Yogi Sudrajat Marsono is a partner in the competition division at Assegaf Hamzah & Partners and head of the real property practice. One of his merger notifications was the Asian-Mena Counsel’s deal of the year 2014: the acquisition of PT Axis Telekom Indonesia by PT XL Axiata Tbk from Saudi Telecom Company. He performed two competition audits for PT Holcim Indonesia Tbk and provided a wealth of competition advice for, among others, the aviation, investment and cement sectors.
Vovo Iswanto is of counsel at Assegaf Hamzah & Partners. He has more than 10 years’ experience advising various industries from shipping liners to online companies, consumer goods to electricity, aviation to oil and gas to broadcasting. He was the co-founder of Rizkiyana & Iswanto before joining Assegaf Hamzah & Partners. Some of his blue-chip clients are Yamaha, Unilever, Airbus ProSky, Nokia and Aramco Overseas Company BV. He co-authored Competition Law in Indonesia and has carried out competition audits for the flat glass, cement and fast-moving consumer goods sectors.
Farid F Nasution is a senior associate at Assegaf Hamzah & Partners. His solid expertise in competition is grounded in seven years’ experience working directly for the Indonesian Competition Commission. During his time there, Farid began as an investigator handling landmark cases and rose to become the head of substantive review at the KPPU Merger Directorate, leading the drafting of the implementing regulation on merger notification obligations and the KPPU’s first Guidelines on Merger Control. He has deep experience in a range of sectors, including e-commerce, telecommunication, pharmaceutical, automotive and public procurement.
GTDT: What have been the key developments in the past year or so in merger control in your jurisdiction?
Yogi Sudrajat Marsono, Vovo Iswanto and Farid F Nasution: Publicly available data from the Indonesian Competition Commission (KPPU), which has the authority to enforce Law No. 5 of 1999 on the Prohibition of Monopoly and Unfair Business Competition Practices (Law No. 5/1999), reveals that there was a striking increase of 166.65 per cent in domestic transactions, from 21 notified transactions in 2016 to 56 in 2017, 13 of which were domestic companies targeted by offshore companies. There were 37 offshore transactions notified to the KPPU, which is a decrease of 15.91 per cent from 2016.
It seems that companies have become more aware of the obligation to notify certain transactions to the KPPU as a total of four transactions were notified in 2017 compared to one in 2016. Therefore, in total the KPPU received 97 filings, 93 of which were submitted as post-transaction notifications while the remaining four were submitted as pre-closing consultations. The KPPU exempted 22 of the submitted transactions as it deemed that they did not satisfy the requirements. Only four opinions are accessible to the public on the KPPU’s website, although we understand that more opinions have been issued.
The most active sectors for notifying transactions to the KPPU in the past year were agriculture, property, shipping, technology, mining, automotive, oil and gas, and tobacco. There was also a digital platform-related transaction that was submitted to the KPPU: GP Network Asia/KUDO Digital Solutions. Although the rise in the number of notified transactions is promising, it presents a challenge as the KPPU is trying to become more efficient in handling each transaction but is faced with limited resources.
However, the aforementioned figures do not reflect the M&A landscape in Indonesia as the current merger control regime only covers share-based transactions (or the equivalent, such as capital interest or membership interest), and only certain joint ventures that meet statutory thresholds of, 5 trillion rupiahs of turnover or 2.5 trillion rupiahs of assets.
As more and more companies wish to consolidate their resources, the KPPU uses its internal monitoring system to find high-profile transactions, both domestic and foreign, particularly those that are publicly announced or receive wide media coverage. The KPPU does not focus on any specific industries, but on individual transactions, which is the approach it has favoured in recent years. When the KPPU becomes aware of a particular transaction, it sends a letter to the parties to remind them that there is a legal obligation for them to notify that transaction –otherwise, the parties may be liable to pay an administrative fine of 1 billion rupiahs for every day that passes without notification, with a maximum of 25 billion rupiahs imposed for each transaction. The KPPU expects parties to respond to the letter at the first available opportunity.
Some of the notable foreign-to-foreign transactions during 2017 were Technip SA/TechnipFMC Plc, Nokia Solutions and Networks/Comptel, SMBC/Brees, BASF/Rockwood, Asahi Glass/Vinythai Public Company, Nippon Steel & Sumitomo Metal Corporation/Nisshin Steel, Hitachi Construction/Bradken Ltd, Sojitz/Solvadis, Hitachi/Sullair, KOG Investment/Aalst Chocolate and Schneider Electric/Asco Power.
GTDT: What lessons can be learned from recent cases to help merger parties manage the review process and allay authority concerns at an early stage?
