“In practice, legal due diligence is necessary for multiple reasons, e.g., provide information related to a certain transaction or to be provided to an outside party. Therefore, it is recommended for a company to gather understanding as to the necessity of a legal due diligence.”
Based on Professional Standards of Capital Market Legal Consultant Association (Standar Profesi Himpunan Konsultan Hukum Pasar Modal), legal due diligence is defined as a thorough examination process from legal aspects which is conducted by legal consultants on a company or transactional objects in accordance with the objection of the transaction, to obtain information or material facts which depict the conditions of the company or transactional objects.
Therefore, generally, legal due diligence is a process in which the legal aspects of documents belonging to one or more parties are being verified by another party of a legal background.
Objectives and Purposes of Legal Due Diligence
As has been defined, legal due diligence is conducted to obtain information or material facts which depict the conditions of the object of the legal due diligence. The output of a legal due diligence usually constitutes a report based on the documents or information submitted to the party of a legal background. Subsequently, the output can be used internally by the requester of the legal due diligence (the client) or presented to an outside party.
As such, the objectives and purposes of legal due diligence are the following:
- obtain information regarding risks in order to mitigating any potential risks;
- obtain information regarding licensing requirements;
- obtain information regarding values of any transactions or in order to negotiate any transactions;
- provide disclosure of information (e.g., to authorized institutions, potential buyer or investor, etc.); and
- generate a legal opinion.
Based on the objectives and purposes of the legal due diligence, legal due diligence can be conducted in a simple manner or elaborate. Should the purpose only pertain to providing information to a potential investor, the legal due diligence can only be conducted towards the legal documents of the company and the status related to shares in the company. However, should the purpose pertain to value of a certain transaction or negotiating a transaction, the legal due diligence can be conducted in a more elaborate manner to determine any potential risks or issues related to the transaction.
Necessity for Legal Due Diligence
As has been elaborated previously, legal due diligence can be conducted for multiple reasons. For example, in the event a company intends to conduct a transaction concerning assets which need to be acquired by the company, a legal due diligence can be conducted to assess whether the company is eligible to obtain such assets. This can include assessment of the licensing of the company, legality of the company, as well as the legal aspects of the asset itself. If it has been found that the company is ineligible to obtain the asset, the legal due diligence can be developed into a legal opinion to provide recommendations to the company as to what steps should be conducted prior to entering into the transaction.
Another example related to the transaction can also require a legal due diligence towards the other party in the transaction. In a lot of cases, a company would not immediately enter into a transactional relationship with another party without first knowing whether the other party is eligible to conduct the transaction. This means that a legal due diligence must be conducted to assess the legality and administrative responsibilities of the other party, whether the other party can be considered to have obtained all required licenses or in compliance with the prevailing laws.
Legal Due Diligence for Obtaining A Certain License
For another example, legal due diligence can be conducted to obtain understanding as to whether a company is eligible to obtain certain license for its business activities. In practice, there are several licenses which must be obtained by application to institutions, e.g., Financial Services Authority (Otoritas Jasa Keuangan or OJK) and Central Bank of Indonesia (Bank Indonesia or BI). For some specific licenses, multiple institutions would stipulate additional requirements aside from the basic legal requirements to be fulfilled by the company. This entails a lot of administrative processes as well as financial conditions, etc. Furthermore, there are other legal aspects which must be fulfilled by the company, e.g., organizational structure and employment of certain positions in the company. For certain licenses, a legal due diligence is required as a process for a license as well, which means that the report of the legal due diligence must be submitted to the relevant authorities. Therefore, a legal due diligence is necessary to determine whether the company can obtain such license or to be submitted to an outside party.
Company Restructuration
In case of a company restructuration, it is also necessary to conduct legal due diligence. This entails scrutinization of the internal affairs of the company as well as the other company involved in the company restructuration, if any. In case of merger or acquisition, it must first be assessed whether there are risks that would entail should the merger or acquisition be conducted. The legal due diligence in these cases can involve the shareholding statuses of the companies, organizational structure of the companies, as well as employment conditions of the companies. Considering how company restructuration can give rise to multiple legal ramifications, it must first be ensured that the legal ramifications would not present any risk towards the company or companies conducting the company restructuration.
Author: Yohana Veronica Tanjung
Gaffar & Co., an Indonesian Boutique Law Firm specializing and focusing on commercial law areas e.g. Capital Market and Financial Services.
For further queries and information, contact us:
+62 811 877 216 | info@gaffarcolaw.com | www.gaffarcolaw.com
