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15 August, 2017
As discussed in our previous recent e-bulletins on the mining industry (available here) and the upstream oil and gas industry (available here), the Minister of Energy and Mineral Resources (“MEMR”) recently issued MEMR Regulation No. 42 of 2017 (“MEMR 42/2017”) which largely increased the supervision (and bureaucracy) of companies engaging in the energy and mineral resources sector. In response to the strong industry criticisms of MEMR 42/2017, wiser heads have prevailed and on 3 August 2017 (less than a month after the issuance of MEMR 42/2017), MEMR issued MEMR Regulation No. 48 of 2017 on the Supervision of Business Activities in the Sector of Energy and Mineral Resources (“MEMR 48/2017”) which revokes and replaces MEMR 42/2017.
MEMR 48/2017 should, in general, be welcomed by the industry as MEMR 48/2017 seeks to simplify and clarify the regulatory supervision of the energy and mineral resources sector in relation to changes of ownership/control, transfers of shares/participating interests and changes to the composition of boards of directors (“BODs”) and boards of commissioners (“BOCs”). As discussed further below, in several circumstances where MEMR 42/2017 previously required prior MEMR approval for certain corporate actions, MEMR 48/2017 now provides that only submitting reports to MEMR is necessary.
1. Upstream oil and gas industry
Transfer of participating interests
Consistent with the terms of most production sharing contracts (“PSCs”) (as well as the existing regulatory regime and MEMR 42/2017), MEMR 48/2017 expressly requires contractors to obtain MEMR approval (the application for which will be considered by MEMR in consultation with SKK Migas) for the transfer of any participating interest in a PSC. Similar to MEMR 42/2017, MEMR 48/2017 includes detailed provisions in relation to the requirements and procedures for obtaining such approval.
Change of control of PSC contractors
Numerous PSCs (particularly PSCs granted before 2008) do not expressly require MEMR approval (or notification) for the change of control of PSC contractors. However, MEMR 48/2017 (similar to the provisions in MEMR 42/2017) states that any “direct” change of control of a PSC contractor must obtain the prior approval of MEMR (the application for which will be considered by MEMR in consultation with SKK Migas). MEMR 48/2017 has clarified that a “direct” change of control means the direct transfer of majority shares in a PSC contractor (i.e. at one shareholder level above the PSC contractor) pursuant to which the controlling shareholding with valid voting rights in the PSC contractor transfers it shares to a third party. While MEMR 48/2017 no longer prohibits any “direct” change of control to non-affiliated parties, the provisions of MEMR 48/2017 could, strictly speaking, still require prior MEMR approval for a “direct” change of control which involves a transfer of majority ownership to an affiliated party (for example, due to an internal restructuring).
In addition (and mirroring the provisions in MEMR 42/2017), MEMR 48/2017 requires any “indirect” change of control of a PSC contractor to be reported to MEMR (through the Head of SKK Migas). MEMR 48/2017 is silent on the timeframes applicable for such report to be submitted (and it is unclear whether such report should be made prior to or after the relevant “indirect” change of control). Under MEMR 48/2017, an “indirect” change of control is where the control of a PSC contractor is transferred to a third party other than through the direct transfer of shares in the PSC contractor.
Changes to BOD and BOC
MEMR 42/2017 sought (somewhat impractically) to require any change to the BOD or BOC of a PSC contractor to be subject to prior approval from MEMR. However, MEMR 48/2017 has now significantly alleviated this requirement by only requiring such changes to be reported to MEMR through the Director General of Oil and Gas (“DGOG”). Again, MEMR 48/2017 is silent on the timeframes applicable for such report to be submitted (and it is unclear whether such report should be made prior to or after the relevant change to the BOD and BOC).
