New company law

The bill on limited liability companies, or Perseroan Terbatas (PT), which was submitted to the House of Representatives last week is part of an overall reform of commercial laws, most of which date back to the 1930s when the country was still under Dutch colonial rule. Bills on small business development and the capital market are expected to be completed within the next few months. Hopefully, legislation on fair business competition and monopolies, both urgently needed since the economy is increasingly reliant on market forces, will follow.

The bill, which was first drafted in 1974 but had to be revised several times to accommodate rapid changes in the business world, should be welcomed despite its imperfections. We need to start with something. After all, both the Commercial Code of 1847 and Company Law of 1939 are outdated and are hindering business development.

The new legislation will facilitate business by expediting the procedures needed to establish and liquidate a limited liability company. That is important to ensuring market competition.

But the relaxed procedures for setting up a company will not translate into a mushrooming of "fly-by-night" companies at the expense of shareholders or creditors. Instead, the bill requires companies to be more accountable by stipulating clear-cut provisions on annual financial reports and the use of the nationally-accepted principles of accounting. Most companies will also be obliged to have their financial reports audited by certified public accountants.

The new legislation provides much protection to minority shareholders, thereby preventing majority owners from acting in ways detrimental to the interests of small shareholders, especially when it comes to such major transactions as mergers, acquisitions and liquidations. Shareholders who represent up to 10 percent of a company are entitled to ask for a shareholders meeting. Minority owners are even allowed to request a court order to investigate their company.

Also significant are the provisions allowing a company to repurchase its issued shares. Until now, a limited liability company was not allowed to re-purchase its issued shares. That ruling, based on the Commercial Code of 1847, has served as a major barrier to the development of mutual funds (open-end investment funds) which are much needed to enhance the capital market. Most investors prefer mutual funds to closed-end funds (investment trusts), the only type of investment funds currently allowed on the capital market, as the former funds have a floating number of outstanding shares, thereby providing them with more flexibility, while trust funds have a fixed number of outstanding shares.

However, the implementation of many of the provisions depends on the judicial system and the efficiency and independence of the court system. Unfortunately, the judicial system has been an area of great concern among the business community. Over-burdened courts, inadequate supervision of court performances, especially with regard to civil courts, have forced most businessmen to shun court proceedings, preferring to settle their disputes outside the court system. That of course is not only unsound and often quite expensive, but leads to uncertainty surrounding the legal redress of business disputes. It is therefore equally imperative that while the justice ministry is now busy drafting new laws relating to the business sector it should at the same time be preparing judges to enforce those laws.