INTERLOCKING DIRECTORSHIP apparently is one of few issues in Law Number 5 Year 1999 regarding Prohibition of Monopolistic Practices and Unfair Competition (“Competition Law”) that has been frequently asked during legal consulations, apart from other issues such as cartel, intellectual property and distribution/exclusive agreements.

1. WHAT IS THE DEFINITION OF INTERLOCKING DIRECTORSHIP?

Interlocking directorship can be described as a conditions where one person acts as a Director or Comissioner in more than one companies. Other similar terms that is often used are ‘interlocking directorate’, ‘double directorship’ or ‘double function’. This provisions also can be applied to group of companies. Article 26 of Competition Law: “A person concurrently holding a position as a member of the Board of Directors or as a comissioner of a company, shall be prohibited from simultaneously holding a position as a member of the Board of Directors or a comissioner in other companies, in the event that such companies:

1. are in the same relevant market; or
2. have a strong bond in the field and or type of business activities; or
3. are jointly capable of controlling the market share of certain goods and or services,

which may result in monopolistic practices and or unfair competition.”

2. WHAT IS THE INTERPRETATION OF “DIRECTOR” IN THIS PROVISION?

According to the Guidelines of Article 26 of Competition Law, published by the Commission of Supervisory Business Competition (Komisi Pengawas Persaingan Usaha – “KPPU”), it can be concluded that Article 26 does not solely intended to cover private limited liability company, but also includes any forms of business entities, such as state-owned enterprises, firms, and civil partnership. Consequently, the definition of “Director” shall be interpreted as top-level management positions that are able to make strategic business decisions and therefore includes some terminology such as executive vice president, vice president, senior vice president, president director, director, and other terms in the board of a company. As for commissioner, this also includes other form of positions that are similar to the role and duties of commissioner.

3. INTERLOCKING DIRECTORSHIP IS A COMMON PRACTICE IN BUSINESS, WHY THEY ARE PROHIBITED?

In other legal areas, interlocking directorship are sometimes prohibited since it may cause conflict of interests between parties involved. However in competition perspective, the measurements of prohibition of interlocking directorship are more focused based on the effects that the duality may bring to the market and competition, because affiliated companies tends to coordinate before making any strategic business decisions. This due to the fact related to common hypothesis that as the company grows bigger, the potential occurrence of market abuse also increases (e.g. unfair conduct to competitors, higher price to consumers). Competition Law aims to prevent those conditions that hamper fair competition in the market. Under Competition Law, Interlocking Directorship is not per se illegal or in other words is not “automatically” prohibited. Based on rule of reason approach, such “duality” can only be deemed unlawful if it results in unfair competition and have caused other anti-competition effects, and falls under these circumstances:

1. The companies are in the same relevant market; or
2. The companies have a strong bond in the field and or type of business activities; or
3. The companies are jointly capable of controlling the market share of certain goods and or services.
4. WHAT ARE THE LIMITATIONS OF INTERLOCKING DIRECTORSHIP THAT MAY HARM COMPETITION?

Based on above explanations, there are three conditions that shall be take into account in analyzing Interlocking Directorship provisions:

1. The companies are in the same relevant market; or
2. The companies have a strong bond in the field and or type of business activities; or
3. The companies are jointly capable of controlling the market share of certain goods and or services.

All of the three conditions are related to in to what extent the relationship of the companies involved or what market that the companies relevant to each other. For example, Mr. X that holds a position as a director in Company A engaged in telecommunication industry and also a director in Company B which is a leasing industry, would be less likely infringe the Competiton Law, since the two companies have a very distant business relationships. In contrast, in a condition where Mr. X acts as a director in Company A and Company B where both are telecommunication companies, it would be under heavy scrutiny from the KPPU and therefore have high risk in breaching the Competition Law. This due to the fact that Company A and B acts as a competitor to each other (horizontal relationship). Another example is when Company A and Company B have vertical business relationship, such as producer-distributor relationship. For instance, Company A is a factory that produces electronic chips for mobile phones and Company B is a company that produces mobile phones. Therefore, Mr. X’s position as director may fall under Article 26 of Competition Law.

5. RELATED ARTICLES

Based on best practice, the Interlocking Directorate provisions is always leads to other forms of Competition Law infringements, such as cartels (Article 5, 9, 11), monopolistic practices (Article 17), bid rigging (Article 22), vertical integration (Article 14), exclusive agreement (Article 15) or Market Concentration (Article 19) abuse of dominant position (Article 25).

6. DOES COMPANIES NEEDS TO COMPLY AND CHANGE THEIR BUSINESS ORGANIZATIONAL STRUCTURES?

“An ounce of prevention is worth a pound of cure”. Competition Law is a delicate legal area. In order to determine whether an Interlocking Directorate is harmful to competition or not, would require an in-depth analysis which includes the nature of the industry. Companies needs to focus to resolve and prepare an internal competition compliance as means for preventive ways before having their companies sanctioned by the KPPU.