QUESTION
“I invested in a private limited company (PT) owned by my friend. I hold 25% of the shares, while my friend owns 75% of the shares and also serves as the Director of the company. I am merely a passive investor and have no involvement in the company’s day-to-day operations. Recently, I discovered that my friend has been using the company’s funds for personal purposes. Can I remove him as Director? Isn’t that difficult since he is the majority shareholder while I am only a minority shareholder? What legal remedies are available to me?”

ANSWER
Conflicts between minority shareholders and majority shareholders are among the most common corporate disputes in Indonesian business practice. The issue becomes even more complicated when the majority shareholder simultaneously serves as the Director and exercises substantial control over the company’s operations.

In many cases, minority investors merely contribute capital and are not involved in the company’s daily management. However, when indications arise of corporate asset misappropriation, embezzlement of company funds, misuse of company bank accounts for personal purposes, self-dealing transactions, or other actions detrimental to the company, minority shareholders are often perceived as being in a vulnerable position.
Note: The term “company” referred to in this section specifically means a Perseroan Terbatas (“PT”), or Indonesian Limited Liability Company.

In reality, Indonesian corporate law provides various legal mechanisms designed to protect minority shareholders.

The question therefore becomes: Can a minority shareholder dismiss and replace a Director who is also the majority shareholder?

The answer is: Yes, but it is not as straightforward as it may seem, as specific corporate legal procedures must be followed.

The Position of Directors and Shareholders in a Limited Liability Company (PT)
Before discussing potential solutions, it is important to understand that a PT is managed through three corporate organs, each with distinct legal functions and authorities:
1. General Meeting of Shareholders (“GMS”);
2. Board of Directors;
3. Board of Commissioners.
Many people assume that because someone is the majority shareholder, they are free to do whatever they wish with the company. This assumption is incorrect.

A. Shareholders
Shareholders are the owners of the company because they contribute capital to the corporation.

Pursuant to Section 1 paragraph (2) juncto Section 52 paragraph (1) of Act No. 40 of 2007 concerning Limited Liability Companies (“Corporation Act”), shareholders have the right to vote and exercise voting rights in the General Meeting of Shareholders on matters that are not delegated to the Board of Directors or Board of Commissioners.

B. Board of Directors
Section 1 paragraph (5) of the Company Act (“UU 40/2007 tentang Perseroan Terbatas”) provides:
“The Board of Directors is a corporate organ authorized and fully responsible for managing the company for the benefit of the company, in accordance with its purposes and objectives, and representing the company both inside and outside the court in accordance with the provisions of the Articles of Association.”

Note: A Director refers to an individual office-holder, whereas the Board of Directors refers to the collective body consisting of one or more directors responsible for managing the company.

Accordingly, when a person serves as a Director, they are not acting for their own personal interests but rather for the interests of the company.

The office of Director must be exercised in accordance with the principles of:
– Fiduciary Duty;
– Duty of Care and Loyalty;
– Good Faith.
Therefore, if your friend uses company funds for personal purposes, there may be a breach of these duties and obligations owed to the company.

C. Board of Commissioners
The Board of Commissioners is responsible for conducting general and/or specific supervision in accordance with the Articles of Association and providing advice to the Board of Directors.

Fundamentally, the Board of Commissioners serves as a corporate check-and-balance mechanism, overseeing the management activities conducted by the Directors.

It should be emphasized that the owners of a company are the shareholders collectively, not the Directors.

The term “collectively” refers to all shareholders holding 100% of the company’s shares, not merely the majority shareholder, even if that shareholder owns 99% of the company.

The Directors are merely entrusted with the authority to actively manage the company’s business affairs and may only act within the limits prescribed by the company’s Articles of Association and applicable laws and regulations.

Can a Director Use Company Funds for Personal Purposes?
-No.
The fundamental reason is that company assets are legally separate from the personal assets of both shareholders and directors.

This principle is known as the Separate Legal Entity Doctrine.

In essence, this doctrine establishes that a limited liability company is a distinct legal entity with assets separate from those of its shareholders.

Consequently:
– The company’s bank account is not the Director’s personal bank account;
– The company’s cash reserves do not belong to any shareholder personally;
– Corporate assets do not belong to the majority shareholder personally.

If a Director uses company funds for personal purposes without lawful authority, such conduct may potentially constitute:
– Abuse of authority;
– Breach of fiduciary duty;
– An unlawful act (tort);
– Embezzlement in office (under certain circumstances);
– Other violations of corporate governance obligations.

Directors’ Duties Under Indonesian Company Law
The Board of Directors is required to manage the company in good faith, with due care, in accordance with the company’s purposes and objectives, and with full responsibility.

Where a Director acts negligently or breaches these duties, he or she may be held personally liable for any losses suffered by the company. For example, if the use of company funds for a Director’s personal purposes causes financial loss to the company, the Director concerned may be held personally liable, including against his or her personal assets.

Can a Minority Shareholder Dismiss a Director?
In theory, YES. However, in practice, it is NOT THAT SIMPLE. Why?

Because the appointment and dismissal of Directors must be carried out through a General Meeting of Shareholders (“GMS”).⁵ The challenge lies in the voting mechanism of the GMS, where voting rights are determined based on share ownership.

In your case:
– You own 25% of the shares.
– The Director owns 75% of the shares

In a GMS, the majority shareholder will almost certainly prevail in any vote. Consequently, from a mathematical standpoint, you do not possess sufficient voting power to remove the Director. However, this does not mean that no legal remedies are available.

Minority Shareholders’ Right to Request a General Meeting of Shareholders (GMS)
Article 79 paragraph (2) of the Company Law grants shareholders representing at least 10% of the voting shares the right to request the convening of a GMS.

