The Nature and Type of Related Party Transaction RPT

1400 shareholders. Generally this RPT occurs on a firm that have a weak corporate governance machanism, and this firm usually have lower adjusted stock return. The opinion that RPT represents a conflict of interest is consistent with agency issues similar to those considered by Berle and Means 1932 and Jensen and Meckling 1976 about agency problem between manager and shareholders, and between majority and minority shareholders. The second hypothesis is efficient transaction hypothesis, which states that RPT efficiently could fulfill economic needs of a company decreasing transaction cost. For example, giving compensation and fringe benefits for directors, because the directors have skill that useful for a firm. Moreover, Ryngaert and Thomas 2007 state that though RPT can be abused to expropriate wealth, it also has some benefits, such as a contract with related party could provide rapid activity coordination and feedback and could overcome financial distress that a firm might have e.g. by providing loan with a lower rate. Consistent with argument that RPT could expropriate and benefiting the minority shareholders, Cheung, Rau and Stouraitis 2006 investigate the relationship between RPT and excess return during corporate action announcements and classify RPT into three categories. First, transactions that are a priori likely to result in expropriation of a listed firm‘s minority shareholders. These involve acquisitions of assets by the listed company from connected parties, asset sales by the listed firm to connected parties, sales of equity stakes in the listed company to connected parties, trading relationships between the listed firm and connected parties, and direct cash payments or loan guarantees from the listed firm to a connected party. Second, transactions likely to benefit the listed firm‘s minority shareholders, such as cash receipts by the listed company and transactions between the listed firm and its subsidiaries. Third, transactions that could have strategic rationales and perhaps are 1401 not expropriation, such as takeover offers in which the connected party is another publicly listed or foreign company and formation of joint ventures, acquisitions of joint venture stakes from the remaining partners, and sales of joint venture stakes to the remaining partners. In the latter two cases, the connected party is the joint venture partner in its capacity as subsidiary shareholder. Their study finds that excess return in connected transactions are negative, consistent with the conflict of interest hypothesis.

3. Regulation and Disclosure Requirement for RPT in Indonesia

The following provides brief description regarding regulation on RPT in Indonesia, concluded from Utama 2008. The new Corporation Law Undang Undang No. 40 2007 states that the Supervisory Board SB and the Board of Directors BOD shall perform their duties for the best interest of the company. Further, it also requires that the decision regarding RPT is made by parties that are involved with the transaction. There is no such requirement in the former corporation law. In addition, the Capital Market Law, which is further detailed in Badan Pengawas Pasar Modal - Lembaga Keuangan or Bapepam-LK Rule 242 , requires certain transactions containing conflict of interest have to be approved by independent or minority shareholders. According to the Corporation Law, shareholders with cumulative 10 voting rights may ask for General Shareholders Meeting to express their concerns or to ask certain information questions. Shareholders may also file lawsuit against a company, BOD, or SB if they suffer loss as a result of negligencemisconduct by the companyBODBOC. Based on the existing laws and rules, especially after the enactment of the new corporation law, in general rules and regulation concerning RPT in Indonesia are relatively adequate. 242 Bapepam-LK is the Indonesian Capital Market and Financial Institutions Supervisory Body. 1402 Enforcing and implementing the laws and the rules are quite a challenge. The Corporation Law is just issued in August 2007, thus the enforcement and implementation of the Law remain to be seen. Further, with regard to Bapepam- δK‘s requirement of independent shareholders‘ approval for certain RPT, in practice only few RPTs about 10 transactions per year during 2001 – 2007 obtain approval from minority shareholders. Thus, before 2007, the majority of RPT were unchecked by parties independent to the transaction, except if a firm voluntarily establishes such policy. Even though shareholders may file a lawsuit against a companyBODBOC, in practice it is difficult to do, possibly due to requirement of having at least 10 voting shares andor due to the lengthy and inefficient judicial process. The following explains the disclosure requirement regarding PRT for public companies in Indonesia. Public companies have to disclose their RPTs in the financial statements semi-annually in accordance with the Indonesian Accounting Standard and Bapepam Rule VIII.G.7. The Bapepam disclosure requirement is quite detail, e.g., disclosing the amount of assets, liabilities, sales, and expenses arising from RPT, disclosing the parties involved in RPT and their relationship with a firm for transactions above USD 100,000, and disclosing that the price and term of transactions are in accordance with arms‘ length transactions. Conflict of interest transactions requiring approval of independent shareholders also have to be disclosed in detail to the public while other conflict of interest transactions have to be reported to Bapepam-LK. Information that should be disclosed are:  Explanation about the transaction: transaction value, related parties, and the nature of the conflict of interest.  Report from independent party about the transaction.