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Indonesian government u-turn on upstream share transfers and changes of directors

ANALYSIS: Following pressure from the industry and intervention by the president of Indonesia, Indonesia's Ministry of Energy and Mineral Resources (MEMR) has revised a controversial regulation on state control over the upstream oil and gas sector.22 Aug 2017

The regulation, introduced in July, required prior consent from MEMR if a PSC contractor wished to change any of its directors, chief executives or managing directors.

A transfer of a majority of shares holding voting rights held directly in a PSC contractor also required prior MEMR consent. The regulation did appear to exclude the requirement for consent for transfers to an affiliate, but the drafting was unclear. The rule applied to the various sectors under MEMR's remit, including the upstream and downstream oil and gas sectors.

This unsurprisingly met strong criticism and calls for the new rules, particularly those on restrictions changing company directors, to be scrapped. Foreign investors don't like regulations like these, as some see them as a first step to the expropriation of their upstream assets.

Fortunately, MEMR met with stakeholders and issued a revised regulation this month which replaces the July regulation in its entirety. The requirement for approval on change of directors, chief executives or managing directors has been removed completely, in both the upstream and downstream oil and gas sectors. 

The position on the transfer of a majority of the shares holding voting rights in a PSC contractor has also been amended. It is now clear that such a transfer requires prior MEMR consent, but where there is a transfer of a majority of the shares holding voting rights in a HoldCo or Parent Company, only written notification to MEMR is required.

Transfer of the majority of the shares holding voting rights in:

Transfer of the majority of the shares holding voting rights

This change provides clarity on whether government approval is required on the transfer of shares relating to a PSC contractor - an issue which was previously unclear, especially under older forms of PSC.

However, the rule requiring MEMR consent appears to also include transfers of a majority of shares holding voting rights in the PSC contractor to an affiliate. It would make commercial sense to carve out intra-group transfers, as these do not strictly fall within a change of control scenario. Clarity on this issue from MEMR would be welcomed.

Any transfer of shares in a company which holds a permit for downstream oil and gas activities requires a report to be made to MEMR, but no prior consent.

Overall, this recent move by the Indonesian government is to be applauded and signals a new and welcome willingness to listen to concerns being raised by the industry.  

Steve Potter is an oil and gas specialist with Pinsent Masons MPillay, the Singapore joint law venture partner of Pinsent Masons, the law firm behind Out-Law.com.