Solving corporate transaction issues by exercising litigation

Corporate actions involving investments or cooperation between parties are typically facilitated through various agreements, including mergers and acquisitions (M&A), joint ventures (JV), indirect or direct investments, or any other mutually agreed-upon means. Despite the careful drafting of these agreements, they can still lead to disputes among the parties. 

Loan transactions can also lead to similar legal complexities. Defaulting debtors sometimes attempt to manipulate legal proceedings to justify non-payment. For instance, a listed company previously sought to invalidate a bond issuance to avoid its debt obligations, an effort that was temporarily successful before being overturned by the Indonesian Supreme Court. Such cases highlight how litigation can shape corporate transaction outcomes.

Facility agreement in sale and purchase disputes

When a JV lacks a shareholders’ agreement that regulates governance and shareholder rights, transactions involving the sale of shares may be obstructed. Approval from the General Meeting of Shareholders (GMS) is often required for these transactions, and certain shareholders may refuse to provide consent. This can hinder shareholders looking to exit their investment, especially if they do not control a majority of the voting shares. Resorting to court or arbitration may be necessary, although it is often a time-consuming and cumbersome process.

An innovative approach is to utilise a facility agreement. Instead of using conventional sale and purchase documentation, the prospective seller enters into a loan agreement with the buyer. The loan amount corresponds to the purchase price, and additional securities such as a pledge of shares, power of attorney to vote, and power of attorney to sell are included. This allows the buyer, upon the seller’s default, to enforce the pledge and sell the shares without requiring GMS approval.

While effective, this mechanism carries risks. The buyer may reject the arrangement, default may harm the seller’s creditworthiness, and public auctions (for the pledge enforcement) may attract competing bidders. Other shareholders could also interfere with the enforcement process.

Bankruptcy and suspension of payment mechanism (SOP)

Bankruptcy declares a debtor insolvent, allowing a receiver to manage asset liquidation to repay debts. Alternatively, SOPs offer temporary debt restructuring. Bankruptcy and SOPs can serve as tools to pressure debtors into compliance, terminate legal cases, or facilitate asset acquisition. Secured creditors may enforce claims through public auctions.

SOPs also restructure loans via composition plans approved by creditors. To secure favourable terms, debtors often involve affiliates to acquire claims, ensuring majority voting rights in composition meetings. However, failure to maintain fairness may result in court rejection.

As with facility agreements, ensuring cooperation from administrators or receivers is crucial. Appointing a nominated receiver can help mitigate risks.

Commentary

Large corporate transactions are prone to disputes, which can lead to costly and time-consuming legal battles. Traditional court or arbitration proceedings may not be optimal for all parties. Innovative strategies, such as facility agreements and bankruptcy mechanisms, provide efficient alternatives to address these challenges and achieve mutually beneficial outcomes.

To gain further insight into these dispute resolution approaches, click here to read the complete article.

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Freddy Karyadi, a seasoned legal and tax professional with over 25 years of experience, currently serves as a tax partner at Protemus Capital. He specialises in project financing, capital markets, and M&A. His expertise spans diverse cross-border deals, particularly in the technology and fintech sectors.