonesia as a separate enterprise unit.
The Indonesian Government shall determine whether an enterprise is entirely
or for the most past operated in Indonesia as a separate enterprise unit.34

VI. INVESTMENT PROTECTION AGREEMENTS

With the aim to render protection to and to promote investments, Indonesia
has signed several multilateral and bilateral agreements. These include:

(1) the Convention establishing the Multilateral Investment Guar-
antee Agency (“MIGA”);35

(2) with the United Kingdom, the Protection of Investment Agree-
ment of 27 April 1976; Presidential Decree No 3 of 1977;

(3) with France, the Agreement on the Encouragement and Protection
of French Investments in Indonesia of 14 June 1973; Presidential
Decree No 10 of 1975;

(4) with Belgium, the Agreement on the Encouragement and Re-
ciprocal Protection of Investments of 15 January 1970, and Protocol;
Presidential Decree No 42 of 1972;

(5) with the Netherlands, the Overeenkomst inzake Economische
Samenwerking and Protocol, signed on 7 July 1968; Presidential

32
See eg, Government Regulation 1994 No 20, and its implementing regulations.
33
FIL, Art 3, para 1.
34
FIL, Art 3, para 2.
35
Apart from Indonesia, members of MIGA include countries in Asia, Africa, South America,
Europe, USA, Canada, Australia, New Zealand and Japan. See also Shihata, ‘IFE, MIGA
and the Standards Applicable to Foreign Investments’ (1986) ICSID Review, Foreign
Investment Law Journal.


Decree No 303 of 1968;

(6) with Norway, the Agreement Concerning the Encouragement and
Reciprocal Protection of Investments of 21 January 1970 and
Protocol; Presidential Decree No 90 of 1968;

(7) with Switzerland, the Agreement Concerning the Encouragement
and Reciprocal Protection of Investments, and Protocol; Presi-
dential Decree No 9 of 1976;

(8) with West Germany, the Agreement Concerning the Encourage-
ment and Reciprocal Protection of Investments of 8 November
1968; Presidential Decree No 7 of 1969;

(9) with South Korea, the Agreement Regarding Economic and
Technical Cooperation and Trade Promotion; Presidential Decree
No 53 of 1971;

(10) with the ASEAN countries, the Agreement for the Promotion
and Protection of Investments; Presidential Decree No 22 of 1988.

There are several basic principles which are common to the above
Investment Agreements concluded between Indonesia and the other
countries mentioned above. These include the following:

(i) The principle of reciprocity and mutual benefit

The parties involved undertake to guarantee that their respective subjects
will obtain “fair and equitable treatment” in connection with their in-
vestments. They will not get a lesser treatment than given to nationals of
other parties. This is the so-called “most favoured nation clause”. With regard
to the possibility of “national treatment”, it is presumed that this should
be made dependent upon the favourable development of Indonesia’s economy.
The same protection will be given in respect of the nationals of other States
as is effected to one’s own nationals. This protection should also not be
less than what has been provided for in the FIL.
In the Agreement with Belgium, it is additionally stipulated that the
protection to Belgian investors will not be less than what is recognised
in international law. There is also a provision in the Agreement with the
German Federal Republic to the effect, that each respective party “shall
grant national treatment within the framework of the present Agreement,
in consideration of the fact that national treatment in like matters is also
granted by the other Contracting Party.” We see here that the “most favoured


nation” clause, the “national treatment” clause, and the principle of reci-
procity are used interactively. This principle of reciprocity and mutual benefit
is consistently used in the above-mentioned bilateral agreements with the
respective States. The Agreement of 1988 between the ASEAN countries
and Indonesia for the protection and promotion of investments contains
similar provisions as mentioned above in the bilateral agreements.

