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