Bentoel vs Bentoel -- Corporate battle hots up

By Winahyo Soekanto

DENPASAR (JP): The conflict pitting PT Bentoel Prima (BP), a producer of various cigarettes, and PT Bentoel International Investama Tbk (BINI), the majority shareholder controlling 75 percent of shares, has reached a point of no return.

Bentoel International is insisting that the Bentoel Prima board of directors convene an extraordinary meeting of shareholders to, among other things, replace its president director. Media reports have said Bentoel International wants the president director to be replaced because of declining corporate performance.

The board of directors has been fighting the motion tooth and nail, citing that when Bentoel International took over the majority share, it agreed it would not replace the current management.

Bentoel International earlier also requested that the local district court allow the extraordinary meeting to be convened. The court has turned this down.

Furthermore, Bentoel International has also filed an appeal to the Supreme Court but the Bentoel Prima board of directors has hired noted lawyer Todung Mulya Lubis to fight against this appeal.

This case is unique because it looks as if the majority shareholders can not protect their own interests in running the normal business course.

This situation is the reverse of what was set out in Law No. 1/1995 on limited liability companies. The law has replaced Articles 36 up to Article 56 of the Code of Commerce (Statute Book No. 23/1847), and includes in its mission the protection of minority shareholders against the domination of majority shareholders (See, among others, Article 66 paragraph 2, Article 85 paragraph 3 and Article 98 paragraph 2).

In this particular conflict, the majority shareholder has found resistance from the management -- a unique situation because it is usually the majority shareholders who can force on the management any decisions on how to run the company.

As it happens, Bentoel International finds itself in an awkward position as Bentoel Prima employees have also staged a protest against an extraordinary meeting of shareholders.

By now we can see a number of material issues underlying this Bentoel versus Bentoel conflict: (1) the procedure for convening an extraordinary meeting of shareholders, as regulated in Law No. 1/1995 on limited liability companies, (2) the substance of the extraordinary meeting requested and (3) the tripartite relationship involving Bentoel as a debtor, the shareholders and the creditors.

Regarding the first issue, Bentoel International has complied with the procedure for convening an extraordinary meeting as stipulated in the 1995 law, up to their filing the request to the district court for a permit to convene the meeting.

The law also stipulates that a request for a meeting can be made even by one shareholder or more as long as he or they represent a minimum of 10 percent of the shares (this is actually for the protection of the minority shareholders).

This request and its reasons may be written in a letter, which must be sent by registered mail. If, after a passage of 30 days, the board of directors or the board of commissioners still ignores the request, the party making the request for the meeting may ask the district court to give a decision allowing the meeting to be convened.

It is regulated in Article 67 paragraph 2 that the district court may decide on the format, the content and the period related to the convening of the meeting, as well as to appoint the chairman of the meeting. The decision to be made by the district court on the granting of this permit is the first and last decision of an official agency.

This is a good procedure because the district court can then ensure that an extraordinary meeting of shareholders will be convened.

If it is feared that the majority shareholders will act as they wish and harm the interests of the board of directors, the minority shareholders and even the company, this law has a provision as protection against this possibility.

Regarding the discharge of a board of directors, they must be allowed to defend themselves in the extraordinary meeting, which must be held at the latest 30 days after the date of discharge (see, among others, Article 92).

Minority shareholders are also allowed facilities to defend their interests, as can be seen in among others, Article 55.

This article stipulates that every shareholder is entitled to ask the company that their shares be purchased at proper prices. This avenue can be pursued if they disagree with the company's acts, which are deemed to be harming to shareholders or the company; for example when it sells, pledges or exchanges most or all of its assets.

As for the agenda of the meeting, said to include the replacement of the president director, it must be drawn up with the reasons transparently made known to all shareholders, who must also find the agenda to be fair, proper and appropriate.

To an observer without access to the document of the Rp 300 billion share transaction, which gave Bentoel International control over 75 percent of the total shares, the deal is somewhat strange.

Especially considering that there is no strong reason why Bentoel International has agreed to accept a provision stipulating that it would have no representatives either in the management of the company or on its board of commissioners, the members of which are still Rajawali Corporation's men.

It would be more sensible, perhaps, to see Bentoel International not represented on the board of directors and have their men on the board of commissioners.

As it is understood, the board of commissioners enjoys substantial power as they can suspend any member of the board of directors from office, convene an extraordinary meeting of shareholders and exercise all the authority vested in the board of directors. Unfortunately, all this is impossible for Bentoel International to do because it has yet to be represented on the board of commissioners.

Now the third material issue. To the best of this writer's knowledge, Bentoel successfully restructured its debts to domestic and foreign banks before the economic crisis hit the country, an indication that the company's financial condition was improving then.

Later, the company showed great aggressiveness in marketing its products, a condition which must be acknowledged as an achievement on the part of Rajawali Corporation. It was also this achievement that made Bentoel International and also, reportedly, George Soros, interested in investing in Bentoel.

Clearly, therefore, the Bentoel case is quite different from cases involving companies now taken over by the Indonesian Bank Restructuring Agency (IBRA). In these latter cases, IBRA directly controls the shares in the companies concerned, including also the outcome of a debt-to-equity swap.

In view of the debt restructuring agreement that Bentoel made prior to the onset of the economic crisis, it is not in IBRA's immediate interest to be directly involved in the day-to-day management of Bentoel.

In light of this, it seems too naive and simplistic for the board of directors of Bentoel to believe that their replacement would lead to an immediate withdrawal of Bentoel's Rp 400 billion restructured debts -- the result of years of negotiations with creditors -- and later to the collapse of the company.

The reasons given for the board of directors' rejection of their replacement are (1) the company's performance is improving; (2) the company's activities concern the lives of tens of thousands of people and (3) Bentoel is one of the largest taxpayers.

Is it sensible that all this will be at stake simply because the board of directors is replaced?

I believe, therefore, that the district court has interfered too much with the company's affairs. It must be remembered that a limited liability company is essentially a civil association and a capital association. In light of this definition, will the decision made by a district court chairman be beneficial to the settlement of the Bentoel case?

This decision has given rise to a new legal problem. Article 67, Paragraph 4 stipulates that a decision made by a district court chairman is the first and last decision made by an official agency. Obviously, it is not subject to an appeal from a higher court of law.

Therefore, a procedural reason must not be used to prevent a discussion of the gist of the problem. This matter should not encourage investors to associate, using a limited liability company as their instrument. As a matter of fact, a limited liability company is a model that better protects public interests.

Last but not least, the extraordinary meeting of shareholders should be convened because Law No. 1/1995 stipulates and arranges the protection of all parties belonging to this limited liability company. Anyway, this is but a normal business course.

The writer is a lawyer based in Denpasar.