YSM, VI & FFN: We understand that to meet their objectives, businesses may prefer a certain scheme of transaction over others, for example transactions that entail negative control by minority shareholders instead of passive investment; or the acquisition of an existing shell company to be jointly controlled by two or more parties rather than creating a greenfield joint venture. Each scheme of transaction will be assessed by the KPPU to determine whether it triggers the notification obligation. The scheme of transaction chosen by the parties is a decisive factor in whether there is a change of control or who shall be liable to notify the transaction to the KPPU. Moreover, the scheme assessment can determine whose assets and turnover that should be included in the calculation of the statutory thresholds as if certain subsidiary or ultimate subsidiary companies or parent or ultimate parent companies are wrongly excluded from the calculation it will mean the assets owned or the turnover in Indonesia are misrepresented, which will in turn affect the notification obligation.
Another critical issue that businesses need to address relates to control. For example, whether the acquirer has a minority interest but decisive influence over commercial terms, directors or business plans of the target.
The current merger control rules do not allow for a simplified procedure. Therefore, once a transaction meets the criteria of change of control, statutory thresholds, share transfer between or among non-affiliates of the parent company, direct impact on the Indonesian market regardless of the transaction value, combined market share and sales turnover, then it must be notified to the KPPU within 30 days of its effective date.
According to the merger control rules, the KPPU must issue its opinion on the transaction within 90 working days of issuing a receipt confirming the completeness of data and information. However, the rules are silent on how long the KPPU should take to determine whether the information, etc, is complete as it depends on the complexity of the transaction and the sufficiency of the information provided, such as data for the relevant markets that may be affected. The review can take six months or longer, although there has been an improvement in the length of time taken to issue an opinion in certain transactions. That being said, the KPPU appears to have some transactions from 2016 that are still pending.
The KPPU has the authority to summon any third party that it considers relevant to assist it in reviewing the transaction, such as suppliers, customers, distributors or even competitors. It then cross-checks this information with the data and information provided to it by the transacting party, which enables it to accurately assess the markets that may be affected. During the notification process, the KPPU usually requests additional information or data from the notifying party, in particular related to domestic market data. The authority usually also provides an opportunity for the notifying party to present the details of the transaction, such as the fulfilment of notification criteria and market conditions in Indonesia.
Moreover, the KPPU seems to be aware of its shortfall in resources when it comes to assessing transaction, therefore, some time after the notification is submitted, it usually issues a letter to the notifying party, addressed to its council, requesting it to submit a summary of the notification, which has the objective of summarising all the relevant facts (which have usually been provided to the KPPU in the notification bundle) needed by the KPPU to assess the transaction. The submission of the summary is not compulsory, but it helps the KPPU to expedite the review process. There is no deadline for submission of the summary.
GTDT: What do recent cases tell us about the enforcement priorities of the authorities in your jurisdiction?
YSM, VI & FFN: The KPPU is an independent body, free from any political affiliations. Further, as mentioned before, the KPPU does not focus on a specific industry or set of industries. Its M&A monitoring system is used to find high-profile transactions and those with public exposure. However, as a golden rule, the KPPU is interested in transactions involving overlapping relevant markets, in particular highly concentrated markets, or vertically integrated markets with one or more parties having a dominant position in any level of production.
Businesses should take heed of the following cases in which the parties failed to notify the KPPU: the acquisition of PT Citra Asri Property by PT Plaza Indonesia Realty, Tbk and the acquisition of PT Mutiara Mitra Bersama by PT Nirvana Property. The former was notified to the KPPU 345 days after the expiry of the 30-day period and the latter 161 days after. Plaza Indonesia/Citra Asri sets the record of the longest notification delay to date, which resulted in a fine of 1 billion rupiahs. The same fine has been imposed on Nirvana Property. The merger control rules strictly state that the maximum daily fine is 1 billion rupiahs, however the total maximum of 25 billion rupiahs has never been imposed.
The two cases mentioned above demonstrate the importance of making sure a transaction is notified to the KPPU within the 30-day time frame, and that there is no expiration period for any alleged violation of Law No. 5/1999. It is therefore important for businesses, in particular those that are high-profile or subject to media scrutiny.
GTDT: Have there been any developments in the kinds of evidence that the authorities in your jurisdiction review in assessing mergers?
YSM, VI & FFN: In each notification, the KPPU expects to receive the necessary supporting documents, which include the articles of association, financial statements, shareholding composition, control issues and documents that indicate the completion of the transaction. Furthermore, like other competition agencies, the KPPU relies heavily on economic assessment, in particular for the calculation of the Herfindahl-Hirschman Index (HHI) delta before and after the transaction. Therefore, it expects the notifying parties to provide an accurate and complete explanation of the transaction, industry characteristics, the competition profile of the potentially affected relevant markets, and the market data.