(ii) Protection with regard to nationalisation

The Agreements also mention protection measures for the investors of
the respective States, in case of a nationalisation being carried out. It is
expressly stated that the parties will not undertake measures to deprive
nationals of their investment, directly or indirectly. Compensation should
be “prompt, adequate and effective”.36 This term is expressly used in several
of the above agreements.37 It is further stipulated that the expropriation should
be non-discriminatory.38 Another trend is to provide that “the legality of
any such expropriation shall be subject to review by due process of law.”39
In the FIL, some safeguards in case of nationalisation have been explicitly
mentioned. The Indonesian Government shall not nationalise by way of
directly revoking the property right in a foreign enterprise, or take measures
which curtail the right to administer or to manage the enterprises, except
in so far as it is in conformity with, or by act is declared as, measures
required “for the public interest of the State”.40 In such a case, it is obligatory
to give compensation. The amount and kind of payment should be “approved
by the two parties, in accordance with the effective principles of international

36
Cordel Hull, in Sudargo Gautama (Gouw Giok Siong), Segi-segi Hukum Internasional pada
Nasionalisasi di Indonesia (International Law Aspects of Nationalisation in Indonesia),
(Jakarta, 1960).
37
See the Agreements with France (Art 6, para 1), Switzerland (Art 6, para 1), Norway (Art
IV, para 2), and Denmark (Art IV, para 2). There are similar provisions in the Agreements
with the Netherlands (Art 7), West Germany (Art 3, para 2), South Korea (Art 6), and the
ASEAN countries (Art VI).
38
This issue has been much debated in the context of the past nationalisation of Dutch
enterprises, see Segi-segi Hukum Internasional pada Nasionalisasi di Indonesia, supra, note
36.
39
This requirement of “due process” has also been a matter of conflicting opinion in the ICSID
arbitration case (ARB 81/1/1) regarding the Kartika Plaza Hotel (Amco et al v Indonesia).
The first arbitration team (the Goldman team) used this notion of due process in the proper
sense. The Higgins re-submission team used the term “denial of justice”, while according
to the fourth stage Sompong Sucharitkul team, it meant in fact, as with the Goldman team,
lack of “due process” in the revocation of foreign investment procedure against Amco.
40
FIL, Art 21.


law.”
In case no agreement is reached between the parties regarding the amount,
kind and manner of paying the compensation, arbitration shall take place.
The award shall be binding on the two parties.41 The arbitration tribunal
shall consist of three persons: two respectively chosen by the Government
and the investor, and the third person acting as chairman shall be jointly
elected by the Indonesian Government and the foreign investor.42
It is evident that the provisions for nationalisation of Dutch enterprises
in the sixties was a bad experience which could influence the opinion of
foreign investors.43 Therefore, the FIL stresses the provision of guarantees
with regard to nationalisation and arbitration. On another occasion, the
present writer had expressed his view that the guarantee of “prompt, adequate
and effective compensation”44 (although in practice no longer strictly upheld
by the majority of leading international scholars) has been upheld by the
Indonesian Government in the sphere of creating a favourable climate for
foreign investment flow into the country.45

(iii) The ICSID Convention

Another safeguard for the foreign investor is the Convention for the
Settlement of Investment Disputes between States and Nationals of other
States (ICSID), to which Indonesia is a party. This Convention has become
positive law in Indonesia.
An illustration of the operation of this Convention is the renowned ICSID
arbitration case regarding the Hotel Kartika Plaza in Jakarta.46 The foreign
investors, AMCO Asia, submitted a request for arbitration as their
investment in the hotel, which originally was intended for a period of 30
years, was prematurely withdrawn, after operation for only 9 years. They
claimed compensation of more than US$16 million. In the first stage of

