A common form of tradable instrument of wealth that is well known and lucrative are shares/stock. Based on the Great Dictionary of the Indonesian Language (Kamus Besar Bahasa Indonesia) a share itself is defined as a portion, contribution; certificate of ownership of capital share in a limited liability company entitles the holder to dividends and other benefits in proportion to the amount of capital contributed. Under this definition any individual that purchases a share will be provided with some form of special rights that they can utilize as long as it is still owned by the said individual. This right can be used in determining company policy, including capital changes, the appointment of corporate organs, and the direction of business development.

In this article we will be providing a general introduction into what a share is under the prevailing Indonesian law especially the Law of the Republic of Indonesia number 40 of 2007 on Limited Liability Companies (Indonesian Company Law/“ICL”). This discussion shall include the rights that it provides to the shareholder, responsibilities under the shares, among others.

Shares and its Correlation with Capital

ICL stipulates that the authorized capital of a company consists of the total nominal value of the shares issued by the company, so that each share represents a certain portion of the authorized capital.[1] Accordingly, shares function as the legal representation of capital participation of an individual or entity in a company.

A company is required to have an authorized capital where at least 25% of the authorized capital must be issued and fully paid up.[2] The amount of paid up capital will thereby be issued shares to whatever individual and/or entity that manages to contribute to the capital as evidence of financial participation into the capital. Every time new shares are issued to increase the issued capital, the shares must be fully paid up, this indicates that the issuance and validity of shares are subject to the obligation to pay up the capital.[3]

During the establishment of a limited liability company, the fulfillment of capital participation would still require substantial evidence but will be hindered with the absence of an actual bank account, in this instance the prevailing Indonesian regulation provides a certain leeway in that the said proof shall be submitted electronically to the Minister of Law within a maximum period of 60 (sixty) days from the date of the deed of establishment.[4]

Payment for shares can be made in the form of monies and/or other form of assets, so long as the asset that is exchanged for the share can be valued in money and is actually received by the company. [5] Valuation for the payment of shares through other forms must be determined based on fair market value or by experts (appraisers) not affiliated to the company.[6] Capital contribution in the form of immovable assets must be announced in 1 (one) or more Indonesian news paper within 14 (fourteen) days after the (i) execution of the company’s deed of establishment; or (ii) after the General Meeting of Shareholders (“GMS”) approves the said capital injection.[7]

Form, value, and nature of shares

Under the prevailing Indonesian law shares must be issued in the name of the owner (registered shares) and the company may not issue bearer shares.[8] The value of shares must be stated in rupiah and, in principle, shares without nominal value cannot be issued, so that each share has a certain nominal value as the basis for calculating capital.[9] Moreover, the authorized capital of a company consists of the nominal value of shares, with the exception that regulations in the capital market sector may stipulate that the authorized capital of a public company consists of shares without nominal value.[10]

Proof of ownership and registration of shares

Each shareholder must be given proof of ownership of the shares they hold, and the form of proof of ownership (e.g., physical certificate or electronic confirmation) is stipulated in the articles of association in accordance with the company's own requirements.[11] The rights attached to new shares can be exercised after the shares are registered in the name of the owner in the shareholder register, therefore registration is an effective requirement for exercising rights as a shareholder.[12]

Rights attached to Shares

Each share essentially gives its owner the right to: (i) attend and vote at a GMS; (ii) receive dividend payments; (iii) receive a share of the remaining assets resulting from liquidation; and (iv) exercise other rights specified in the ICL.[13] Certain rights, such as voting rights at GMS and other corporate rights, may be excluded for certain classifications of shares regulated by the Company Law and/or articles of association, which we will discuss further below.[14]

Each share provides its owner rights that cannot be divided, this means that the rights of one share cannot be divided among several people separately; if one share is jointly owned by several people, a joint representative must be appointed to exercise the rights of that share.[15]

Classification of Shares

The articles of association must stipulate one or more classifications of shares in the company, and each share within the same classification must grant the same rights to its owners, so that the principle of equality within a class of shares is guaranteed by the ICL.[16]

