Shares Classification in Indonesia Company

Shares classification in Indonesia company is not merely a drafting choice; it is a statutory-anchored mechanism that determines control, economics, governance stability, and investor protections. Under Law No. 40 of 2007 on Limited Liability Companies (UUPT) as amended companies may create one or more classes of shares in their Articles of Association (Anggaran Dasar/AD), provided the rights and obligations of each class are expressly set out. Consequently, robust share-class architecture is essential to: (i) preserve founder control while admitting capital, (ii) tailor investor upside and risk, (iii) prevent decision-making deadlocks, and (iv) ensure regulatory compliance for private and (if applicable) public companies.

Legal Framework and Hierarchy of Sources

The UUPT (notably, Article 53) authorizes a Perseroan Terbatas (PT) to issue one or more share classes as stipulated in the Article of Association. Where multiple classes exist, at least one must constitute common (ordinary) shares with baseline rights. In addition, the company’s General Meeting of Shareholders (RUPS) is the sole organ empowered to approve new classes or amend existing ones via Article of Association amendments, which must be set forth in a notarial deed and submitted for approval/receipt by the Ministry of Law and Human Rights (MOLHR).
Furthermore, if the company is a public company (Tbk), capital actions must also comply with OJK and IDX regulations (e.g., procedures on pre-emptive rights, disclosure, and settlement). Accordingly, it must align: (i) UUPT; (ii) Article of Association; (iii) shareholder agreements; and (iv) sectoral/OJK rules (if applicable).

Core Taxonomy of Share Classes (with Typical Rights)

Although practice allows bespoke combinations, the following archetypes are most common. Each should be defined exhaustively in the Article of Association rights, conditions, procedures, and any financial formulas.

1. Common (Ordinary) Shares

• Voting: Full voting rights at RUPS (unless law/ Article of Association restricts in specific circumstances).
• Economics: Entitled to dividends pro rata and residual assets upon liquidation, subject to solvency and retained-earnings tests.
• Transfer: In principle transferable, yet the Article of Association may impose approval rights, rights of first refusal (ROFR), lock-ups, and tag/drag-along mechanics.
• Pre-emptive Rights: Typically enjoy pre-emptive rights (non-public PT per Article of Association; public PT per OJK rules).

2. Preferred Shares (Non-redeemable/Redeemable/Convertible)

• Voting: May be limited or non-voting; if so, the Article of Association must articulate precisely which matters (e.g., mergers, liquidation, related-party transactions) still trigger class consent.
• Dividend Priority: Cumulative or non-cumulative dividend preferences; formulas (fixed %, index-linked, or board-discretion bands) should be explicit.
• Liquidation Preference: Multiple or 1x preference, participating or non-participating, with clear distribution hierarchy.
• Redemption: Terms (timing, price, funding source) must respect capital-maintenance rules; consider solvency protections and MOLHR filing implications.
• Conversion: Automatic/optional triggers (e.g., IPO, qualified financing), ratios, anti-dilution (full-ratchet/weighted-average), and protective provisions (no impairment without class consent).

3. Non-Voting Shares

• Voting: No general voting rights, but critically class veto may still apply for fundamental changes affecting that class.
• Economics: Customizable (e.g., higher fixed dividend).

4. Shares with Nomination/Appointment Rights

• Governance: Right to nominate or appoint 1 Director/Commissioner (or more) and/or committee seats; tie this to ownership thresholds and qualifications (fit and proper).

5. Series Shares (A/B/C…)

• Differentiation: Same “type” (e.g., preferred) split into series with staged economics (Series A vs B) and consent mechanics.

6. Restricted/Founder Shares

• Transfer Limits: Lock-ups, performance/vesting, buy-back rights, forfeiture on bad-leaver events, and pricing formulae (fair market value vs nominal).

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Implementing New or Amended Share Classes: Procedure

Given that errors in process could vitiate the structure, the steps must be carefully complied with:

• Board Proposal → Draft term sheet + black-line Articles of Association changes (rights, definitions, schedules, and formulas).
• Shareholder Approval (RUPS) → Comply with quorum and voting thresholds; if multiple classes already exist, obtain separate class approvals where rights are affected.
• Notarial Deed → Record Articles of Association amendments in a notarial deed.
• MOLHR Submission → File within statutory deadlines; address any clarifications; secure approval/receipt.
• Share Register & Certificates → Update the List of Shareholders, issue certificates or electronic records, and annotate legends/restrictions.
• Ancillary Agreements → Align shareholders’ agreement, investment agreement, and management policies with the Articles of Association to avoid conflicts.
• Regulatory/OJK (if Tbk) → Disclosures, circulars, HMETD mechanics, and KSEI settlement where relevant.

