Monday, March 24, 2008

Corporate Shareholder Litigation in Indonesian Company Law

I. Corporate Litigation in Indonesian Law

It is acknowledged that in Indonesian Company Law, also taking into account its rather new corporate statute which is the Regulation No. 40 Year 2007 as a sucessor of the old company law provisions stipulated in the KUHD, corporate litigation as a method of stengthening the shareholders position and to correct wrongdoing also vindicating liability of the company directors and the company itself are rarely used.

But in regard of the important use and pragmatic solution provided by the derivative action as one of the important method of corporate governance, Indonesian legislators has also inserted provisions regulating the institution of the derivative action. While this being of corporate litigation have been given life through the New Company Law provisions, other methods such we will find in the american system namely through class action and direct action, is still not clearly regulated in Indonesian Law, in other words there is no prohibition of pursuing director or company liability through class action and direct actions existed in Indonesian legislation nor there is an explicit provision regulating in detail the litigation method. Hereafter in a paragraph excerpted from a book by Munir Fuady, in which he expresses his concerns regarding the need for a stronger basis for other corporate litigation proceedings outside of the derivative action method:

In a company, the derivative action model should have the same (legal) standing with other company litigation methods, such as the shareholders direct suit or the class action suit which is also instituted by the shareholders. Only that, in Indonesian Company Law led by Regulation No, 1 Year 1995, those corporate litigation method have not yet been fully accomodated.[1]

This by no means have rejected the concept of class action and direct action in Indonesian company law based litigation, but merely stating that its application is still rare and therefore in need of a stronger legal basis for vindication of director and commisioners liability.

II. The Derivative Action as an Ex-Post Strategy for Minority Shareholders

The New Company Law as also it predecessor Regulation No.1 year 1995 contained provisions regulating the institution of derivative actions against director(s) and commisioners or the supervising board of the company.

While it has not been regulated exhaustively as with the procedural and substantive law of corporate litigation as in the United States, nonetheless the provisions stipulated in the new company law is sufficiently regarded to be a strong basis in pursuing liability through derivative litigation.

Preceeding regimes of Regulation No.1 Year 1995 and The New Company Law such as the KUHD basically does not acknowledge the principles of minority shareholder protection against wrongdoing by company organs through litigation as have been provided by the former. This condition is in line with the principles of the Persona Standi in Judicio of the old company law (and also in the New Company Law), that the rights to act as representative of the company, can only be done through the company’s organs. The minority shareholders is not allowed to pursue a derivative action[2]. The legal standing or Persona Standi in Judicio of directors to act as representative of the company is stipulated in article 98 of the New Company Law where it is stated that Director(s) represent the Company either inside or outside of court[3], but the number of directors authorized to represent the company somehow vary from company to company on the basis of each specific company bylaws.

In light of these condition and circumstances of barriers to representation of the company by minority shareholders, legislators has created a concept of what is known as a derivative right formed in article 97 (6) and 115 (6) in the New Company Law which is according to Chatamarrasjid Ais in his book, a derivative right according to Indonesian law is a right given or owned by minority shareholders so that he can take specific actions in safeguarding or to represent the company against actions taken by other organs of the company if the company incurs damages.”[4]

So by now we have come to the conclusion that through corporate litigation particularly derivative action, Indonesian company law gives minority shareholders a vehicle to act as representative of the company which can be viewed as an abnormality, where this duty or obligation is normally to be bore by the company’s director by virtue of article 98 of the New Company Law and subject to the articles of incorporation also bylaws of the company. “Why is this derivative action more characteristic to minority shareholders and not majority shareholders?” one might ask, because as for the the majority shareholders their representation on the company’s board and by virtue of their majority ownership of company shares will eventually lead to a dominaton of the general meeting of shareholders, it is viewed that their (majority shareholder) protection has been sufficiently given, while this is not the case with minority shareholders, where often they (minority shareholders) do not have much say in the general meeting shareholders which can lead to abuse of their rights.