41
42
43
But from Indonesia’s side, seen as a process of “decolonisation” making itself “economically
free” after obtaining “political independence”, supra, note 36.
44
For the difference between these terms, see supra, note 36. On the effect of nationalisation
and the transfer of title, see also M Sornarajah, The Pursuit of Nationalized Property,
(Dordrecht, 1986).
45
See Sudargo Gautama, ‘Perjanjian-perjanjian Internasional Indonesia mengenai Perlindungan
Penanaman Modal (International Agreements of Indonesia concerning Protection of Foreign
Investments)’, in Hukum dan Pembangunan (1991) 3 Law Review of the Law Faculty,
University of Indonesia, Jakarta.
46
24 ILM 365 (1985), (1986) 1 Int’l Arb Rep 601. See also Sudargo Gautama, Indonesia
dan Arbitrase Internasional (Indonesia and International Arbitration), Alumni, (2nd Ed,
1992).


arbitration, the ICSID Arbitration Team chaired by Professor Berthold
Goldman granted the investor a compensation of US$3,200,000 plus interest
as of the day of filing of the arbitration claim on 27 February 1981 (Award
of 29 November 1984). Upon Indonesia’s request in annulment proceedings,
this First Award was annulled “as a whole but with qualifications” by the
ad-hoc ICSID team, chaired by Professor Ignaz Seidl Hohenveldern of
Vienna.47
A re-submission procedure was filed and heard by a Review Tribunal
chaired by Professor Rosalyn Higgins of London. A decision on jurisdiction
was rendered in May 1988, outlining the points to be considered and the
relation between Indonesian law (as law of the host State) and international
law, according to Article 42 para 1 of the ICSID Convention. The issue
was whether international law was “supplemental and corrective” to In-
donesian law. In the words of the ad-hoc Seidl Hohenveldern Annulment
Committee: “Article 42 para 1 of the ICSID Convention authorises an ICSID
tribunal to apply rules of international law only to fill up lacunae in the
applicable domestic law and to assume precedence to international law norms,
where rules of the applicable law are in collision with such norms.”48
The Higgins Tribunal was of another opinion. International law was
regarded as “fully applicable”, and to classify its rule as “only supplemental
and corrective” seemed to be a distinction without a difference. The Tribunal
believed that its task was to test every claim of law in this case “first against
Indonesian law, and then against international law”.
What do we see here? There has been a graduation of difference in
appreciation between the role of Indonesian law and international law. The
two Teams adhered to different opinions. The Seidl Hohenveldern Team
wished to apply “host State law first”, ie, only in case of a lacuna would
it apply international law. The Higgins Team applied international law first,
such law being of “superior value”. The Higgins Tribunal ultimately concluded
that “rather, the issue that must be determined is whether there exists a
generally tainted background that necessarily renders a decision unlawful,
even if substantive grounds may exist for such a decision.” This background

47
(1980) 25 ILM 1991. Cf also the discussion of this annulment decision in David Caron,
‘Reputation and Reality in the ICSID Annulment Process – Understanding the Distinction
between Annulment and Appeal’ (1992) 7 ICSID Review, Foreign Investment Law Journal,
at 21. See also Stephen I Pogany, ‘Economic Development Agreements’ (1992) 7 ICSID
Review, Foreign Investment Law Journal, at 14.
48
Arbitration Award, at para 20.
49
The point at issue was whether the investor had fulfilled its obligation to invest fresh capital
of US$3 million. The Goldman team confirmed that there was a shortage of US$600,000,
which amount was regarded as too small (“not material”) by the team to justify withdrawal
of the investment license, given that the project had been in operation for not less than


