Several weeks ago, the Times of Israel published a headline stating that around 80 percent of new Israeli start-ups were opting to incorporate in the United States. One entrepreneur explained, “It mainly revolves around corruption and uncertainty of what system there is to protect me as a business, from a tax perspective, from a legal perspective or an intellectual property perspective”.
Similarly, in 2020, HukumOnline published the following headline: Many Indonesian start-ups are moving to Singapore. Ahmad Fikri Assegaf, a top-tier corporate lawyer, noted that two of the reasons for such exoduses are contract enforcement and easy capital access.
This start-up exodus should serve as a wake-up call for Indonesia that something is wrong with the Indonesian start-up legal landscape. It should also serve as a wake-up call for the Israeli government because it signals a capital flight, which hinders economic development.
Casual empiricism suggests that capital flight is caused by multiple factors instead of just one, but common sense dictates that it is better safe than sorry. Tackling the issue from every angle might therefore be a good prescription for Indonesia. Viewpoint Every Thursday Whether you’re looking to broaden your horizons or stay informed on the latest developments, “Viewpoint” is the perfect source for anyone seeking to engage with the issues that matter most.
One legal factor that might be easily forgotten is evident in the weaknesses of Indonesian corporate law, namely Law No. 40/2007 on Company, which has been amended from time to time (Indonesian Company Law). After the Indonesian start-up exodus began in 2020, The Indonesia Company Law was amended through Law No. 11/2020 on Job Creation, which was then revoked by Government Regulation in Lieu of Law No. 2/2022 on Job Creation. But the question remains, has the 2022 Job Creation Law effectively addressed the weaknesses of the Indonesian Company Law?
Unfortunately, the answer is no, at least from my perspective as an Indonesian lawyer. There are still several weaknesses that have not been addressed.
First, protection for minority shareholders under the Indonesian Company Law is excessive. Minority protection is important, but so is the ability to make business decisions quickly, especially regarding start-up equity funding. Start-up equity funding through the issuance of new shares to venture capital firms is integral to start-up development. Regrettably, minority shareholders can prolong start-ups’ corporate actions during equity funding.
The Indonesian Company Law requires start-ups to get approval for all equity funding. Such approval is obtained through a general shareholders meeting, which is required under Article 82 of Company Law, to deliver a 14-day shareholder summons prior to the day of the general meeting, or alternatively, unanimous shareholder written consent under Article 91 of the Company Law.
Companies generally prefer the quick shareholder written consent option because there is no requirement for a 14-day shareholder summons. Unfortunately, it needs to be unanimous.
What if a shareholder with 0.1 percent ownership in the start-up does not agree with the new equity funding?
There could be many reasons for the disagreement: a dispute among shareholders, or differences in management styles that lead existing shareholders not to agree with the new investor. Indeed, the start-up could still hold a general shareholder meeting, but this would take at least two weeks and time is precious for start-ups whose survival depends on equity funding.
The irony is that whether through a general meeting or unanimous shareholder written consent, the minority shareholders will be outvoted.
The Singapore Companies Act gives an example of better legislation as it does not require a written resolution to be agreed upon by all shareholders, but only by a majority, or a greater majority if the company’s constitution requires.
Another weakness in the company law is that Indonesia has implemented a mandatory preemptive right provision that is not in line with start-up market standards. A preemptive right is the right of a company’s existing shareholders to purchase newly issued shares before a third-party (non-shareholder).
We can see the mandatory nature from the wording of Article 43 of the Indonesian Company Law. A preemptive right is beneficial for minority shareholders to protect them from dilution, but it is not necessary for this right to be made mandatory under the law. A preemptive right could be agreed upon based on the freedom of contracts among shareholders.
If we refer to market standard agreements among investors, such as the National Venture Capital Association (NVCA) documents used by Silicon Valley players or the Venture Capital Investment Model Agreements (VIMA) used for Singapore companies, we can see that these documents permit new shares to be offered first to certain shareholders (it does not have to be all shareholders).
This arrangement is beneficial to venture capital firms that hold a majority stake in a company, helping them maintain their status in the company. Unfortunately, this beneficial arrangement conflicts with the Indonesian Company Law, which requires that new shares be offered to all shareholders on a pro rata basis.
Article 43 of the Indonesian Company Law does not represent the market standard and is not friendly to venture capital firms wishing to invest. Therefore, logic dictates that venture capital companies could ask Indonesian start-ups to move to more business-friendly environments.
These weaknesses show us the shortcomings of the Indonesian Company Law when compared to the Singapore Companies Act, and the problems go beyond corporate law. Venture capital firms are attracted to Singapore because there is no capital gains tax and contract enforcement is more robust, which gives the firms reason to push Indonesian start-ups to move to Singapore.
Regrettably, many Indonesian scholars are not aware of the necessity to alter the Indonesian Company Law, not even in the 2016 and 2018 academic papers on Indonesian Company Law written by scholars from the best universities in Indonesia and prepared by the Law and Human Rights Ministry.
Therefore, 15 years after its introduction in 2007, the Indonesian Company Law has not seen much improvement. Perhaps what needs to be changed is not only the law itself, but also the mindset of Indonesian scholars, who have failed to notice these weaknesses for more than a decade as the country is outcompeted by neighboring Singapore.
* The writer, a graduate from New York University and the University of Indonesia, is head of legal at a start-up and a lecturer at Jentera Law School. The views expressed are his own.
Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.
Tanggal: 11 September 2023
Penulis: Rizky Raditya Lumempouw