But usage of this method is not without boundaries. Inline with the principle of the proper plaintiff, as also can be found in other countries regulating derivative litigations, instituting a derivative action under the New Company Law does also require a shareholder plaintiff to cross a certain threshold, by which a minority shareholder after the fulfillment of the requirement can be regarded as a proper plaintiff thus authorized to also continue pursuing the derivative action against the company directors or a member of the board of commisioner liable for wrongdoing. The article containing provisions as the basis for minority shareholder to institute a derivative action is as the following:

(6) Acting on behalf of the of the company, a shareholder representing at least 1/10 (one tenth) of the whole amount of shares with voting rights can submit to sue through the district court against the company director in which because wrongdoing or negligence incurred damages to the company.[5]

But this derivative vehicle threshold does also pose a problem, that is in this provision the wording refers to a single substantial substantial shareholder who is able to exercise at least 10% of the issued shares with valid voting rights[6]. Thus a pooling of shareholder stakes to reach the 1/10 ownership threshold is not an available choice, this will especially cause barriers for the minority shareholders in a public company eager to use the derivative vehicle, where a dispersion of share ownership is so apparent that it is impossible for a minority to sue by the fact that the minority shareholder is not legible to sue using the derivatie vehicle because his ownership does not cross the 1/10 threshold.

Further, similar comparable wording in other articles were brought in comparison for the purpose of analyzing the relevancy of the argument that it is not possible to aggregate votes from more than one shareholder in order to reach the 1/10 threshold. Benny S. Tabalujan compares this article concerning derivative litigation with two provisions of Regulation No.1 year 1995 which is Article 66 (2) (now article 79 (2) (a) in the New Company Law) and article 117 (1) (b) (this article or a similar provision is now non existent in the New Company Law, where Regulation No.1 year 1995 stipulated that a shareholder could and should submit a request to the district court for the dissolving of a company, where in the New Company Law this request for dissolvance of the company can be made through the general meeting of shareholders.) hereunder is his statement:

(if it is intended that this right be extended to one or more shareholders who, together in aggregate, exercise at least 10% of the issued shares with valid voting rights, then a different wording – similar to that used in Arts 66 (2) or 117 (1)(b) UUPT – would have been used instead.)[7]

To clarify the statement above, the articles mentioned (art 79 (2) (a)) used as a comparison to the derivative action provision uses the wording “1 (one) or more shareholder which together represent 1/10 (one tenth) or more than the whole amount of shares with voting rights[8]”, so this means that the legislator of the New Company Law as also in Regulatin No.1 year 1995 clearly intended that pooling of shareholders to reach the threshold is not possible, thus using class action in combination with derivative litigation according to the New Company Law is not applicable.

Similar provision regarding derivative litigation which applies mutatis mutandis with the provision in article 97 (6) of the New Company Law can also be enforced against individual members of the board of commisioners liable for wrongdoing or negligence causing damages to the company. This in its substance is contradictive with the provisions stipulated in article 108 (3) regulating the actions taken by the Board of Commisioner, there it is specified that the Board of Commisioner which consisted of more than 1 (one) one more member is a council and a single member of the Board of Commisioner can not act on its own, whereas it has to act based on the decision of the Board of Commisioner as a whole.[9] Thereby in this sense it is more appropriate that the derivative claims under article 97 (6) of the New Company Law were to be enforced against the board of commisioners as a whole not against individual member of the board, because by virtue of article 108 (3) it implies that each member of the board is jointly and severally liable for the the wrongdoing and negligence done by each of its member as it is obligated to always act as a whole board and not as individual commisioners.



[1] Munir Fuady, SH, LL.M, Doktrin-Doktrin Modern Dalam Corporate Law & Eksistensinya Dalam Hukum Indonesia, (Bandung: PT. Citra Aditya Bakti, 2002), P. 73.

[2] Felix O. Soebagjo. 1995. “Merjer, Akuisisi dan Konsolidasi Ditinjau Dari Sudut Undang-undang Nomor 1 tahun 1995 dan Peraturan Perundang-undangan di Bidang Pasar Modal”. This paper is presented on the Menyongsong Berlakunya Undang-Undang Nomor 1 Tahun 1995 Tentang Perseroan Terbatas Dan Implikasinya Terhadap Perkembangan Dunia Usaha Di Indonesia Seminar. Yogyakarta: Universitas Gadjah Mada.

[3] Regulation No. 40 Year 2007 concerning Limited Liability Company, article 98 (1)

[4] Prof. Dr. Chatamarrasjid Ais, S.H., M.H., Penerobosan Cadar Perseroan dan Soal-Soal Aktual Hukum Perusahaan,(Bandung: PT. Citra Aditya Bakti, 2004), P. 31

[5] Regulation No. 40 Year 2007 concerning Limited Liability Company, article 97 (6)

[6] Benny S. Tabalujan, Indonesian Company Law A Translation and Commentary, (Singapore: Sweet & Maxwell Asia, 1997), P. 193

[7] Id, at P. 193

[8] Regulation No. 40 Year 2007 concerning Limited Liability Company, article 79 (2) a

[9] Regulation No. 40 Year 2007 concerning Limited Liability Company, article 108 (4)