4 Important Aspects to be Examined in Legal Due Diligence
Legal Due Diligence (LDD) is an important thing done by lawyers or legal consultants, usually, the ones specializing in the corporate field, for a specific purpose. Usually, LDD is done before making a transaction, especially a materially significant transaction.
The object of due diligence in an LDD varies. Generally, a company or business entity to be acquired or assets to be purchased or expropriated. LDD is carried out to obtain information related to the object of the LDD, including the existing material facts, for consideration before making a transaction.
In brief, LDD is an activity to examine an object and assess the legal risks based on the examination, especially in the context of transactions that interested parties will carry out. The LDD is carried out to clarify the condition of an object of due diligence in the eyes of the law.
There are several objectives of the LDD itself, including:
- Examine the completeness of the legal documents or the legal basis of an object being examined, for example, the articles of association of a company or a certificate of title to a land object;
- Examine legal compliance carried out by the object being examined. For example, oil palm companies must have permits in accordance with the provisions of the applicable laws and regulations;
- Clarify the legal status of the object being examined; and
- To recapitulate the results of the analysis so that the data can provide a perspective from the legal aspect as part of considering the condition of the object being examined.
4 Basic Aspects that Are Important for LDD
In Legal Due Diligence, the scope of the due diligence will determine the extent of the examination being carried out.
However, in general, there are 4 Basic Aspects that are important to be examined in the implementation of an LDD, which are as follows:
1. Examination of Legal Documents or Legal Basis of LDD Object
The legal consultant must examine the legal documents or the legal basis for the LDD object in accordance with this LDD. What is meant by a legal document or legal basis is a document that is legally valid evidence that an LDD object is legally true and whose form is in accordance with the LDD object being examined.
For example, for an LDD object in the form of a limited liability company or company, the legal documents consist of the articles of association and company data, as well as ratification and receipt of notification of the articles of association, company data, and amendments issued by the authorized agency, namely the Ministry of Law and Human Rights. In addition, it is also necessary to examine the existence of a shareholder agreement that regulates aspects of company management.
It is different if the LDD object is an asset in the form of land and buildings. Legal documents or legal basis consist of proof of ownership of the land and buildings, certificates of rights such as ownership rights or building use rights, location permits, building permits, and other documents which are evidence of legal control of the LDD object. Examining these documents to determine the condition of ownership and management of LDD objects based on applicable law is crucial.
2. Examination of License and Permit Documents
It is essential to examine the license and permit documents to check the condition of compliance of the LDD object with the laws that apply to it. In addition, the presence or absence of license and permit documents owned by LDD objects will affect the obligations that are required to be fulfilled in the future and the legal risks that arise if they fail to be fulfilled.
Based on the current law, if the object of the LDD is a company, the license and permit documents that need to be checked include the business registration number, risk-based licensing (depending on the risk of the company’s business activities), and other sectoral permits, by the company’s business activities that are the object of LDD.
LDD to the license and permit documents is one of the crucial parts of implementing an LDD process. Suppose a discrepancy or violation is found in the form of non-fulfillment of licenses and permits that are required to be fulfilled by the LDD object. In that case, this will be one of the considerations and the subject of negotiations before the finalization of a transaction.
3. Examination of Agreements with Third Parties
It is necessary to examine the contents of the agreements between the LDD object and the third party so that the party conducting the LDD can find out the legal relationship, as well as what rights and obligations the LDD object has to third parties and how the legal relationship may affect or pose a risk of the transactions to be made.
One type of agreement with a third party that is crucial is an agreement that creates financial obligations to be fulfilled by the LDD object, such as debt and receivable agreements, guarantees for existing assets, as well as other similar agreements. Before the transaction is carried out, of course, it is essential to clarify who is the party responsible for these obligations in the future. And it is also necessary to check whether there are obligations to third parties before a takeover or management transfer is carried out from the transaction to be carried out.
In addition, agreements related to daily operational activities are also objects of inspection that can be carried out in the LDD. This is to ensure the sustainability of the rights and obligations contained in the agreement documents when the transaction is carried out. And also to check whether the object of the LDD is in a position of default before the LDD is carried out, as well as the risks that arise from the existence of the default condition.
Another one of the agreements usually examined in its part is the agreement between the LDD object company and its employees. This is because the employment agreement and the relationship between the employer and the employee are specifically regulated in the laws and regulations concerning manpower and their implementation.
4. Examination of Court Case Documents
Sometimes many LDD activities forget to check court case documents. Court case documents are just as essential to examine as other documents. This document examination is intended to find out what cases are currently being reported, undertaken, or have been decided on by the company that is the object of LDD, as well as individuals related to the management of the company.
Case information is also seen in detail, both in criminal, civil, tax, industrial relations, and others. If there are cases involving vital company organs, such as directors and commissioners, then this also needs to be taken into account in carrying out transactions that are currently underway.
Thereby are the things that need to be examined in the LDD. This is intended so that legal consultants obtain objective data and can ensure legal status, legality, and how a company complies with applicable laws and regulations.
If you have further questions regarding the implementation of Legal Due Diligence (LDD) in Indonesia, you can contact us at ask@bplawyers.co.id or 082112341235.