ARMA Update SOE Law Series - Series 1: Encouraging Strategic Decisions in SOE Management through Enactment of Law 1/2025

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State-Owned Enterprises (“SOE(s)”) play a pivotal role in Indonesia’s economy. Since 2003, the Government of Indonesia has established regulations for the management of SOEs as stipulated in Law No. 19 of 2003 concerning State-Owned Enterprises (“SOE Law”). With the enactment of Law No. 1 of 2025 concerning the Third Amendment to Law No. 19 of 2003 on State-Owned Enterprises (“Law 1/2025”), it is hoped that opportunities for SOEs to innovate and contribute more substantially to Indonesia’s economy will be further expanded.

Law 1/2025 introduces various new concepts and amends previous provisions with the aim of establishing a stronger and more comprehensive foundation for SOE governance, in which SOEs are not only expected to generate optimal profits, but also to fulfil their primary function of delivering greater positive impact for the state and society.

This ARMA Update is presented in three parts, each highlighting major changes brought by Law 1/2025.

1. Series 1 (this edition) focuses on two key topics:
   1. the expansion of the criteria for SOEs under Law 1/2025; and
   2. the application of the Business Judgment Rule within SOEs in accordance with Law 1/2025 and its relation to SOE Organs.

2. Series 2 will examine the establishment of a new sovereign wealth fund in Indonesia, which is Badan Pengelola Investasi Daya Anagata Nusantara (“BPI Danantara”), along with the various holding companies supporting its role in managing SOEs.

3. Series 3 will examine various adjustments and additions to the internal governance provisions of SOEs.

In Series 1, we analyse how Law 1/2025 reshapes the SOE landscape, providing a more flexible framework for management. Notably, under this revised framework, SOE executives may not constantly be exposed to the risk of criminalization for state financial losses, provided that their business decisions align with fiduciary duties and statutory good faith.

1. Expansion of SOE Criteria

	SOE Law Pre Law 1/2025	SOE Law Post Law 1/2025
Definition (Article 1 Point 1)	A business entity in which all or the majority of its capital is owned by the state through direct equity participation derived from separated state assets.	A business entity is classified as a SOE if it meets at least one of the following criteria: all or the majority of its capital is owned by the Republic of Indonesia through direct equity participation; or the Republic of Indonesia holds special rights in the entity.
SOE Capital (Article 4)	SOE Capital originates from separated state assets. Explanation: “Separated” refers to the separation of state assets from the State Budget (“APBN”) to be used as state capital participation (penyertaan modal negara) in a SOE. Once the assets are separated and invested as capital, the supervision and management of the SOE are no longer based on the APBN system, but rather are conducted in accordance with sound corporate principles.	SOE Capital originates from APBN and Non-APBN Sources. The capital of SOEs as referred to in paragraph (1) is part of the SOE's finances, and its management is carried out in accordance with the principles of good corporate governance.

Referring to the changes mentioned above, it is important to note that the phrase “originating from separated state assets”, which has often sparked debates regarding the applicability of state financial regulations to SOEs and the application of the Business Judgment Rule in SOEs, has been removed from the criteria for SOEs. In line with this change in definition, the provision on SOE capital, as outlined in Article 4, has also been amended. The phrase “originating from separated state assets” is no longer included in the scope of SOE capital.

This marks a shift toward a more corporate-oriented governance approach, where the financial management and decision-making within SOEs are no longer primarily bound by state financial regulations but are instead guided by principles of sound corporate governance and business practices, as reflected in the Business Judgment Rule.

The removal of the phrase “originating from separated state assets” provide clarity regarding the applicability of state financial regulations as stipulated under the relevant laws and regulations governing state finances. Previously, separated assets in state-owned companies were considered part of state finances. With the change, it becomes clearer that SOEs are now subject to a corporate governance framework, distinct from direct state financial regulations. The implication of this change is closely tied to the greater flexibility given to the board of directors and board of commissioners of SOEs in making decisions related to the management and oversight of the SOEs. These decisions are now based on concepts outlined in the regulations governing limited liability companies (Perseroan Terbatas – PT), rather than being primarily bound by state financial management rules. This shift in the concept of SOE capital and the increased autonomy in governance will be further explored in Section C below.

In addition to the substantial change with the removal of the phrase “separated state assets”, Law 1/2025 also broaden the scope of SOEs by incorporating the criterion of special rights held by the Republic of Indonesia in SOEs. In this context, these special rights are associated with the status of the Republic of Indonesia as the holder of Series A dual-class (dwiwarna) shares in SOEs. ¹

1. the right to approve decisions in the General Meeting of Shareholders (“GMS”);
2. the right to propose the agenda for the GMS;
3. the right to request and access company data and documents in accordance with applicable laws and regulations;
4. the right to establish guidelines/strategic policies in the following areas:
   1. accounting and finance;
   2. development and investment;
   3. operations and procurement of goods and/or services;
   4. information technology;
   5. human resources;
   6. risk management and internal oversight;
   7. legal and compliance;
   8. Social and environmental responsibility programs; and
   9. environmental, social, and governance (ESG) program;
5. the right to appoint and dismiss the Board of Directors and Board of Commissioners with the approval of the President; and
6. other rights as stipulated in the articles of association.