includes, but is not limited to, the question of procedural irregularities”.49
The Higgins Tribunal further concluded: “rather, the international law
test is (applicable), whether there has been a denial of justice.”50 It was
because of this accusation of “a denial of justice” and a “generally tainted
background” of the investment license withdrawal,51 that Indonesia felt
obliged to submit another annulment request. Amco, on the other hand
thought it necessary to also file an annulment request, as the Higgins Award
drastically reduced the original compensation amount of the Goldman Team,
ie, from US$3,200,000 plus 6% interest per annum from the date of filing
of the claim (15 January 1981) to US$2,567,966.20 with 6% interest per
annum as from the date of the Award (5 June 1990).
In the “fourth round” of arbitration proceedings, the Tribunal chaired
by Professor Sompong Sucharitkul of Thailand upheld the Higgins Award,
rejecting both Indonesia’s and Amco’s requests for annulment (dated 3
December 1992 in San Francisco). Although this Tribunal found that the
Higgins Team had not used the legal term “denial of justice” as properly
understood in international law, what the Higgins Team really intended to
point out was that the withdrawal procedure of Amco’s license showed
lack of “due process”, as the Goldman team had remarked. However, according
to the Sucharitkul Team, there was no serious departure from the rule of
procedure, and the rule was not fundamental. It is submitted that in order
to uphold ICSID’s role in dispute settlement, the Sucharitkul award has
upheld the Higgins award. Otherwise, the “annulments” could have gone
on and on forever, rendering the ICSID dispute-solving system unworkable.52

VII. THE NEW PT LAW 1995 NO 1

As the legal form to be used for a PMA company is prescribed by the
Indonesian Limited Liability Company Law, we should in this survey
elaborate on the new Indonesian PT Law 1995 No 153 which was introduced

nine years. This exercise by the Goldman team has been regarded as giving a decision ex
aequo et bono, whereas according to the ICSID Convention, Indonesian law as “law of
the host state” should be used.
50
Arbitration Award, supra, note 46, at para 136.
51
Cf the consideration: “it thus is necessary to decide whether the procedural irregularities
and other background factors in this case amounted to a “denial of justice”, that would taint
the decision of BKPM, regardless of whether BKPM might have had substantive grounds
for its action against AMCO, Arbitration Award, para 137.
52
For a recent criticism of the awards seen from the view of less developed nations, see M
Sornarajah, ‘ICSID Involvement in Asian Foreign Investment Disputes: The Amco and
AAPL Cases’, 4 Asian YIL (1994), at 69 ff.
53
SG 1995 No 13, Elucidation in ASG No 3587.


on 7 March 1995 by the President of the Republic of Indonesia. In particular,
the new provisions which are different from the old Commercial Code
provisions on PTs, will be further discussed.
The new PT Law has now become positive law. It came into operation
one year after its promulgation, ie, on 7 March 1996.54 It was the result
of a long procedure and efforts to reform the old provisions concerning
limited liability companies, as contained in Articles 36 to 56 of the Com-
mercial Code.55 These articles had long since been felt to be no longer fitting
into the current world economic structure, which has shown remarkable
development, nationally as well as internationally. The dualism of PTs
according to the Commercial Code and the so-called “Indonesian Company
with Shares” (Indonesische Maatschappij op Aandelen, “IMA”)56 has been
abolished. A new uniform PT law is now in force with UU-PT 1995 No 1.

A. Transitory Provisions

With the application of this new law, the old provisions in articles 36 to
56 and the IMA Ordinance 1939 No 569 will no longer be valid. All PTs
are to be covered by the new PT law, which stipulates that after 3 years
from the promulgation of this new law,57 the Ordinance on IMA will no
longer be valid. The existing IMAs must be converted and its Articles of
Incorporation approved by the Minister of Justice as PTs under the new
law.58
The old PTs which were incorporated and having had its Articles of
Incorporation approved by the Minister of Justice before the new law came
into operation on 7 March 1996, will continue to be valid in so far as they
are not inconsistent with the new law.59 However, Articles of Incorporation
not yet approved by the Minister of Justice at the date when this new law
came into force, must be made in accordance with the provisions of the
new law.60 Within two years after the coming into force of the new law,
ie, on 7 March 1998, all the PTs incorporated and approved under the old
Commercial Code provisions have to be made in accordance with the new
law.61

54
Art 129.
55
SG 1847 No 23.
56
SG 1939 No 569 Juncto 717.
57
Art 28, paras 1-3.
58
Art 126.
59
Art 125, para 1.
60
Art 125, para 2.
61
Art 125, para 3.