2. Downstream oil and gas industry
MEMR 42/2017 also sought to require prior MEMR approval for any transfer of majority shares in, or any changes to the BOD or BOC composition of, the holder of downstream oil and gas licenses. However, under MEMR 48/2017, any transfer of shares in, or any changes to the BOD or BOC composition of, the holder of downstream oil and gas licenses are now only required to be reported to MEMR through the DGOG. Such reports are required to be submitted to MEMR (though the DGOG) after the relevant Ministry of Law and Human Rights (“MOLHR”) approval/notification is issued for such actions.
3. Electricity industry
Similar to the downstream oil and gas industry, MEMR 42/2017 sought to require prior MEMR approval for any transfer of shares in, or any changes to the BOD or BOC composition of, the holders of Electricity Supply Business Licences (“IUPTLs”). However, under MEMR 48/2017, such actions are now only required to be reported to MEMR through the Director General of Electricity (“DGE”) (and, in the case of renewable energy projects, copied to the Director General of New Renewable Energy and Energy Conservation (“EBTKE”)). These reports are required to be made within five working days from the date that the relevant MOLHR approval/notification is issued for such corporate action. In addition (and while the relevant provisions are somewhat unclear), it appears that MEMR 48/2017 requires all holders of IUPTLs to submit a report to MEMR, by no later than 3 November 2017, setting out it latest composition of shareholders, BOD and BOC (unless there have been no changes to such compositions since the relevant company’s establishment). MEMR 48/2017 has also now helpfully clarified that the holders of IUPTLs who do not sell electricity to PLN will not be subject to any such reporting (or approval) requirements.
In addition, and consistent with the previously issued MEMR Regulation No. 10 of 2017 (MEMR 10/2017), MEMR 48/2017 re-confirms the restriction on the direct transfer of shares in the holders of IUPTLs (who sell electricity to PLN) until the project achieves its Commercial Operation Date. This general transfer restriction is generally consistent with the provisions typically seen in Indonesian power project sponsors’ agreements. However, importantly and unlike most sponsors’ agreements, neither MEMR 10/2017 nor MEMR 48/2017 provides any exception for this restriction in relation to pledges or assignments pursuant to project financing arrangements. As a result, this could continue to affect the bankability of Indonesian power projects. However, consistent with MEMR 10/2017, MEMR 48/2017 does provide a very limited exception to this transfer restriction for transfers to affiliates (which remains subject to written approval from PLN) whereby the affiliate’s shares are more than 90% owned by the sponsor wishing to transfer the shares. This very limited 90% ownership threshold is significantly higher than the 25% or 50% ownership threshold typically applied in Indonesian power project sponsors’ agreements with PLN previously.
4. Geothermal industry
Similar to MEMR 42/2017, MEMR 48/2017 requires prior MEMR approval for any initial public offering of, or the transfer of shares through the Indonesian Stock Exchange in, the holder of a geothermal license (“IPB”). However, MEMR 48/2017 expands the applicability of this approval requirement to also include the holders of geothermal mining authorisations and geothermal mining license holders as well as contractors under geothermal mining joint operation contracts (together with IPB holders, “Geothermal Companies”).
Under MEMR 48/2017, any transfer of shares (other than through the Indonesian Stock Exchange) in, or any changes to the BOD or BOC composition of, Geothermal Companies now only requires the submission of reports to (and not approval from) MEMR, through EBTKE. These reports are required to be made to MEMR (through EBTKE) within five working days from the date that the relevant MOLHR approval/notification is issued for such corporate action. Similar to the requirements applicable to the electricity industry, it appears that MEMR 48/2017 requires all Geothermal Companies to submit a report to MEMR, by no later than 3 November 2017, setting out it latest composition of shareholders, BOD and BOC (unless there have been no changes to such compositions since the relevant company’s establishment).
5. Mining industry
The provisions in MEMR 48/2017 applicable to the mining industry remain unchanged from the generally positive reforms set out in MEMR 42/2017. Our previous e-bulletin in relation to the impact of MEMR 42/2017 on the mining industry is available here.
For further information, please contact:
David Dawborn, Partner, Herbert Smith Freehills
david.dawborn@hbtlaw.com
