Incorporation

Understanding Shareholders in Indonesia: Rights and Responsibilities

Trường Lăng

October 21, 2024

Incorporation

Understanding Shareholders in Indonesia: Rights and Responsibilities

Trường Lăng

October 21, 2024

The investors of every business organization play a very vital role in the investment factor that the business requires for its growth and attainment of long-term stability. Being the backbone of the business, they put in the capital with the view of returns through dividends and appreciation of stock value.

The shareholders in Indonesia are, therefore, great investors and motors to drive a company to set the strategic direction and make decisions concerning performance. Shareholding in any firm gives the owner not only partial ownership but also one of the most important rights: to participate in major decision-making, including voting on significant corporate policies and the election of directors.

The discussion of various aspects of shareholders, types of rights and liabilities derived from the shareholders in Indonesia, and the role of the shareholders with respect to corporate governance and general outlook regarding the economy is discussed here.

Key Takeaways:

  • Shareholder is the owner of at least one unit of mutual fund or share of stock in a firm or company including individual, business, and legal organizations.
  • They are very important to the financial jurisprudence of a firm as, mostly, they are the ones that provide funds for the companies as capital to operate a business and, thus, are considered major investors.
  • The major two categories in which shareholders could be divided are common shareholders and preferred shareholders.

Shareholder Definition

shareholders in indonesia

A shareholder may be defined as an individual business or legal organizations owning at least a unit of mutual fund or a share of stock in a company. In other words, they may be said to actually own the business because they are liable for a fraction of the gain.

According to Adam Hayes, an Investopedia contributor with extensive experience of more than 15 years in professional trading in equity, option, futures, forex, and cryptocurrency markets, if the company is successful, then the shareholders benefit either through capital appreciation in the stock price or through receipt of dividends. They also have the power to vote in corporate elections, thus helping to determine business decisions of the company in question (Adam Hayes, 2024).

On the other hand, when the company suffers losses, the stock goes down and may involve losses on the part of shareholders. In case the business declares bankruptcy, the shareholders become entitled to the sale of remaining company’s assets after paying their liabilities.

Why Are Shareholders Important to Businesses?

These are the most important in a company’s financial ecosystem, who often supply the capital or funds which the company needs to work, and therefore they are crucial investors. Beyond their contribution in the company’s financial ecosystem, they have the right to vote, giving them immense influence in decision-making processes dealing with matters touching on strategic and operational orientations of a company.

These are the basic rights of shareholders in the companies they invested in, as cited from Indeed, a job matching and hiring global platform (Indeed Editorial Team, 2024):

Right to Access Company Documents

In the company they invested in, the shareholders have the right to view and access the corporate papers, including financial statements and reports. These are reporting requirements to track or evaluate the business’s performance and financial well-being.

Right to Sue

Shareholders are entitled with the right to sue on behalf of the firm in cases where the directors or officers in the company they invested commit misconduct or fail to perform their duties. This right is conferred to ensure their liability is availed and given the fact that they have personal interests at stake.

Voting on Important Matters

These are the powers given to every shareholder to vote for several important business issues of the company like the appointment of directors and managers and other significant issues related to corporate governance. In effect, their votes determine the direction and leadership structure that the company would pursue.

To attend General Meetings

Shareholders are also entitled to participate in the general and special general meetings where important matters affecting their interests are discussed or voted upon. A meeting is an important avenue for communication and control by shareholders.

Proxy Voting

In case a shareholder cannot attend a meeting in person to vote, then through appointment of a proxy that has a right to vote in his place to ensure the wishes of such a shareholder are known and carried out in his absence.

Priority in Liquidation

If the business declares bankruptcy after its debtors are paid off, then the shareholders will have first claims on any assets of the business. These rights give the shareholders tremendous influence over the management and direction of a business while their interest is protected at the same time.

2 Types of Shareholders

Generally speaking, shareholders are divided into two types of categories, including common shareholders and preferred shareholders. The detail of each category is explained below as per the Corporate Finance Institute, which is a dependable online provider of financial education (Corporate Finance Institute Team, 2024):

Common Shareholders

The common shareholders are the most pervasive category of equity holders because they hold shares in the common stock of the company. Voting rights usually come attached to common shareholders, giving them the right to vote on major corporate decisions regarding major issues involving the election of board members or a change in policy.

This is in order for the management to continue carrying on business in their interest. Secondly, common shareholders have a legal right to sue the business through a class-action suit if its actions result in a loss of the company or diminishing its value.

Preferred shareholders

The preferred shareholders, on other hand, are relatively less common, their shares in a firm’s preferred stock. Unlike common shareholders, they do not have any voting right and hence do not directly feature in the governance or decision-making of a firm.