B. End of Old Commercial Code Provisions

For almost 150 years, the old Commercial Code PT provisions have been
followed in practice. Now, the validity of these articles will come to an
end and the new PT provisions will replace them.

C. Result of Globalisation Process

The official Elucidation on the new PT Law 1995 No 1 explicitly states
that seen within the framework of the “globalisation” process, the new PT
Law is a must. Indonesia’s economy is interwoven with the world economy.
Indonesia cannot shut off its economy from the rest of the world’s, nor
from the globalisation process. However, the new regulation on PTs should
remain based on the economic principles as set forth in the Constitution
of 1945, ie, the principle of familiarity (“asas kekeluargaan”).
The aims of the nation’s General Principle of State Policy (Garis-garis
Besar Haluan Negara) and of the Second Long Development Plan
(“Pembangunan Jangka Panjang Kedua”) is the creation of human quality,
an Indonesian Society which is progressive, self-efficient in a climate of
welfare, physical, as well as spiritual aspects, and the social life of the
nation and people based on the State philosophy of Pancasila. The lives
of the Indonesian people should be in balance and in line with other people
and society; emphasising man and his natural surroundings, as well as man
with the Almighty God. The PT is regarded as one of the pillars of economic
development based on “asas kekeluargaan” in accordance with democracy
founded on Pancasila and the 1945 Constitution.
The old Commercial Code PT provisions, enacted nearly 150 years ago,
are no longer appropriate for the changed economic situation. A new policy
is needed in all fields connected with the economy, eg, in matters of foreign
currency, world aid, foreign investment, enhanced international cooperation,
the banking system, the capital market etc. This is elaborated upon in the
official Elucidation of the new law.62

D. Features of the New PT Law 1995 No 1

The PT is a legal entity, of which the capital is embodied in shares; the
shares are a collection of capital. Therefore the new law requires that the
whole capital issued should be paid up by the shareholders, in order that
the company can become more effective and succeed in its functional efforts.

62
ASG No 3587, preamble.


Besides, the new law would protect the interests of the shareholder, creditor
and other involved parties, including the interests of the PT itself. This
is important as it turns out in practice that within a PT, conflicts can arise
between the interests of the shareholder and those of the PT, or between
the interests of the minority shareholders and those of the majority
shareholders.
The minority shareholders get some special protection, eg, the right to
call a shareholders meeting ( “Rapat Umum Pemegang Saham” or “RUPS”)
and to request for an investigation into the course of management of the
company after obtaining a Court’s authorisation. In order to avoid unfair
competition caused by the building up of economic strength through monopoly
by a few, the new law imposes certain requirements in cases of merger,
consolidation or acquisition. Similarly, in order to protect the creditor and
third parties, special requirements are made regarding capital lowering,
company purchase of own shares and the dissolution of the PT. Without
diminishing the protection of the minority shareholder just mentioned,
the protection of public interest and the company’s own interests itself are
preserved by clear descriptions and limitations of the tasks, authority and
responsibilities of the company’s organs, ie, the Directors, Commissioners
and the General Shareholders’ Meeting (RUPS).

E. Other Differences Between the Old and New PT Laws

We will further discuss other important differences between the old and
new laws, after giving a short summary of the new law’s systematic framework.
The new Law 1995 No 1 contains 129 articles. It is divided into 12
Chapters, ie:

I. General Provisions (articles 1-6);

II. Incorporation, Articles of Association, Registration and Publi-
cation (articles 7-23);
First part: Incorporation (articles 7-11),
Second part: Articles of Incorporation (articles 12-33);

III. Capital and Shares (articles 24-55);
First part: Capital (articles 24-29),
Second part : Protection of capital and company’s assets (articles
30-33),
Third part: Increase of Capital (articles 34-36),


Fourth part: Decrease of Capital (articles 37-41),
Fifth part: Shares (articles 42-55);

IV. Yearly Report and Use of Profit (articles 56-62);
First part: Yearly Report (articles 56-60),
Second Part: Use of Profit (articles 61-62);

