Legal Due Diligence

By: Dendi Adisuryo (ADCO Attorneys at Law)

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AGENDA OF DISCUSSION

Introduction to acquisition
Acquisition deals flow
Roles of legal due diligence
Workflow of legal due diligence
Preparing due diligence checklist
Key areas for legal due diligence review
Frequent findings
Preparing legal due diligence report
How LDD Report will affect the deal?

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INTRODUCTION TO ACQUISITION

WHATS THE ACQUISITION?

Acquisition may be defined as an act of one enterprise of acquiring, directly

or indirectly of SHARES, voting rights, assets or control over the
management, of another enterprise

Acquisition is a legal action taken by a legal entity or an individual to take

over shares in a company which will change the control of the Company
(Article 1 (11) of Company Law)

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INTRODUCTION TO ACQUISITION

ACQUISITION RATIONALE
Enhance, build and preserve markets
Achieve rapid business growth
Secure new resources
Develop globally-competitive companies
Establish a new business unit
Supporting tools for core business unit

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ACQUISITION DEALS FLOW

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ACQUISITION DEALS FLOW

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ACQUISITION DEALS FLOW

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ROLES OF LEGAL DUE DILIGENCE

Obtaining objective information

Identifying legal risks

Arguments for negotiations

Transaction structuring

Determining conditions precedent to transaction

Determining holdback amounts in transaction

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LEGAL DUE DILIGENCE WORKFLOW

Management Information Analysis The Report Post Report

START UP Meeting Gathering

Reassure Gather info from Legal issues Clear, easily- Presentation to

Term of management that dataroom/documen read document client
Reference LDD will not t provided Legal
disrupt Gather info from consequences Address what Q&A
commercial internet and other the commercial
Initial activities of the resources Legal Solution people need to Next stage of
manageme target Close liaison with know the transaction
nt meeting the targets official
Establish timings Gather info from Timely manner
and reporting financial/environm
Site visit ent/technical Good news is
Review initial counsel nice, but the
proposed Obtain infofrom truth is the aim
transaction government
structure agencies
Site Visit
Obtain person in
charge in the
data room

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Obstacles to Due Diligence in Indonesia

No sophisticated public data base

Reluctance to present full package of documents
Delays in gathering and presentation of documents (from usually remote
sites)
Differences: so many interdisciplinary issues (e.g. forestry, transportation,
overlapping, counterfeited documents
More important than in developed countries not purely a data room
exercise
Legal uncertainty clear title (in licenses, buildings, property)
Lawsuits: difficult to access
Representations and warranties may be useless because sellers are often
big local person

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LEGAL DUE DILIGENCE CHECKLIST / QUESTIONS

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KEY AREAS FOR LEGAL DUE DILIGENCE REVIEW

Corporate legal standing

Establishment
Capital structure (eg. change of capital structure, minimum capital requirement
for PMA Co)
Shareholding composition
Company management
Authorities of management and corporate approval
Domicile of the company

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KEY AREAS FOR LEGAL DUE DILIGENCE REVIEW

Operating Licenses

Validity
Compliance
Possibility of license revocation

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KEY AREAS FOR LEGAL DUE DILIGENCE REVIEW

Third Party Comitment

Sale agreement
Exclusivity, duration, committed volume, price adjustment, payment methode, quality
and quantity determination, exit clause, Exclusifity, commited amount, price
determination, pre shipment payment,

Services / contractorship agreement

Scope of work, service fee, fall and rise, exclusivity, evaluation based on performance
indicator, parties responsibility
Joint Venture/Joint Operation/ Shareholder agreement
Scope of cooperation, parties responsibilities, rights of first refusal, quorum, minority vs
majority roles, tag along vs drag along, additional investment and capital injection, pre
agreed matters, changes of control
Financing agreement
Indebted amount, security, prepayment, change of control, covenants, breach of
agreements, debt reschedule / restructurisation

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KEY AREAS FOR LEGAL DUE DILIGENCE REVIEW

Assets

Types of assets
Ownership title
Land compensation?
Encumbrances
Property rights
List of property owned, occupied, leased
Supporting documents of ownership, occupation or leasing
Physical checking to BPN Lurah for land properties
Appraisal or valuation of assets

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KEY AREAS FOR LEGAL DUE DILIGENCE REVIEW

Disputes
Court searches in PN, PTUN, PHI, P Niaga, BANI, PN Jakarta Pusat
Court search cannot reach potential disputes

Disputes in international arbitration forum?