Foreign Investment Interface (Positive Investment List)

Since Presidential Regulation No. 10/2021, Indonesia applies a Positive Investment List regime. Sectoral caps and conditions may require Indonesian control. Therefore, share-class engineering often couples:

• Indonesian holders with voting/control classes; and
• Foreign holders with economic/non-voting or preferred classes.
  Importantly, avoid nominee arrangements that contravene law. Instead, use transparent, Articles of Association anchored preferences (dividend/liquidation). Additionally, in conditional sectors (licenses, local content, or strategic industries), ensure that the share-class design does not undermine compliance undertakings embedded in permits.

Drafting Architecture: What Must Be in the Articles of Association

To pre-empt disputes and MOLHR queries, codify at least the following items verbatim in the Articles of Association (and mirror in transaction documents):

• Definitions (e.g., “Liquidation Preference,” “Change of Control,” “Qualified IPO,” “Qualified Financing”).
• Voting Matrix (ordinary/special matters; class veto; supermajority thresholds; written resolutions; quorum).
• Dividend Mechanics (priority, cumulative status, compounding, arrears cure).
• Conversion/Redemption (formulas, timelines, cash source, procedures, financial covenants).
• Anti-Dilution (method, exceptions for ESOP, rounds below threshold, MFN).
• Transfer Regime (ROFR, co-sale/tag, drag-along, lock-ups, encumbrances).
• Board/Commissioner Nomination Rights (eligibility, removal, independence, committees).
• Information & Audit Rights (financial package cadence, inspection windows, confidentiality).
• Deadlock Resolution (escalation, independent commissioner vote, put/call, mediation/arbitration).
• Exit Waterfall (priority, caps, participation, distribution order).

Governance Safeguards and Minority Protection

Because share classes can entrench control, balance them with predictable safeguards to enhance enforceability and investor comfort:

• Class Consent for adverse changes.
• Related-Party Transaction approval rules (board/commissioners/independent approval).
• Reserved Matters list (M&A, dissolution, asset disposals, indebtedness caps, ESOP pools).
• Information Rights with default remedies (e.g., temporary dividend block if reporting in arrears).
• ESG/Compliance Covenants for reputational risk.
• Arbitration Clause (seat, language, institution) for cross-border investors.

Economics: Dividend, Preference, and Waterfalls

To avoid litigation, economics must be formula-driven and mechanical:

• Dividend Priority: State rate, base, accrual, compounding, and payment windows; clarify if board discretion applies.
• Liquidation Preference: Define liquidation events (winding-up, sale, deemed liquidation), multiple (1x/2x), participation (participating vs non), and caps.
• Conversion: Ratio, price-based and broad-based weighted-average anti-dilution; triggers (qualified financing size threshold; IPO market cap).
• Redemption: Year, price (par/premium), source (distributable profits), and deferment if solvency at risk.
• Exit Distribution: Order of payments and cap behaviour under multiple series.

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Risk, Compliance, and Pitfalls to Avoid

• Ambiguous Articles of Association Language → invites MOLHR queries and shareholder disputes. Draft with definitions, examples, and schedules.
• Ignoring Sectoral Caps → can jeopardize licensing/regulatory standing. Validate investment caps before issuance.
• Under-estimating Solvency → redemption obligations can breach capital-maintenance rules; use deferment and solvency tests.
• Document Misalignment → Articles of Association, SHA, and investment agreements must be consistent; include conflict-override clauses.
• Tax Oversights → dividends, redemption gains, and cross-border payments may attract withholding tax and treaty analysis; loop in tax counsel.
• Accounting Treatment → certain preferences may be treated as equity vs liability; align with auditors to avoid covenant breaches.

Public vs Private Company Considerations

• Private PT: Greater contractual freedom in Articles of Association and SHA; nonetheless, maintain clarity on pre-emptive rights and transfer controls.
• Public Tbk: Must follow OJK rules on rights issues, disclosures, related-party transactions, and fairness opinions; share settlement via KSEI; stricter minority protections and timelines.
  Accordingly, any migration path from PT to Tbk should include a re-papering workstream to harmonize preferences with public-market rules.

Practical Commentary from Kusuma & Partners

From our point of view, the most resilient structures are those whose Articles of Association reads like a term sheet with definitions, eliminating grey areas that typically trigger litigation or regulatory queries. Moreover, aligning economics with solvency and sectoral compliance at the drafting stage invariably saves time and cost at exit or IPO. Finally, in multi-class settings, we strongly recommend class-specific consent maps and worked examples in schedules these two features alone resolve most interpretive disagreements before they surface.

Conclusion

In essence, shares classification in Indonesia company is a strategic legal tool that secures investor confidence, preserves founder control, ensures compliance with investment rules, and provides flexibility for capital raising or exits. Properly drafted share structures safeguard governance and growth, while unclear classifications risk disputes and regulatory challenges.

How We Can Help

We help businesses structure and implement effective share classifications by drafting clear Articles of Association, advising on foreign investment limits, and aligning shareholder agreements with the law. Our tailored approach ensures compliance, protects control, and supports sustainable business growth.

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“DISCLAIMER: This content is intended for general informational purposes only and should not be treated as legal advice. For professional advice, please consult with us.”