With this, however, their investment returns a certain, fixed payment per year, and this takes precedence over any dividend distribution to common shareholders. In other words, preferred shareholders, when there is any financial distribution, will be paid first, in better and more secure standing concerning earnings.

While every shareholder is supposed to benefit from the increased value of the company once it starts performing well, large capital gains or losses are more sensitive with the common shareholders due to the inherent volatility and growth associated with investment in the common stock. Preferred shareholders enjoy more stability but at limited capital appreciation potential.

Shareholders’ Rights and Responsibilities in Indonesia

shareholders

Indonesia’s CG Code contains elaborate provisions on protection and regulations of the rights and responsibilities of shareholders, which ensure that the rights of all shareholders, whether majority or minority, are properly protected in a fair and transparent manner under applicable laws, regulations, and articles of association.

The Indonesia Corporate Governance Manual, 1st edition, prepared by IFC-a member of the World Bank Group assigning particular emphasis to private sector development in emerging markets-and OJK, or Financial Services Authority of Indonesia, a government agency responsible for regulation, supervision, and oversight over the financial services sector in Indonesia-are thoroughly described below in depth. Herein, they outline the rights and various obligations of the shareholders in Indonesia. These are as follows (IFC & OJK, 2014):

Rights of Shareholders in Indonesia

Shareholders have a set of core rights that should be duly guarded and exercised in the legal and regulatory framework. Below are the rights shareholders have in Indonesian company:

Right to Attend and Vote at the GMS

Every shareholder has a right to attend the GMS, state his opinion, and exercise his voting right. The size of the voting rights usually corresponds to the amount of shares held, and in general each share gives a right to one vote. To such an extent, it would enable the shareholders to have their influence on main corporate decisions, such as election of board members, approval of major transactions, or amendments to the company’s articles of association.

Right to Full, Factual, and Periodic Information

The shareholders shall be entitled to full, factual, and timely information with respect to the performance, financial situation, and strategic perspectives of the company, except for information of a confidential nature whose disclosure could lead to disadvantages in competition or violate official regulations. Access to information is given so that each shareholder may have the opportunity to make better decisions with regard to his investment and exercise the rights deriving from his shares accordingly.

Right to Profit Distribution

Thus, they have a right to the shares of profit that may be declared as dividends in proportion to the number of shares held by them for fair distribution of profit. They may benefit by appreciation in their stock if the company fairs well thus increasing the market value of their shares.

Right to Participate in Key Decision-Making Processes

They should also be informed about the procedure for convening GMS and other decision-making forums. As such, it would make this an effective opportunity to involve themselves in major decisions concerning the future of the company, including decisions on any merger or acquisition among other major corporate activities.

In Indonesian company, the shareholders also have a right to obtain full and sufficient explanations for decisions to be made at GMS discussions.

Right to Equal Treatment amongst Share Classes

Where there are different classes and types of shares issued by a company, each shareholder shall enjoy a right to vote or a right to receive dividends as defined by a share class and type he or she is in possession of. At the basis of a principle of fair treatment, all shareholders shall be accorded this right irrespective of class or status or any other form so as not to have contravened the setting-up ruling which established the corporation.

Voting Right

The prejudicial or hurtful dealing with shareholders by the GMS, Board of Directors, and Board of Commissioners can be taken to the district court. The main purpose behind this is that the shareholders must have a proper channel based upon which they can have access for redressing such unjust or unreasonable decisions.

Responsibilities of Shareholders in Indonesia

In turn, the shareholders, being the owners of the firm’s capital, are obliged to ensure their actions equally fall within the precincts of the law and corporate governance frameworks, specifically:

To Act within the Law as well as the Memorandum and Articles of Association

The shareholders should also comply with all applicable laws and regulations relevant to the company, as well as the memorandum of association and articles of association of the company. To this effect, it therefore encompasses compliance with the rule of law which governs the company and sees to it that their conduct is properly within the best practices for good governance and standards of conduct in the company.

Majority Shareholder Duties

Controlling shareholders may be described as those shareholders who have significant influence in the direction taken by the company. In their conduct of operations, they have to act in a way that respects the rights of shareholders and is highly transparent to protect the interest of minority shareholders and other stakeholders.

Moreover, the controlling shareholders should disclose to law enforcement or regulatory authorities the ultimate beneficiaries of the company in cases when violation of the law is suspected, at the request of competent authorities. The responsibility of the minority shareholders falls under the following subsections.

Minority Shareholder Responsibilities

Even though the stake held by minority shareholders may be small in the company, there is a requirement that it should be utilized responsibly. They have to act in concert with the articles of association of the company and the law to avoid causing disruptions or causing harm to the operations of the company. Even though their rights may be protected, there is also a need for them to be tamed through their obligation to act in the interest of the company.

