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The Board of Directors is the organ of a Limited Liability Company that has the authority to represent the Company (“Company”), both in or outside the Court. With this authority, it is to be understood that the Board of Directors has the power to bind the Company into an obligation with other parties in every Company’s transaction, such as sale and purchase, loan transaction, grants, etc.

However, it needs to be understood that there is a limitation to such authority. Some transactions require that the Board of Directors to obtain approval from other Company’s Organ, the General Meeting of Shareholders (“GMS”), and/or the Board of Commissioners. Law Number 40 Year 2007 regarding the Limited liability Company (“Company Law”) itself regulates one limitation to the Board of Directors’ authority, as contained in Article 102 of the Company Law. Besides that, there is a limitation that is regulated in the Company’s Articles of Associations. In practice, these approvals are commonly known as Corporate Approvals. Therefore, it is a matter that must be taken into account in every Company’s Transaction, both by the Company itself or the other company that conducts the transaction with the Company.

Limitation according to the Company Law

Article 102[1] paragraph (1) of Company Law stated that the Board of Directors is required to obtain approval from the GMS when transferring the asset of the Company or when to make a Company’s asset as a security for a loan. With a note that the transferred or encumbered asset has the value of more than 50% (fifty percent) of the Company’s Net Value, in one or more transactions, either each transaction is related to one another or not. The Company’s asset referred to by Company Law shall include all moveable or immoveable asset, tangible or intangible asset, that is owned by the Company (the elucidation of Article 102 paragraph (1) of Company Law).

With regards to the Company’s transfer of a net asset, transaction referred to by the Company Law is for the transactions that happened within 1 (one) financial year period, or other period according to the Company’s articles of association. With regards to the making of the Company’s asset as security for a loan, the Company Law doesn’t specifically state for which loan, the Company itself or other parties. Therefore it can be understood that in the event the Company intends to make Company’s asset as security for the Company’s loan or other party’s loan (including its parent and subsidiary), then the Board of Directors is required to obtain the GMS’ approval.

Exception

The Company Law gives an exception to the GMS’ approval for a transaction. According to Article 102 paragraph (3) of Company Law, the Board of Directors does not require to obtain GMS’ approval in case the transaction is for the purpose of conducting its main business activity according to its provision of the articles of association.

The elucidation of Article 102 paragraph (3) of Company Law provides an example for this exception, such as the sale of houses for a real estate company, sale of interbank negotiable instruments, sale of inventory for distribution company or trading company 

Limitation in According to the Provision of Articles of Association

Besides being regulated under the Company Law, similar limitation is also found in the provision of the Company’s articles of association. The Company Law also accommodates about this in Article 117 of Company Law[2]. Because it is regulated under the articles of association, the content of its provision might differ from one Company and the other.

But in general practice, the transactions that regulated under the articles of association are the transaction of providing or receiving a loan or in the event the company intends to establish a new business or to become a shareholder of other company. Usually for these transactions only require the Board of Commissioners’ approval. The requirement for these two transactions is in general practices. Specifically, there are also other transactions that require approval (either from GMS and/or Board of Commissioners) that are regulated in certain Company’s articles of association.

Legal Protection for the Other Party in the Transaction if the Approval is not obtained

Although the nature of the requirement is obligatory and should be obtained by the Board of Directors before entering into the transaction, the non-fulfillment of these requirements does not automatically make the transaction null and void. The Company Law has protected the other party in the transaction. Article 102 paragraph (4) of Company Law states that the absence of this approval shall not make the transaction null and void. Further, the transaction still binds the Company, as long as the other party poses a good faith.

Therefore, the other party may still demand the Company to fulfill its obligation under the transaction, even though in its process, the board of Directors did not obtain the approval as the law requires.

The same is also applicable for approvals that are required according to the articles of association of the Company. In case the articles of association requires a certain transaction to be approved by the Board of Commissioners, then the absence of this approval does not make the transaction null and void. The transaction still binds the Company, as long as the other party in the transaction poses good faith. 

Board of Directors Liability if Approval is not obtained

If for the other party the law provided protection, but for the Board of Directors shall be liable for any loss suffered by the Company.

According to Article 92 paragraph (2) of Company Law, the Board of Directors performs the management of the Company in accordance with policies that are considered appropriate, but it must observe any limitation regulated under the law and the articles of association. In this matter, it includes the Board of Directors’ requirement to obtain approval form GMS or Board of Commissioner in representing the Company to conduct the transactions as explained above.

Further, according to Article 97 paragraph (3) of Company Law, it is stated that in the event that the Company suffered loss due to the fault or negligence of the Board of Directors in performing its duty, then they can be personally liable to compensate the Company’s loss. In this case, if the transaction represented by the Board of Directors that is without the approval from the GMS or Board of Commissioners (which is required) causes loss to the Company, they can be liable to compensate for the loss.

In this matter, the shareholder who represents a tenth (1/10) of the shares with voting rights may act to represent the Company to file a lawsuit against the Board of Directors in the District Court.

In conclusion, it is an important matter in a Company’s transaction to see first whether for such transaction a Corporate Approval is required or not, if it is required, the Board of Directors needs to obtain it. This checking should see any specific regulation that is in the Company’s articles of association, because companies may regulate the requirements differ from one and the other. In other hands, it is better for the other party in the transaction to see and to require that the Board of Directors obtains such approval, although even without such approval the obligation still valid, but however such transaction may still be revoked if it can be proven that there is bad faith. 

Hope it’s useful.

FREDRIK J PINAKUNARY LAW OFFICES

This article also available in Indonesian. Follow this link: Batasan Kewenangan Direksi dan Corporate Approval dalam Transaksi Perseroan


[1] The provision of Article 102 of Company Law stipulates as follow:

  • The Board of Directors must ask for an approval from GMS for:
    • transferring the Company’s asset; or
    • to make the Company’s asset as security for a loan.

Which constitute more than 50% (fifty percent) of the total Company’s net asset in one (1) or more transactions, and whether between one transaction and the other is related or not.

  • The transaction referred to in paragraph (1) a. means any transaction by which the Company’s net assets are transferred within a period of 1 (one) financial year or another longer period according to the articles of association of the Company.
  • The provisions set out in paragraph (1) shall not apply to the transfer or encumbrance of the Company’s assets by the Board of Directors as an implementation of the Company’s business activities according to its articles of association.
  • Any legal act as referred to in paragraph (1) conducted without approval from the GMS shall remain binding on the Company as long as that the other party in that legal act acted in good faith.
  • The provisions regarding the quorum and/or the requirements for adopting resolutions of the GMS as set out in Article 89 shall apply mutatis mutandis to resolutions of the GMS approving the acts of the Board of Directors referred to in paragraph (1).

[2] The provision of Article 117 of Company Law states as follow:

(1) The articles of association may provide the granting of authority to the Board of Commissioners to approve or assist the Board of Director in performing certain legal acts.

(2) In the event that the articles of association provide the requirements for the granting of approval or assistance as referred to in paragraph (1), then without the approval or assistance by the Board of Commissioners, a legal act will remain binding on the Company as long as the other party in that legal act was acting in good faith.


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