Government to Approve Corporate Actions in the Indonesian Energy Sector

Jakarta

By Ira A. Eddymurthy and Fransiscus Rodyanto

The Indonesian Minister of Energy and Mineral Resources (“MEMR”) has issued MEMR Regulation No. 42 of 2017 regarding Supervision of Business Activities in the Energy and Mineral Resources Sector (“MEMR 42/2017″). The stated aim of MEMR 42/2017, which took effect on July 17, 2017, is to improve the supervision of business entities in the energy and mineral resources sector in part by closing regulatory gaps.

In general, MEMR 42/2017 regulates (i) the requirements to notify or obtain prior approval from the MEMR for the transfer of participating interest of upstream oil and gas contractors; (ii) the transfer of shares and change of board of directors (“BOD”) and/or board of commissioners (“BOC”) of upstream oil and gas contractors, downstream oil and gas business entities, business entities holding electricity supply business licenses, business entities holding (a) mining business license, (b) special operation production mining business license for processing and/or refinery issued by the MEMR, (c) special mining business license, (d) contract of works, or (e) coal contract of works; and (iii) the mechanism for the procurement of biofuels in the form of biodiesel composed of fatty acid methyl ester (FAME).

This article discusses the provisions under MEMR 42/2017 regarding notification to be made or prior approval to be obtained with respect to the transfer of participating interest, transfer of shares, and change of BOD and BOC.

Transfer of Participating Interest

MEMR 42/2017 regulates that the transfer of any and all participating interest of upstream oil and gas contractors requires prior approval from the MEMR, based on the consideration from the Head of the Special Task Force for Upstream Oil and Gas Business Activities (“SKK Migas”).

MEMR 42/2017 prohibits any transfer of majority participating interest to a non-affiliate within the first three years of the exploration stage.

A list of the required documents is stipulated in MEMR 42/2017.

Transfer of Shares

In general, MEMR approval must be obtained prior to any transfer of shares in an upstream oil and gas contractor, downstream oil and gas business entity, a business entity holding an electricity supply business license, and a business entity holding a (a) mining business license, (b) special operation production mining business license for processing and/or refinery issued by the MEMR, (c) special mining business license, (d) contract of works, or (e) coal contract of works, as well as business entities holding a geothermal business license.

For upstream oil and gas contractors, the requirement to obtain prior approval from the MEMR only applies if the transfer of shares results in a direct change of control; such transfer of shares can only be made to an affiliate. Any transfer of shares resulting in indirect change of control shall only be reported in writing to the MEMR through the Head of SKK Migas.

As to business entities engaging in downstream oil and gas business activities, the requirement to obtain prior approval from the MEMR only applies to the transfer of majority shares.

MEMR 42/2017 stipulates that any transfer of shares of business entities holding an electricity supply business license can only be done provided that (i) the power plant has reached commercial operation date, or (ii) it is a transfer of shares to affiliates, with more than 90% of the transferred shares owned by the sponsor intending to transfer the shares. For this latter scenario, such transfer of shares can only be made at one level below the sponsor intending to transfer the shares.

Based on the approval from the MEMR, contractors and/or business entities in all energy sectors are required to apply for approval, ratification, recordation, or other forms from the Capital Investment Coordinating Board (Badan Koordinasi Penanaman Modal or “BKPM”) and/or the Minister of Law and Human Rights in accordance with the prevailing laws and regulations.

MEMR 42/2014 provides a list of the documents to be submitted for any transfer of shares in each of the energy sectors mentioned above.

Change of BOD and/or BOC

In general, MEMR approval must be obtained prior to a change of BOD and/or BOC in an upstream oil and gas contractor, downstream oil and gas business entity, business entity holding an electricity supply business licenses, and a business entity holding a (a) mining business license, (b) special operation production mining business license for processing and/or refinery issued by the MEMR, (c) special mining business license, (d) contract of works, or (e) coal contract of works, as well as business entities holding a geothermal business license.

MEMR 42/2014 provides a list of the documents to be submitted for a change of BOD and/or BOC in each of the energy sectors mentioned above. Interestingly, MEMR 42/2017 stipulates that any change of BOD and/or BOC in business entities holding an electricity supply business license should obtain a recommendation from the buyer of electricity, which is state-owned PT PLN (Persero), as the sole off-taker in Indonesia, as one of the documents to be submitted along with the application.

Transitional Provisions

The transitional provisions of MEMR 42/2017 stipulate that any approval for the transfer of participating interest, transfer of shares, or change of BOD and/BOC granted prior to the enactment of MEMR 42/2017 is still valid. They also stipulate that the determination of business entities supplying FAME biodiesel and the allocation of FAME biodiesel volume determined prior to the enactment of MEMR 42/2017 shall remain valid until their expiry date. In addition, any application for the transfer of participating interest, transfer of shares, or change of BOD and/or BOC submitted prior to the enactment of MEMR 42/2017 shall follow the provisions of MEMR 42/2017.

Conclusion

Despite the need to supervise the energy industry, the enactment of MEMR 42/2017 has been criticized by some stakeholders within the energy sector, who view that the Government has gone too far by requiring such approval for changes to the BOD and/or BOC, or the composition of shareholders. There is concern that this requirement could affect companies’ decision to invest in the mineral and energy sector in Indonesia.

Another issue that MEMR 42/2017 creates is whether the transfer of shares to a non-affiliate resulting in a change of control in an upstream oil and gas contractor is now prohibited. Prior to this, there has been no such prohibition within upstream oil and gas business activities.

According to recent news reports, many stakeholders in the energy and mineral resources sector have raised their objections to MEMR 42/2017. Thus, we will have to watch how MEMR 42/2017 will be implemented.

This publication is intended for informational purposes only and does not constitute legal advice. Any reliance on the material contained herein is at the user’s own risk. You should contact a lawyer in your jurisdiction if you require legal advice. All SSEK publications are copyrighted and may not be reproduced without the express written consent of SSEK.

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