   Further provisions regarding the special rights of the state as the holder of Series A dual-class shares will be regulated in more detail through a Government Regulation. ²

2. Business Judgement Rule under Law 1/2025

Essentially, SOEs are operated in accordance with the provisions of the laws and regulations governing limited liability companies, unless otherwise specified in the SOE Law. Their management follows the business judgment rule, which protects the board of directors and commissioners from liability for company losses, provided they can prove:

For the Board of Directors: (i) the loss was not due to their fault or negligence; (ii) they managed the company in good faith and with prudence, in the interest of and in accordance with the purposes and objectives of the company; (iii) they had no conflict of interest, either directly or indirectly, in the management actions that resulted in the loss; and (iv) they took action to prevent the occurrence or continuation of the loss. ³

For the Board of Commissioners: (i) they have carried out supervision in good faith and with prudence in the interest of the company and in accordance with the purposes and objectives of the Company; (ii) they have no personal interest, either directly or indirectly, in the management actions of the board of directors that resulted in the loss; and (iii) they have provided advice to the board of directors to prevent the occurrence or continuation of the loss. ⁴

As noted earlier, one of the recurring issues has been the tension between the protection of the business judgment rule and concerns that SOE business losses might be classified as state losses. Law 1/2025 introduces clarification and affirmation to address this concern.

1. Affirmation of the Concept of SOE Losses or Assets

   Law 1/2025 affirms that the losses or assets of SOEs constitute the profits or losses of the SOEs themselves, ⁵ which, in its elucidation, is further emphasized that the losses or profits experienced by SOEs are not automatically considered as state losses or profits. ⁶ Moreover, it is also stipulated that state capital in SOEs originating from capital participation, whether for establishment or capital increase, constitutes SOE assets that are fully owned by and the responsibility of the SOEs. This separation allows SOEs to operate more independently and professionally.

2. Classification of SOEs Organ

   The above affirmation applies to parties directly involved in SOE management, namely: (i) the organs and employees of BPI Danantara; (ii) members of the Board of Directors, Board of Commissioners, and Supervisory Board of SOEs; and (iii) SOE employees who are explicitly not categorized as state administrators. ⁷ These parties are clearly separated from or not included as state administrators as referred to in Law No. 28 of 1999 concerning State Administrators who are Clean and Free from Corruption, Collusion, and Nepotism.

3. Legal Liability of SOE Organ

   In principle, the business judgment rule in the context of a limited liability company begins with the provisions set forth in Article 97 paragraph (5) of Law No. 40 of 2007 on Limited Liability Companies and its amendments (“Company Law”), which states that members of the board of directors cannot be held accountable for company losses if they can prove: (i) the loss was not due to its fault or negligence; (ii) it has acted with good faith and caution in the interest of and in accordance with the purpose and objectives of the Company; (iii) there is no conflict of interest, either directly or indirectly, with the management actions that resulted in the loss; and (iv) it has taken steps to prevent the occurrence or continuation of the loss.

   Law 1/2025 adopts the above principle, stating that members of the board of directors, board of commissioners, and supervisory board of SOEs are likewise shielded from liability for SOE business losses if they can prove the following cumulative elements:

   For the Minister of SOEs, the organs, and employees of BPI Danantara: ⁸

   1. the loss was not due to their fault or negligence;
   2. they have carried out the management with good faith and caution in accordance with the purpose and objectives of the investment and governance;
   3. they have no conflict of interest, either directly or indirectly, with the investment management actions; and
   4. they have not obtained any personal profit unlawfully.

   For SOEs’ board of directors: ⁹

   1. the loss was not due to their fault or negligence;
   2. they have managed the affairs with good faith and caution in the interest of and in accordance with the objectives of the SOE;
   3. they have no conflict of interest, either directly or indirectly, with the management actions that resulted in the loss; and
   4. they have taken steps to prevent the occurrence or continuation of the loss.

   For SOEs’ board of commissioners: ¹⁰

   1. they have exercised supervision with good faith and caution in the interest of the SOE and in accordance with its objectives;
   2. they have no personal interest, either directly or indirectly, in the actions of the Board of Directors that resulted in the loss; and
   3. they have provided advice to the Board of Directors to prevent the occurrence or continuation of the loss.

The emphasis on the concept of the business judgment rule in Law 1/2025 is expected to encourage the management of SOEs to be more courageous in making strategic decisions without the fear of potential criminalization, as long as the decisions are made in good faith (in accordance with the fiduciary duty principle), based on thorough analysis and caution, in line with good corporate governance principles, and without personal gain derived from the outcomes of those decisions. In this way, SOEs are expected to focus more on improving performance and contributing to the national economy.

1. Article 4C(3) of SOE Law ↩
2. Article 4C(4) of SOE Law ↩
3. Article 97(4) of Company Law ↩
4. Article 114(5) of Company Law ↩
5. Article 4B of SOE Law ↩
6. Elucidation of Article 4B of SOE Law ↩
7. Article 3X jo. Article 9G jo. Article 87(5) of SOE Law ↩
8. Article 3Y of SOE Law ↩
9. Article 9F(1) of SOE Law ↩
10. Article 9F(2) of SOE Law ↩

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Disclaimer:
This client update is the property of ARMA Law and intended for providing general information and should not be treated as legal advice, nor shall it be relied upon by any party for any circumstance. ARMA Law has no intention to provide a specific legal advice with regard to this client update.

Go to

1. Expansion of SOE Criteria
2. Business Judgement Rule under Law 1/2025

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