V. General Shareholders Meeting (Rapat Umum Pemegang Saham
– RUPS) (articles 63-78);

VI. Directors and Commissioners (articles 79-101);
First Part: Directors (articles 79-93),
Second Part: Commissioners (articles 94-101);

VII. Merger, Consolidation, Acquisition (articles 102-109);

VIII. Investigation against the company (articles 110-113);

IX. Dissolution of the Company and Liquidation (articles 114-124);

X. Transitory Provisions (articles 125-126);

XI. Other Provisions (article 127);

XII. Concluding Provisions (articles 128-129).

Article 1 gives an authentic interpretation of what is understood by the
terms Perseroan Terbatas (PT), Limited Liability Company, “Organs” of
the Company (the RUPS, Directors and Commissioners), the RUPS (General
Shareholders’ Meeting), Directors (Direksi, managers of the company and
Commissioners, as general controllers and advisers to the Directors), and
Public PT (Perseroan Terbuka), a company of which the shares are publicly
offered in the share market. The Minister concerned is the Minister of Justice.
A PT should be formed by at least two persons as founders,63 (similar
to what is stated in the old Commercial Code provisions), as it is an agreement
between the parties. However, unlike the Commercial Code, the new PT

63
Art 7.


law retains the requirement of a minimum of two persons as shareholders,
even after the PT has been incorporated.64

F. Liability of Directors

A matter which is not so clear is when in fact the company becomes a
legal entity (badan hukum). Article 7 para 6 clearly states that the company
obtains the status of legal entity after the Minister of Justice approves its
Articles of Incorporation. However, article 23 states that as long as the
registration in the Companies Register and the publication in the Additional
State Journal (Tambahan Berita Negara Republik Indonesia) have not yet
been effected, the Directors will be jointly and severally responsible for
all the acts the company has done (“Direksi secara tanggung renteng bertanggung
jawab atas segala perbuatan hukum yang dilakukan perseroan”). What does
this mean? Is this not contrary to what is stated in article 7 para 6, that
the company has become a body corporate (legal entity) after obtaining
the Minister of Justice’s approval on its Articles of Incorporation?

G. Buying Back Own Shares

The company is prohibited from issuing shares to be owned by itself.65
The company is however, in a position to buy back its shares in certain
limited cases, ie, if the shares are paid from the profits of the company
and the total nominal value of the shares owned by the company and its
sister companies is not more than 10 per cent of all the shares issued.66
The RUPS should also approve this transfer and further transfers.67 The
quorum for this RUPS is a minimum of two-thirds of all issued shares,
and approved by at least two-thirds of the votes present.68 The shares bought
back by the company do not have voting rights69 and cannot be used to
fulfil the quorum requirements for an RUPS.
Where an increase of capital is done with the approval of the RUPS,
the additional shares to be issued should first be offered to the other
shareholders pro rata to what they already own, and in the same share
classification.70 If the other shareholders do not make use of this priority
offer within 14 days, the company has to offer them to the employees, before

64
Art 7, para 3.
65
Art 29, para 1.
66
Art 30, para 1(a) and (b).
67
Art 31, para 1.
68
Art 31, para 2.
69
Art 33, para 1.
70
Art 36, para 1.


offering them to other parties.71 An implementing Regulation from the
Government will regulate this matter further.72

H. Decrease of Capital

Decrease of capital is also only possible with approval of the RUPS.73 Within
60 days after this planned decrease is made public via two newspapers and
the Additional State Journal (Tambahan Berita Negara Republik Indonesia),
the creditors may in reasoned writing, raise objections. A copy of the
objections is to be sent to the Minister of Justice.74 Where the company
rejects the creditors’ objections, the latter can bring the matter before the
Court of First Instance within the company’s territory.75 The Minister of
Justice has to approve the decrease of capital.76 The approval will be given
if the following requirements are complied with:

a) no objection from the side of the creditors has been filed;
b) a solution has been reached upon the creditor’s objection; or
c) the creditor’s claim has been decided by the Court with an enforceable
judgment.77

