Debt to Equity Swap According to Indonesia Company Law

A. DEBT TO EQUITY SWAP PROCEDURE

Debt to Equity Swap can be conducted by transferring existing shares owned by Shareholders or issued new shares. Debt to Equity Swap that conducted by transferring existing shares owned by Shareholders actually requires the shareholder(s) becomes the guarantor of the Company’s debt. Therefore, in order to pay off the Company’s Debt, the shareholders transfer they shares as much as the receivables.
Among the Company, Creditor and Shareholder(s) shall be made a settlement agreement which stated the Company’s debt fully paid by swap of the shareholders shares with receivables. Transferring of shares between the Shareholder(s) and creditor shall be made in deed of shares transfer and registered to the Minister of Law and Human Rights.

Pursuant to the Article 35 of Law No. 40 Year 2007 regarding Limited Liability Company Shareholders and other creditors having receivables against the Company, may not set off their receivables against the payment obligation to pay up the share price they have subscribed, except with the approval from the General Meeting of Shareholders.
The receivables which may be set off against the payment of share are receivables on claims to the Company which arise out of:
1. The Company has received the money or the surrender to tangible or intangible goods which have a monetary value.
2. Party who becomes the guarantor of the Company’s debt has paid the Company’s debt in full, for the amount guaranteed.
3. The Company becomes the guarantor of a third party’s debt, and the Company has the received benefits in the form of money or goods which have monetary value, and the Company has in fact directly or indirectly received.

B. LEGAL EFFECT OF DEBT TO EQUITY SWAP

After conduct Debt to Equity Swap, creditor of the Company shall become to shareholder with all rights and obligations and by law receivable of the Company to creditor is fully paid. Creditor has no right to claim his debt payment.
Pursuant to the Law No. 40 Year 2007, rights of the shareholder are as follow:

1. Attend and cast vote in the General Meeting of Shareholders (GMS)
1.1 GMS shall be lawful if more than ½ (one-half) from the total shares with voting right are present or represented.
1.2 GMS for the amendment of the articles of association can be convened if at least 2/3 (two-third) of the total shares issued with voting rights are present or represented and the resolutions thereof shall be valid if approved by more than 2/3 (two-third) of total votes cast at the meeting
1.3 GMS to approve the Merger, Consolidation, Acquisition, or Separation, bankruptcy, extension of duration, and the liquidation of the Company can be convened if at least 3/4 (three-fourth) of the total shares issued with voting rights are present or represented and the resolutions thereof shall be valid if approved by more than 3/4 (three-fourth) of total votes cast at the meeting.
(Majority shareholders shall calculate and consider this quorum if they want to conduct debt to equity shares because majority shareholders will get difficulty to make resolution regarding the company policies. However, in order to debt to equity swap, Company may issues different classification shares which not granted with voting right. So that the majority shareholders still have unanimous right to take resolution).

2. Receive dividend payment and the remainder or assets from liquidation.
Since the interest of the creditor is to get payment of their claim, therefore after become shareholder, they expect to receive dividend from company’s profit. If they are not receive any dividend from the company, shareholder is entitled to file bankruptcy against company so they can receive the remainder or assets from liquidation. It means, bankruptcy petition against company is still possibly filed.

3. Obtain annual or periodically report from BOD and BOC.
The Board of Directors shall prepare an annual work plan prior to the commencement of the coming financial year and must be approved by General Meeting of Shareholders.
The Board of Directors shall submit an annual report (including audited financial statement) to the GMS after it has been reviewed by the Board of Commissioners, no later than 6 (six) months after the Company’s accounting year ends.
In the event that it is proven that the financial statement is inaccurate and incorrect, the members of the Board of Directors shall jointly or severally liable to the inflicted loss party. The member of the Board of Directors and Board of Commissioners shall be fully discharged and released against any responsibility if it is proven that such condition is not resulted from their fault.

4. Request to conduct Inspection over the Company
1 (one) shareholder or more which representing at least 1/10 (one-tenth) of the total number of shares with voting rights may apply request to conduct inspection over the Company. Inspection over the Company may be performed with the purpose to obtain data or explanation in the event that there are suspicion concerning the following matters:
a. the Company has committed an illegal action which may cause adverse effect to the shareholders or the third party; or
b. the members of the Board of Directors or the Board of Commissioners has committed an illegal action that may cause adverse effect to the Company or shareholders or the third parties.
(Considering many kinds of obligation shall be conducted by mining company, this inspection can be harm if BOD / BOC has not fulfill all obligation to government can be classified as illegal action).

5. Shareholders is entitled to transfer, pledge or fiduciary his shares
Shares are movable objects and give the rights as referred to prevailing law and regulations. Shares can be transfer other party and shall be conducted with a deed of transfer of right. The article of association may regulate requirements regarding of rights over shares as follows:
a. the obligation to offer pre-emptive rights to the shareholders with a certain classification or to other shareholders;
b. the obligation to obtain prior approval from the Company Organ; and/or
c. the obligation to obtain prior approval from the authorized institutions in accordance with the provisions of the legislations.
Based on Indonesia mining regulations, transfer of shares of mining company shall be approved by the Minister of Energy and Mineral Resources.
Shareholder is entitled to pledge or fiduciary his shares as collateral of his debt. Pledge or fiduciary of share must be registered to Company registration by BOD.
Based on Minister of Energy and Mineral Resources Regulation the divestment shares is prohibited to pledge.

6. Each shareholder shall have the right to file a suit against the Company to the District Court if they suffer losses due the action of the Company which is considered to be unfair and unreasonable as a result of a resolution of the GMS, the Board of Directors, and/or the Board of Commissioners.

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