Due diligence constitutes a critical stage in mergers and acquisitions (M&A) transactions, aimed at assessing the overall condition of a target company from both legal and commercial perspectives. Through this process, prospective investors or acquiring parties are able to identify risks, uncover potential liabilities, and ensure that the contemplated transaction is viable. Beyond a mere verification exercise, due diligence serves as a foundation for strategic decision-making and as a key mechanism for managing and allocating risks among the parties involved.
In practice, the scope of due diligence encompasses various essential aspects of the target company, including:
- Corporate Matters
A review of the articles of association and their amendments, shareholding structure, and the validity of corporate actions, including approvals from relevant corporate organs.
- Business Licensing
Verification of the alignment between the company’s business activities and its licenses, including the validity and completeness of such licenses under the risk-based licensing regime.
- Material Contracts
Analysis of key agreements, with particular attention to critical provisions such as change of control clauses, transfer restrictions, and obligations that may be triggered by the transaction.
- Employment
Evaluation of employment relationships, compliance with statutory obligations, and potential liabilities arising from a change in control, including risks of industrial relations disputes.
- Disputes
Identification of ongoing litigation as well as potential claims that may affect the company’s legal standing.
- Company Assets
Examination of ownership, legal status, and encumbrances over the company’s assets, including any security interests or third-party rights.
The conduct of due diligence in Indonesia cannot be separated from the various legal frameworks governing corporate, competition, licensing, and employment matters. Law No. 6 of 2023 concerning the Stipulation of Government Regulation in Lieu of Law No. 2 of 2022 on Job Creation into Law (“Job Creation Law”), together with Law No. 40 of 2007 on Limited Liability Companies (“Company Law”), forms the principal legal basis for assessing the validity of corporate actions, including mergers, consolidations, and acquisitions, as well as ensuring compliance with General Meeting of Shareholders (GMS) approvals, protection of minority shareholders, and obligations toward creditors.
In parallel, Law No. 5 of 1999 concerning the Prohibition of Monopolistic Practices and Unfair Business Competition (“Competition Law”), together with Government Regulation No. 44 of 2021 concerning the Implementation of the Prohibition of Monopolistic Practices and Unfair Business Competition (“GR 44/2021”), regulates competition law aspects, including the obligation to notify the Indonesian Competition Commission (KPPU) of transactions meeting certain asset or turnover thresholds.
For public companies, regulations issued by the Financial Services Authority (OJK) are particularly relevant in relation to disclosure obligations, material transactions, and affiliated party transactions, all of which must be carefully assessed to mitigate regulatory risks. In addition, the current risk-based business licensing regime refers to Government Regulation No. 28 of 2025 concerning the Implementation of Risk-Based Business Licensing (“GR 28/2025”) as the principal framework for assessing the conformity and validity of a target company’s business licenses through the OSS system. Employment aspects are equally significant, as the provisions under the Job Creation Law provide the framework for evaluating employees’ rights and obligations, including the implications of a change of control on employment relationships.
From a practical standpoint, due diligence is conducted through a structured process designed to ensure effective risk identification, typically involving:
- Data Room
The provision of documents by the target company, either physically or through a virtual platform, as the primary source of information.
- Legal Review
A comprehensive review of documents by legal advisors to assess compliance and identify potential legal risks.
- Clarifications and Follow-Ups
Requests for additional information or confirmations through discussions with the target company.
- Identification of Material Issues
A focus on findings that may impact the viability or structure of the transaction.
In practice, common issues identified during due diligence include:
- Incomplete or non-compliant corporate approvals;
- Invalid, incomplete, or non-compliant business licenses;
- Contractual restrictions, including change of control clauses; and
- Exposure to disputes or contingent liabilities.
The findings arising from the due diligence process have a significant impact on how a transaction is structured and negotiated. Identified risks are typically addressed through contractual protection mechanisms, such as the inclusion of conditions precedent to be fulfilled prior to completion, indemnities to allocate specific risks to the seller, and purchase price adjustments to reflect the actual condition of the target company. In addition, due diligence findings form the basis for the drafting of representations and warranties, through which the seller provides assurances regarding the company’s condition.
Accordingly, due diligence functions not only as an investigative process but also as a central tool for risk allocation and for ensuring a balanced outcome between the parties. Its effectiveness depends on the completeness of documentation, timeliness, and effective coordination among the parties involved. When conducted systematically and in alignment with the applicable legal framework, due diligence supports well-informed decision-making and helps ensure that transactions proceed in accordance with both commercial objectives and legal compliance.