Asset and Role Segregation

What the shareholders should not do is mix their assets with those of the business. The shareholders who work their way into the Board of Directors or the Board of Commissioners must take different obligations between them as shareholders and them as board members to avoid conflict of interest. This will avoid undue influence in the companies’ operations and minimize the cases of self-dealing, thus maintaining integrity in the company law processes.

Accountability between Companies

Where a shareholder owns the controlling interest in more than one company, inter-company relationships should be clearly and transparently maintained. This accountability will make certain that there is no conflict of interest and that the dealings between sister companies are conducted at arm’s length and in conformity with relevant laws and standards of corporate governance.

Shareholders Agreements

One useful mechanism to accomplish common action through shareholders is agreements among shareholders. This is especially crucial for the minority shareholders because such agreements can unify their usually diffuse minority interests. For example, to nominate an auditor who would audit a company’s books, in many cases, one has to be in possession of at least 10 percent of the company’s total issued shares.

However, the agreements between the shareholders and the company itself or one of its governing bodies are much more complex dynamics. Through forms of commitments, shareholders can get “locked in.”.

These are arrangements involving an agreement to vote homogeneously for proposals brought about by the board of directors or, alternatively, to follow the will of management with respect to major shareholder matters. These can also relate to simple rights such as the redemption of shares, entitlement to dividends as well as other common shareholder rights. While stability may be achieved from such arrangements, a shareholder’s independence and room to make choices may, in turn, be threatened.

Shareholder’s Right to Receive Dividends

The policy of dividend distribution is one of the most important determinants of investment decisions in a company an investor intends to invest in. A shareholder, importantly, has basic rights to receive dividends. The Board of Directors is authorized to recommend the same with the prescribed distribution ratio for each class of share, then forward it to the GMS.

Where it is a listed company, the GMS is to have the final decision and the approved rate shall not exceed the one proposed by the Board. Dividend may be either in cash or in common shares.

The company is duty-bound to pay all the profits, after deducting the amount required to be set apart for reserves, to its shareholders by way of dividends except if otherwise decided by GMS. Even the Board may declare interim dividends provided the financial results warrant such declaration. The provisions covered under Article 72 of the ICL deal with distribution of interim dividends.

The most important method to protect the rights of the shareholders regarding dividend is. In respect of Article 79 of the ICL, one or more shareholders having at least one-tenth of the voting shares, unless the Articles of Association provide a smaller number, may request that a GMS be convened. The request shall be made to the Board of Directors by registered letter with justifications.

You might also like: PT PMA Indonesia: A Gateway to Foreign Investors

Can a Shareholder be a Company Directors?

A shareholder and a director are two different roles within the jurisdiction of a firm, but still, a person can undertake both roles at the same time.

A shareholder, as earlier described, is an equity holder of the company and is, therefore, entitled to rights that include entitlement to profits besides the capacity to influence or participate in decisions regarding the strategic direction and governance of the company. It is this ownership stake by the shareholders that forms the basis through which such control is exercised over corporate affairs mainly through voting at general meetings.

On the contrary, the director, appointed by the shareholders, is responsible to run or manage the day-to-day operations of the company. He is under a fiduciary duty to act in the best interest of the company and the shareholders for improvement in performance, profitability, and market position. The directors shall implement such policies and strategic plans approved by the shareholders for operational and regulatory compliance of the company.

While the shareholder is more interested in the role of oversight and financial return, the director plays an intimate role in the operational and managerial aspects of the company. To this effect, even though the two are stand-alone roles, there is no legal impediment to prevent a shareholder from concurrently undertaking the responsibilities of a director, in so far as it is in compliance with the governance structure of the company and its Memorandum and Articles of Association.

Conclusion

They are major shareholders in any organization, and identification of this role, more so should be well- informed about the rights they have in such an organization. Observance of such duties goes a long way in protecting the integrity of the organization and in effect safeguarding the interests of the shareholder. For example, at times, the rapid business changes have certain aspects of the role and responsibilities that are quite overwhelming to comprehend regarding the shareholders.

Professional advice will be indispensable in giving you a clear vision of precisely what your standing is and what your liabilities could mean. Let Viettonkin advise you about the consequences of being a shareholder, including an explanation of your rights and responsibilities and further consequences of your decisions.

The Viettonkin Consulting Group is a multidisciplinary group of consulting firms. It holds and continues to hold the trust of hundreds of entrepreneurs within the overseas area. Our experts provide specific assistance on developing strategic decisions for the growth of the company, protecting the interests of the shareholders at the same time.

Feeling interested? Go to our website and take a look at our services.

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