New company law
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of 1847 and Company Law of 1939 are outdated and are hindering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.