The decrease of capital with Ministerial approval should be registered
in the Register of Companies and published in the Additional State
Journal. 78 The decrease of capital is effected upon each share or all the
shares or parts with legal classification.79

I. Register of Shareholders

The company must maintain a Register of Shareholders.80 In addition, a
special Shareholder Register is to be kept. This Register contains in-
formation about the shares owned by the Directors and Commissioners
in the company concerned and in other companies.81

71
Art 36, para 2.
72
Art 36, para 3(a).
73
Art 37.
74
Art 38, para 1.
75
Art 38, para 3.
76
Art 39, para 1.
77
Art 39, para 2.
78
Art 40.
79
Art 41.
80
Art 43, para 1.
81
Art 43, para 2.


J. Shares Indivisible

The right on shares given to the owners is indivisible.82 If one share becomes
owned by more than one person, the right in the share can only be used
by a representative appointed by the co-owners.83

K. Classification of Shares

It should be noted that the shares could be in one or more classifications.84
Each share in the same classification gives the owner equal rights.85 Where
more than one classification is made, the Articles of Incorporation will
identify one classification as ordinary shares.
The classification of shares can be regulated in the Articles of Incor-
poration as follows:

a) shares with special voting rights, with requirements, limited, or
without voting rights (eg, the shares bought back by the company
as outlined above);
b) shares which within a certain period, can be withdrawn or changed
into another classification;
c) shares which give the owner the right to receive dividends, cumula-
tive or otherwise; and/or
d) shares which give the owner the right of prior receipt over shares
in other classifications, over the remaining dividends and over
the rest of the company’s assets in case of liquidation.86

L. Transfer of Shares

The transfer of shares is stipulated in the Articles of Incorporation.87A special
deed of transfer (notarial or private) is required.88 The transfer is notified
in writing to the company.89 The transfer is noted by the Directors in the

82
Art 45, para 1.
83
Art 45, para 2.
84
Art 46, para 1.
85
Art 46, para 2.
86
Art 46, para 4.
87
Art 48.
88
Art 49, para 1.
89
Art 49, para 2.


Register of Shareholders.90 Bearer shares are transferred by way of handing
over the shares. 91 This is in accordance with the general provisions of
contract law as known in the Civil Code. Transfer of shares in public
companies is to be effected in accordance with the special regulations of
the share market.92
For the transfer of shares, the following limitations can be stipulated
in the company’s Articles of Incorporation:

a) the requirement of prior offer to other shareholders; and/or
b) the requirement to have the prior approval of the company’s Organs.

If the offer is made to parties without the owner’s choice, the company
must guarantee that the seller will receive payment in a reasonable value
and in cash.93 In case of non-fulfilment of this guarantee by the company,
the shareholder may offer his shares to the company’s employees before
offering them to others.94 A special implementing Government Regulation
is to be issued on this matter.95

M. Pledge of Shares

Bearer shares may be pledged as security (“digadaikan”).96 Shares in name
can only be pledged if this is provided for in the Articles of Incorporation.97

N. Share is a Movable

A share is qualified as a movable thing (“benda bergerak”).98

O. Financial Accounting Standard/ Standard Akuntansi Keuangan

Article 58 of the new law is important for accounting in Indonesia. “Annual
financial statements” (“perhitungan tahunan”) should be drawn up according

90
Art 49, para 3.
91
Art 49, para 4.
92
Art 49, para 5.
93
Art 51, para 1.
94
Art 51, para 2.
95
Art 51, para 5.
96
Art 53, para 1.
97
Art 53, para 2.
98
Art 54, para 1.


to the “Standard Akuntansi Keuangan” (“SAK”) or the Financial Accounting
Standard.
The new PT Law provisions, concerning the RUPS, Directors and
Commissioners have been elaborated above in the course of our comparison
between the old and new PT Laws.