In concentrated markets, the KPPU may ask the notifying parties to provide it with expert economic evidence on, among other things, the price elasticity of demand of the potentially affected relevant markets and calculation of efficiency defence that might arise from the transaction. The KPPU has applied this in the Holcim/Lafarge transaction as the delta HHI prior and post-transaction exceeded 150, and requested that price elasticity of demand be assessed from all angles.
The KPPU also pays particular attention to the calculation of efficiency that might be attained through the transaction. For example, in the Aisin Seiki/Shiroki Corporation transaction, the KPPU used quantitative analysis to calculate the economic efficiencies gained from the transaction. It concluded that the price of the affected product would decrease and that the efficiencies level of Aisin Seiki group and Shiroki Group would increase.
In addition, as previously mentioned, the KPPU can also ask third parties to provide information if it is deemed necessary.
GTDT: Talk us through any notable deals that have been prohibited, cleared subject to conditions or referred for in-depth review in the past year.
YSM, VI & FFN: The KPPU can issue opinions and has the authority to implement behavioural and structural remedies, although to date it has never implemented a structural remedy.
The KPPU required behavioural remedies in the following transactions: Nestlé/Wyeth, through a report of three years of monthly sales value and volume of formula milk for infants up to six months old and above one year; XL/Axiata, through three years of quarterly reports on the development of the market, products and tariffs and for the merged entity to commit to providing competitive telecommunications tariffs; Koridor Usaha Makmur/Medika Sarana, through three years of efficiency reports and financial report submissions to the KPPU; and Cargill/Format, through two years of reports of product selling activity to Indonesian customers.
GTDT: Do you expect enforcement policy or the merger control rules to change in the near future? If so, what do you predict will be the impact on business?
YSM, VI & FFN: In the current process of amending the Indonesian competition law, the KPPU is still trying to change the mandatory post-transaction notification to a mandatory pre-transaction notification. It means that every transaction that qualifies for notification must obtain the KPPU’s clearance prior to closing. The current parliament proposal is that the KPPU must issue its clearance within 25 working days. This time frame and the mandatory pre-merger notification regime will be a great challenge for the KPPU. There has been a lot of discussion between the parliament, government and all stakeholders regarding the proposed timeline.
In contrast to the requirement under the current merger rules, the draft competition law requires asset-based transactions as well as joint ventures to obtain clearance from the KPPU prior to closing. However, no details have been released on the criteria for a transaction that qualifies for notification and must obtain clearance from the KPPU or on whether a simplified procedure will be introduced. It is expected that such details will be provided in the implementing regulation.
The Inside Track
What are the most important skills and qualities needed by an adviser in this area?
In assessing a transaction, the KPPU will rely on the nature of the related industry, the economic assessment of the potential impact on the relevant markets, and the legal aspect.
Therefore, in addition to having legal expertise, the client will be greatly assisted if the adviser has a solid understanding of competition economics so that the client can present the KPPU with arguments on the market definition, calculation of the market share, concentration ratio pre- and post-transaction, assessment on the entry barrier, assessment of impact, or even proposal of remedies in the transaction. The adviser must also possess the ability to quickly familiarise himself or herself with the industry in question, in particular when preparing the required documents for the KPPU, and assist the client in explaining the industry or sector to the KPPU during a clarification meeting.
What are the key things for the parties and their advisers to get right for the review process to go smoothly?
The parties need to ensure that their advisers know and understand all the details of the transaction, such as the scheme and sequence of the transaction, pre- and post-transaction shareholding composition, issues on control (both positive and negative), the decision-making on reserved matters, whether the reserved matters shall also include a commercial decision and a daily operational management decision, group organisational structure explaining the subsidiary up to its ultimate subsidiaries and parent up to the ultimate parent company, and any affiliates.
Even though transactions in certain sectors will have a global reach, the KPPU will still often demand that market data and assessment be limited to the Indonesian market. In these cases, it is best to provide the company’s forecast in the domestic sphere when explaining the transaction methodology.
What were the most interesting or challenging cases you have dealt with in the past year?
We are unable to comment on specific cases, however every transaction is different and can pose a variety of challenges. The change of control issue, either between transacting parties or from parent to subsidiary, is the most heavily discussed between client and adviser. This is because there is no official view of the KPPU regarding, among other things, negative control by minority shareholders. Owing to the absence of regulation, a conservative approach is always advised.
Yogi Sudrajat Marsono, Vovo Iswanto and Farid F Nasution
Assegaf Hamzah & Partners