Since you own 25% of the shares, you satisfy this requirement.

Through a GMS, you may:
– Request an explanation regarding the use of company funds;
– Request an audit;
– Request an evaluation of the Director’s performance;
– Propose the dismissal of the Director.

However, in practice, such efforts are often unlikely to succeed because resolutions at a GMS are generally based on consensus or voting according to majority share ownership. As a result, your proposal to dismiss the Director will most likely be defeated.

This is because a resolution is generally valid only if approved by more than one-half (50%) of the votes cast. Accordingly, the majority shareholder holding 75% of the shares effectively controls the outcome of the vote.

Moreover, the majority shareholder may intentionally frustrate the GMS process by refusing to attend. This is because a GMS may only proceed if shareholders representing more than one-half of all voting shares are present or represented. Since your friend holds 75% of the shares, his absence alone may prevent the GMS from reaching the required quorum.

Although the likelihood of obtaining the desired outcome may be low, formally requesting a GMS remains important because it creates documentary evidence that you have officially objected to the Director’s conduct. In certain cases, it may also indirectly demonstrate the Director’s bad faith.

Reporting the Matter to the Board of Commissioners for Temporary Suspension
If the company has a Board of Commissioners, one of the most practical initial steps is to report the matter to the Commissioners.

The Board of Commissioners is responsible for supervising the policies and management of the company carried out by the Board of Directors.

One of the Commissioners’ powers is the authority to temporarily suspend a Director where necessary to protect the company’s interests.

It should be emphasized that such suspension is temporary rather than permanent. Consequently, within 30 days after the suspension, a GMS must be convened to determine whether the suspension should be revoked or confirmed.

Right to Request a Court-Ordered Investigation of the Company
This is one of the strongest legal remedies available to shareholders, although it is relatively unknown in practice.

Article 138 of the Company Law grants shareholders representing at least 10% of the voting shares the right to petition the District Court for an investigation of the company.

Such a petition may be filed where there are reasonable grounds to suspect that the company, its Directors, or its Commissioners have committed acts causing losses to shareholders and/or third parties. If the court grants the application, it may appoint independent experts to examine:
– Company bank accounts;
– Corporate transactions;
– The use of company funds;
– Corporate accounting records and books.
The results of such an investigation can serve as powerful evidence in holding the Director personally accountable for abusing his authority.

The Ultimate Remedy: Derivative Lawsuit
A derivative action is a lawsuit filed by a shareholder on behalf of the company against a Director whose actions have caused harm to the company.

This legal remedy may be exercised by shareholders representing at least one-tenth (10%) of all voting shares.

Since you own 25% of the shares, you satisfy this requirement.

Importantly, the claim is not brought for your personal benefit or the benefit of any individual shareholder. Rather, it seeks recovery for losses suffered by the company itself.

Accordingly, common remedies sought in a derivative action include:
– Recovery of misappropriated company funds;
– Compensation for losses;
– Cancellation of unlawful transactions.
Such claims may ultimately expose the Director to personal liability, including liability against his personal assets.

This remedy is particularly important because it does not rely solely upon the GMS mechanism, which is controlled by the majority shareholder.

What If Your Shareholding Is Below 10%?
Option 1: Join Forces with Other Shareholders
You may collaborate with other shareholders until your combined voting rights reach at least 10% of the voting shares.

The law does not require the 10% threshold to be held by a single shareholder. Therefore, shareholders may collectively satisfy the threshold required to:
– Request a court investigation of the company; or
– Initiate a derivative action.

Option 2: File a Civil Claim for an Unlawful Act (Tort)
A minority shareholder may also file a claim for an Tort (Perbuatan Melawan Hukum or “PMH”) pursuant to Section 1365 of the Indonesian Civil Code (“KUH Perdata”).

The essential elements are:
1. An act or omission attributable to the Director’s fault or negligence;
2. A violation of law, whether statutory law or the company’s Articles of Association (“Anggaran Dasar Perseroan”);
3. Loss or damage suffered by the shareholder, whether material or non-material;
4. A causal connection between the Director’s unlawful conduct and the shareholder’s loss.

Common examples include:
1. The Director transfers company assets to his own company;
2. The Director uses company funds to purchase personal assets;
3. The Director derives personal benefits from corporate transactions.

Filing a Criminal Complaint
Where a Director transfers company assets or funds to his personal account and uses them for personal purposes, such conduct may potentially constitute Embezzlement in Office under Article 486 of Act No. 1 of 2023 concerning the Indonesian Criminal Code (“KUHP”).

The offense carries a maximum penalty of: Five (5) years’ imprisonment; or a fine of up to IDR 500 million.

CONCLUSION
A minority shareholder holding only 25% of the shares may face significant challenges in removing a Director who simultaneously controls 75% of the company’s shares. In terms of voting power at a GMS, the majority shareholder will almost always maintain control.

However, this does not mean that the Director is free to use company funds for personal purposes without legal consequences.

The Indonesian Corporation Act provides several protective mechanisms for minority shareholders, including:
– The right to request a GMS;
– Reporting misconduct to the Board of Commissioners;
– Requesting a court-ordered company investigation (S. 138 Corporation Act);
– Filing a derivative action under Section 97 of the Corporation Act.

In practice, the most effective strategy is often not to focus immediately on removing the Director, but rather to first gather evidence, request an independent audit, and utilize the available corporate law mechanisms to recover losses suffered by the company and hold the Director personally accountable.

In other words, even as a passive investor and minority shareholder, the law still provides meaningful protection to ensure that your rights as a company owner are not sacrificed due to the unprofessional conduct or abuse of authority by a Director.

Author: Jose Tjahjono, S.H., LL.M., CPLA.