Court search must be authorized by the targeted company through a
formal PoA
Cost may vary, depends on where, who, how big is the company, time
frame
No full reliance to court search result
Potential dispute
Always asked for indemnity in the definitive agreement

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KEY AREAS FOR LEGAL DUE DILIGENCE REVIEW

Environment
AMDAL Documents / approval
AMDAL requirement time line
RPL RKL documents

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FREQUENT FINDINGS

Corporate Matters
The shares have been transfered to other parties
Unreported amendment to the AoA
Lack of deed of shares transfer
Absence of spousal consent
Lack of corporate approval for certain transaction (eg. Loan, establishment of
subsidiary, assets encumbrance, assets divestment)
Absence of shareholder registry
Absence of annual general meeting of shareholders
No BoD for certain period of time

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FREQUENT LDD FINDINGS
General matters
Discrepancy in assets ownership (eg. Land)
No financial statement
Liabilities in the financial statement
disputes
Target company has not submited any annual tax return
Lack of compliance documents
Wrong business model (legally)

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FREQUENT LDD FINDINGS

Contractual
Long-term contract with onerous provisions and no possibility to adjust
Contract with its affiliated party
Contracts with no-perfect provisions
Agreement to pay royalty to un-disclosed party
Exclusife offtake agreement or marketing agreement
Business contract contradicts with the laws and regs
One-sided services agreement

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PREPARING LEGAL DUE DILIGENCE REPORT

Golden rules:
Findings
Legal consequences
Proposed action

A glancing through a LDD Report

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HOW LDD REPORT WILL AFFECT THE DEAL?

Subtance of the report:

Information of the target company
Risk identification

What to do with the risk:

Transfer of risk (eg. Insurance, seller)
Limit the risk
Absorb the risk
Reject the risk

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HOW LDD REPORT WILL AFFECT THE DEAL?

Buyer Seller
Get discount as much as possible Get selling price as high as possible

Calculate future / contingent risks Release from any future risk

Get full representation and warranties Minimize representation and warranties

Maximize indemnity Minimize indemnity

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HOW LDD REPORT WILL AFFECT THE DEAL?

Drafting acquisition agreement

Definitions and Interpretation
Sale and Purchase
Consideration
Condition
Pre-Completion and Post-Completion Obligations
Completion
Warranties
Indemnities
Share Purchasers Undertakings
Security for Claims
Share Purchasers Rights to Terminate
Confidentiality
Governing Law and Dispute Resolution
Notices
Miscellaneous

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The contents of this presentation are intended for informational
purposes only and are not in the nature of a legal opinion or
advice. They may not encompass all possible regulations and
circumstances applicable to the subject matter and readers are
encouraged to seek legal counsel prior to acting upon any of the
information provided herein.

ADCO Attorneys at Law

2014

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Lawyer/Consultant Biographies

DendiAdisuryo

Practice Description
He specializes and has practical experience in energy and mining projects
and the banking/finance sector. He also has broad experience in
assignments related to foreign capital investments and corporate
restructuring.

Please contact us if you have any questions regarding our firm:

ADCO Attorneys at Law

Setiabudi Building 2 6th Floor , Unit 605C
Jl. HR. Rasuna Said, Jakarta 12920
Jakarta Selatan - Indonesia
Telp: +6221-52903034
Fax: +6221-52903035
email: dendi.adisuryo@adisuryo.com

Legal Due Diligence for Acquisition Deal

in Indonesian Mining Projects 27
Legal Due Diligence

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