Increase & Reduction of LLC’s Capital: How Does That Work?

In our previous article, “Indonesia’s Limited Liability Company’s Capital Structure”, we discussed the general understanding regarding the structure of capital of Limited Liability Companies (“LLC”) in Indonesia. Today, we’ll discuss on the procedure for either the ‘Increase’ or ‘Reduction’ of said capital.

What Does An ‘Increase’ & ‘Reduction’ of Capital Mean?

First and foremost, each company is required to have ‘Authorized Capital’. The amount of authorized capital of the company is determined based on the decision of the company founder. Through owning a certain amount of Authorized Capital, it as well determines the total number of shares that can be issued by the LLC. Whilst, the numbers of shares used as Authorized Capital is called ‘Article of Assosciation’, this is the “pure face value” of the company’s share capital.

That said, whenever an LLC decides to whether ‘Increase’ or “Reduce’ their Authorized Capital, it will effect the total number of shares that LLC can issue.

1.‘Increase of Capital’

Article 41 (1) of Law Number 40 of 2007 on Limited Liabiliy Company (“Law 40/2007”) states that an ‘Increase’ of capital is made by the approval of the General Meeting of Shareholders (“RUPS”) consensus. RUPS has the capacity to delegate the authority to approve the implementation of RUPS resolution to the Board of Commissioners, for a maximum period of 1 (one) year and maybe withdrawn at any time by them as well.

How is the ‘Increase of Capital’ decision implemented

As said previously, only through the RUPS that the decision for increasing capital can occur. They do this through the process of resolution to increase the authorized capital that is adopted with due regard to quorum requirements and number of assenting votes for an amendment to the articles of association. The quorum mentioned means an attendance quorum must be more than ½ (one-half) of the total number of shares with voting rights and approved by more than ½ (one-half) of the total number of votes casted, unless a greater number is stipulated under the articles of association. Only after, such procedures and resolution has been achieved then the company must notify such changes to the ministry related to be recorded in the Company Registry.

2.Reduction in Capital

A ‘Reduction in Capital’ is an amendment to the articles of association that must secure an approval from the Minister. The approval from the Minister shall be granted if:

a.There are no written objection from creditors within the timeframe of 60 days from the date of ‘Reduction’ announcement or within 30 days from the receipt of the objection (if there are any objections);
b.A settlement has been reached over any objection submitted by creditors; or
c.The lawsuit of creditors has been rejected by a court based on a decision that has become final and binding.

Similar to the process of “Increase of Capital’, the reduction in capital must as well followed through the resolution of company’s RUPS. However, as additional requirement for the implementation procedure of the reduction in capital, the Board of Directors must notify the resolution to all creditors by way of announcing it in 1 Newspaper or more within a maximum period of 7 days from the date of the RUPS resolution.

How is the ‘Reduction in Capital’ decision implemented

A RUPS resolution on the reduction in the issued and paid-up capital is carried out by withdrawing shares or decreasing the par value of shares. The withdrawal of shares is carried out toward shares that has been bought back by the Company or shares classified as revocable shares. The reduction of par value of shares without buyback must be conducted in proportional manner toward all shares of each classification of shares. The proportional manner in reduction of par value of shares without buyback may be exempted with the approval of all shareholders whose par value of their shares has been reduced.

Note: In the event of there are more than 1 classification of shares, then the RUPS resolution on the reduction in capital may only be adopted after firstly securing approval from all shareholders of each classification of shares whose rights are injured by the RUPS resolution on the reduction in capital in question

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