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Start-up exodus signals urgency to reform Indonesia's corporate law
Venture capital firms could require Indonesian start-ups to move to more business-friendly environments.
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Start-up scale-up: Visitors look at technology developed by start-ups on Aug. 11, 2023, during the Indonesia Startup Ecosystem Summit 2023 in Solo Technopark, Surakarta, Central Java. (Antara/Mohammad Ayudha)
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everal weeks ago, the Times of Israel published a headline stating that around 80 percent of new Israeli start-ups were opting to incorporate in the United States. One entrepreneur explained, “It mainly revolves around corruption and uncertainty of what system there is to protect me as a business, from a tax perspective, from a legal perspective or an intellectual property perspective”.
Similarly, in 2020, HukumOnline published the following headline: Many Indonesian start-ups are moving to Singapore. Ahmad Fikri Assegaf, a top-tier corporate lawyer, noted that two of the reasons for such exoduses are contract enforcement and easy capital access.
This start-up exodus should serve as a wake-up call for Indonesia that something is wrong with the Indonesian start-up legal landscape. It should also serve as a wake-up call for the Israeli government because it signals a capital flight, which hinders economic development.
Casual empiricism suggests that capital flight is caused by multiple factors instead of just one, but common sense dictates that it is better safe than sorry. Tackling the issue from every angle might therefore be a good prescription for Indonesia.
One legal factor that might be easily forgotten is evident in the weaknesses of Indonesian corporate law, namely Law No. 40/2007 on Company, which has been amended from time to time (Indonesian Company Law). After the Indonesian start-up exodus began in 2020, The Indonesia Company Law was amended through Law No. 11/2020 on Job Creation, which was then revoked by Government Regulation in Lieu of Law No. 2/2022 on Job Creation. But the question remains, has the 2022 Job Creation Law effectively addressed the weaknesses of the Indonesian Company Law?
Unfortunately, the answer is no, at least from my perspective as an Indonesian lawyer. There are still several weaknesses that have not been addressed.
First, protection for minority shareholders under the Indonesian Company Law is excessive. Minority protection is important, but so is the ability to make business decisions quickly, especially regarding start-up equity funding. Start-up equity funding through the issuance of new shares to venture capital firms is integral to start-up development. Regrettably, minority shareholders can prolong start-ups’ corporate actions during equity funding.