If there is more than one classification of shares, the articles of association must stipulate one of them as common shares, which are shares that in principle have voting rights in the General Meeting of Shareholders, rights to dividends, and rights to the remaining liquidation assets.[17] The classification of shares that can be regulated by the articles of association shall at least include:[18]

1. shares with or without voting rights;
2. shares with special rights to nominate members of the Board of Directors and/or members of the Board of Commissioners;
3. shares that can be redeemed or exchanged for another class of shares after a certain period of time;
4. shares that give the right to receive dividends in advance (preferred) on a cumulative or non-cumulative basis;
5. shares that give the right to receive the remaining assets from liquidation in advance.

The classification above does not always indicate that each classification are separate from one another, a share can actually have a combination of two or more of the classification mentioned above.

Fractional Shares

The articles of association may stipulate the existence of fractional nominal share values, so that ownership can be expressed not only in whole shares but also in fractions, to the extent that this is explicitly regulated in the articles of association.[19] Holders of fractional shares are not granted individual voting rights, unless the holders of such fractional shares, either individually or collectively with other holders of fractional shares of the same classification, reach a nominal value equivalent to one full share, which then gives rise to voting rights equivalent to one share.[20]

The provisions stating that each share confers indivisible rights and the requirement to appoint a joint representative if one share is owned by more than one person also apply mutatis mutandis to fractional shares.[21]

Transfer of Shares

The ICL mandates that the transfer of share rights must be regulated in the articles of association, with the obligation to comply with the provisions of laws and regulations, so that the articles of association become the main source of procedures for the sale and transfer of shares in a company.[22]

The transfer of share rights is generally carried out through:[23]

1. a deed of transfer of rights (authentic or private);
2. delivery of the deed or a copy thereof to the company;   
3. registration by the Board of Directors in the shareholder register;
4. Notify the change of shareholders to the Minister of Law to be registered in the company registration database of the Ministry of Law, this also includes notification for the change of shares due to inheritance, acquisition, of split off/separation.

In addition, the ICL allows the articles of association to stipulate certain conditions before the transfer of share rights can be carried out, such as the requirement to offer the shares to other existing shareholders first or the approval of the competent authority, so long as it is in accordance with the provisions of the law.[24] Examples of approval from competent authority would be approval from the Minister of Energy and Mineral Resources for companies engaging in mining activities.[25]

Share Ownership Requirements

In general shares ownership must fulfill the basic requirement stipulated under the ICL especially the requirement to place or contribute to the capital, in which the shares serves as evidence of said contribution. ICL allows the articles of association to stipulate certain share ownership requirements, with due observance to the provisions of the competent authority as stipulated under the prevailing law in accordance with the field of business (e.g., banking or energy authorities), thereby allowing restrictions on the types of shareholders in certain sectors.[26] If these share ownership requirements are not met, the party acquiring the shares cannot exercise their rights as a shareholder, and the shares in question will not be counted in the GMS quorum or vote count, thereby confirming the validity of sanctions for violating ownership requirements.[27]

Key Takeaways:

As explained in the beginning of this article shares are a fundamental investment instrument in a limited liability company as they serve as proof of ownership that legally determines who owns and controls the company. Share ownership reflects the ownership interest of an individual or legal entity in the company, which also forms the basis for the rights and obligations of shareholders.

Through share ownership, shareholders obtain the right to participate in the company's strategic decision-making through their participation and vote during a GMS, the right to profit sharing (dividends), and the right to the company's remaining assets in the event of liquidation. Thus, shares not only represent economic value, but also control rights and legal legitimacy over the company.

Whereby recognition as a valid shareholder will only occur upon the complete fulfillment of the legal requirements for ownership according to the prevailing Indonesian law as well as specific requirements the company may specify in relation to the ownership according to its article of association. Only legally recognized shareholders have the right to claim ownership, enjoy economic benefits, and/or exercise control over the company.