P. Merger, Consolidation and Acquisition

Another topic which is wholly new and not regulated at all in the old
Commercial Code provisions is Chapter VII concerning “Merger, Consoli-
dation and Acquisition”. Articles 102-108 regulate “Statutory Merger, Statutory
Consolidation and Stock Acquisition”. According to article 109, the matter
will be further regulated in an implementing Government Regulation. It
should be noted that in general, what is regulated in Chapter VII follows
closely the situation in the United States of America, where the problems
of business combinations had been raised almost a century ago.
A company can merge, becoming one with another company which is
already existing, or be united with another company to form a new company.99
For this purpose, the Directors of the companies who intend to carry out
the statutory merger and statutory consolidation must prepare a plan for
the merger, consolidation or acquisition. All companies involved must
make the plan together, so that the problem of “unfriendly take-overs” will
be avoided. Thus, the power of big companies over smaller companies has
been curtailed.
The plan should contain several relevant matters, such as the explanation
why the Directors of the respective companies intend to carry out the merger
or consolidation. The plan should also lay out its requirements, the procedure
for the conversion of the shares, the scheme of changes on the Articles
of Incorporation in case of a merger, or the plan for the Articles of In-
corporation of the new company in case of a consolidation.100 The RUPS
of each company involved should approve the plan.101 The minimum quorum
for the respective RUPS is three-quarters of all shares with voting rights
and approved by a minimum of three-quarters of the votes cast.102 Thus,
only serious intentions backed up by a majority of shareholders are con-
sidered.

99
Art 102, para 1.
100
Art 102, para 2.
101
Art 102, para 3.
102
Art 76.


Acquisition can be carried out by a body corporate or an individual.103
The acquisition can be effected by taking over all or a substantial part of
the shares so that control over the company will be transferred.104
In the context of merger, consolidation and acquisition, the following
should be noted: the interests of the company, the minority shareholder
and the employees. Also to be taken into consideration are the interests
of society and of fair competition.105 Monopoly is to be constrained. The
minority shareholder is not to be diminished in his right to sell his shares
for an equitable price.106
The plan of the RUPS to carry out a merger, consolidation or acquisition
should be published in at least two newspapers.107 The issue of merger,
consolidation or acquisition will be further regulated in a Government
Regulation.108

Q. Implementing Regulations Still Required

As we have seen, a number of Government Regulations have still to be
issued to implement the new PT Law of 1995 No 1. The new law itself
contains only the basic provisions. Many implementing regulations in the
form of Government Regulations are still needed in order to have the new
Law on PTs realised in practice.109
Meanwhile, the Minister of Justice has, on 11 March 1996, issued
implementing Regulations on the procedure to file a request to obtain
approval of the PT’s Articles of Association,110 the amendments to the

103
Art 103, para 1.
104
Art 103, para 2.
105
Art 104, para 1.
106
Art 104, para 2.
107
Art 105.
108
Art 109.
109
For a more detailed discussion of the new PT Law of 1995 and the Foreign Investment
Law, see Sudargo Gautama, Komentar Atas Undang-undang Perseroan Terbatas (baru)
tahun 1995 No 1 – Perbandingan dengan Peraturan Lama (Commentary on the Law of
1995 No 1 concerning Limited Liability Companies – A Comparison with the Old Regulations),
(Bandung: Citra Aditya Bakti Publishers, 1995).
110
Decree No M.01-PR.08.01 of 1996.


Articles of Association, 111 the procedure of submitting a Report regarding
the Amendment to the Articles of Association,112 and Standard Model I,
II and III for the Deed of Incorporation drawn up by the Notary under
the new PT Law of 1995 No 1.

PROF MR DR SUDARGO GAUTAMA*

111
112
* Professor, Faculty of Law, University of Indonesia; Military Law School; Pajajaran State
University, Bandung; Visiting Professor, Faculty of Law, National University of Singapore.

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