Legal Due Diligence : Ensuring Company Legal Risks

• Admin
• News and Insights
• September 2, 2025

LEGAL DUE DILIGENCE : ENSURING COMPANY LEGAL RISKS

Every company conducting business activities cannot be separated from legal issues. Even if it is not currently involved in a dispute in court, this does not mean that the company is free from legal risks. At some point, these legal risks can become legal problems that threaten the company’s survival. Ensuring legal risks are important for company stakeholders. Especially if the company is going to undergo a merger, acquisition, or other corporate action. Legal Due Diligence (LDD) is an instrument that can be used to identify legal risks or potential legal problems.

What is Legal Due Diligence?

Legal due diligence can be understood as the process of reviewing and analyzing the documents of a transaction object to assess the target’s suitability from a legal perspective with the aim of obtaining information or material facts that can describe a company or transaction object. Rio Christiawan, in his book “Legal Due Diligence,” defines LDD as an activity to assess the legal risks that may arise in relation to transactions to be carried out by the parties.

For Who is Legal Due Diligence Performed?

LDD is performed for investors, target companies, and lenders.

Who is Involved in the Legal Due Diligence Process?

The parties involved in the LDD process include legal consultants (lawyers), notaries, public accountants, and internal company teams.

Aspects of Legal Due Diligence

Ulya Yasmine Prisandani explains that the aspects that must be examined in LDD include:

1. 1. 1. Examination of deeds, including the company’s ownership history, structure and amount of ownership, condition of the company, and its rights and obligations.
      2. Permit examination, covering business permits and relevant technical permits.
      3. Asset examination, including tangible and intangible assets, along with the rights and obligations attached to those assets.
      4. Case examination, namely tracing the company’s involvement in cases in the General Court, State Administrative Court, Commercial Court, or other related institutions.

The documents examined and reviewed in the LDD include at least the following:

1. 1. 1. Company Articles of Association in the form of the deed of establishment, minutes of shareholder meetings, list of shareholders, organizational structure, and proof of capital deposit.
      2. Company Asset Documents in the form of land certificates, proof of motor vehicle ownership, share ownership in other companies, and other assets.
      3. Agreements with Third Parties in the form of debt agreements, cooperation agreements, agreements with shareholders, and other relevant contracts.
      4. Licensing and Approval Documents such as domicile certificates, company registration certificates, licenses from government agencies, and similar documents.
      5. Employment Documents such as company regulations, employee social security programs, foreign worker permits, payroll lists, employment agreements, and other supporting documents.
      6. Company Insurance Documents in the form of building insurance policies, vehicle insurance policies, cooperative insurance policies, fund deposit insurance policies, and other insurance policies owned by the company.
      7. Tax Documents in the form of company tax identification numbers, proof of land and building tax payments, tax liabilities, and other tax documents.
      8. Dispute and Legal Claim Documents in the form of cases or claims involving the company, both in and out of court.

Under Law No. 8 of 1995 concerning the Capital Market (“Capital Market Law”), there are provisions mandating Legal Due Diligence (LDD), although, in principle, LDD may be conducted at any time in accordance with a corporation’s needs. Thus, there are both discretionary and mandatory aspects. This underscores two essential points: First, LDD may be undertaken voluntarily or at the discretion of the corporation in connection with strategic decisions such as merger, acquisition, restructuring, major investment, or joint venture, with the purpose of mitigating legal risk and ensuring regulatory compliance, even if not expressly required by statute. Second, there are circumstances in which LDD is compulsory by operation of law, as provided in Article 1(6) of the Capital Market Law, which defines an issuer (emiten) as a party conducting a public offering. Specifically, in the context of an Initial Public Offering (IPO), the issuer must ensure that documents and information disclosed to the investing public and to the capital market regulatory authority are accurate, transparent, and compliant with the law.

Benefits of Legal Due Diligence

Upon understanding the meaning and scope of document review under LDD, it may be concluded that LDD confers significant advantages upon corporate stakeholders, namely: enabling informed decision-making, formulating policies to mitigate or minimize legal exposure, serving as a negotiation tool, and ensuring that parties do not engage in transactions tantamount to “buying a pig in a poke,” thereby safeguarding the integrity of corporate transactions and corporate actions.

Conclusion

Legal Due Diligence constitutes an undertaking performed by legal counsel for the purpose of examining and analyzing the documentary record of a transactional object, in order to assess the legal propriety and compliance of the target entity. The objective is to obtain material facts and information that accurately reflect the condition of a corporation or transactional object, thereby providing a reliable basis for corporate stakeholders in determining subsequent business decisions.

Legal Basis

Law No. 8 of 1995 concerning the Capital Market Act.

Author:

Yuliana Munthe

Editor:

Muhammad Arief Ramadhan, S.H.