Understanding the Role and Function of Articles of Association

Articles of Association is one of the key documents in establishing a Limited Liability Company or Perseroan Terbatas (“PT”) in Indonesia. This document serves as the primary legal foundation governing the company’s management, from the rights and obligations of shareholders to the organizational structure. Understanding the Articles of Association is a crucial first step, so let’s explore further to learn about its significance and the essential elements it must contain.

What Are Articles of Association?

Articles of Association are a mandatory formal document for every PT in Indonesia, as they must be included in the company’s Deed of Incorporation (or Akta Pendirian). This document serves as a basic set of rules governing the company’s management, including provisions on organizational structure, capital, rights and obligations of shareholders, and decision-making procedures within the company. As the company’s “constitution”, the Articles of Association also serve as a guideline for the Board of Directors (“BOD”) and shareholders in carrying out PT’s management and business activities in accordance with applicable laws.

Functions and Importance of Articles of Association

Articles of Association are a fundamental element in the operation and governance of a PT. This document serves some key functions, including:

Guide for Shareholders and Directors
Articles of Association are a reference for both shareholders and directors in carrying out corporate activities. This document establishes the framework for decision-making processes, delineates the rights and obligations of all parties involved, and outlines the procedures for general meetings of shareholders or Rapat Umum Pemegang Saham (“RUPS”).
Legal Foundation for Company Operations
A PT’s Articles of Association provide legal legitimacy for all corporate activities. Any company action that deviates from the provisions of the Articles of Association may be considered illegal, making compliance with the Articles of Association essential to maintaining the PT’s integrity.
Protection for Shareholders
In addition to delineating obligations, the Articles of Association also protect the rights of all parties such as BOD, Board of Commissioner (“BOC”) and shareholders, including minority shareholders. Clear rules help minimize internal conflicts, ensuring all shareholders feel secure in their roles.
Guidance During Changes or Transfers of Ownership
Articles of Association facilitate a smooth transition in the event of a change in ownership structure or management, as they provide clear guidance on the regulatory aspect of such changes. This provides legal certainty and operational stability, which are essential for any business.

The above functions render the Articles of Association indispensable to the continuity and legal certainty of a PT.

What Are the Key Elements of a PT’s Articles of Association?

Several key elements must be included in the Articles of Association, as required by law, including:¹

Name and Domicile of the Company
Purpose and Objective of the Company’s Business
Duration of the Company’s Existence
Amount of Authorized, Issued, and Paid-Up Capital
Number and Classification of Shares
Organizational Structure: Board of Directors and Board of Commissioners
RUPS Provisions
Procedures for Appointing, Replacing, and Dismissing Members of the Board of Directors and Commissioners
Procedures for Using and Distributing Profits and Dividends

The above elements form the core components that must be included in a PT’s Articles of Association. With clear rules, the Articles of Association ensure that all corporate activities are conducted in accordance with the law and the initial agreements among shareholders. This also ensures legal clarity and operational consistency for the PT.

The Difference Between Articles of Association and Bylaws

In addition to the Articles of Association, we often hear the term “Bylaws” in the legal structure of a company or organization. Although these two documents are often considered similar, they are designed to serve different functions and roles in corporate management. What are the differences between these two documents?

As previously explained, the Articles of Association are formal and legally binding, which also reflect the company’s compliance with applicable regulations. Any amendments to this document must be approved by the RUPS, and the Minister’s approval is required for certain changes.

On the other hand, Bylaws focus more on the company’s internal regulations, including detailed rules on implementing policies established in the Articles of Association. The Bylaws regulate more operational and specific matters, such as internal meeting procedures, the company’s code of ethics, or applicable employee regulations.

Unlike certain changes to the Articles of Association, which must be approved by the Minister, the Bylaws usually do not require approval from any particular authority. They can be amended through more straightforward procedures, such as agreements among members or shareholders.

The main difference between the two lies in the legality and the scope of regulation. While the Articles of Association are legally binding and must be approved by the government, the Bylaws regulate operational details that support the implementation of the Articles of Association.

Understanding the Articles of Association is one of the important steps in ensuring that corporate governance is carried out under applicable laws and internal policies.

For further information regarding Articles of Association and related regulations, contact us at ADCO Law.

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