Top Considerations of M&A in Indonesia

Top Considerations of M&A in Indonesia

In Indonesia, Mergers and Acquisitions (M&A) are regulated under Law No. 40 of 2007 regarding Limited Liability Companies (“ the Company Law ”). The Company Law recognizes two types of mergers: 1) consolidation merger or amalgamation ( peleburan ), where two or more corporations merge to form a new corporation, to which the assets and liabilities of the consolidating companies are transferred in accordance with Article 1 par. 10 of the Company Law, and 2) integration merger ( penggabungan ), where two or more corporations merge, one corporation of which receives the assets and liabilities of the others, with the transferrors dissolving after the merger in accordance with Article 1 par.9. On the other hand, under article 1 par. 11, acquisition means a legal action conducted by a legal entity or an individual to acquire shares of a company which results in the transfer of control of the company.

The M&A is linked to being both a growth strategy and part of the fund formation in a favorable economic environment because all M&A negotiations require a number of commitments.  It is crucial to recognize and understand every critical legal point in conducting acquisition deals. Therefore, this article is intended to provide consideration for bidding companies and target companies in M&A transactions.


Key M&A Considerations

Below are some of the top issues that should be considered as early as possible in the M&A process.

P rices

Mergers and Acquisitions are considered as one of the useful strategies for the growth and expansion of businesses. These strategies have widely been adopted in developed countries, yet are quite often practiced in developing countries like Indonesia. In M&A transactions, there are two things that should be considered, namely the value generated from acquisition activities and the parties that will benefit the most from these activities. M&A transactions are expected to create synergies so that the company’s value will increase.


Methods of payment

Both the bidding company and the target company must really consider time and cost. Choosing the right payment method can make M&A transactions successful. Referring to the Statement of Financial Accounting Standards No. 22 concerning Accounting for Business Combinations (“ PSAK No. 22 ”), the acquisition of company assets or shares can be made with payments through cash, debt, and shares.


This cash payment is made when the company has sufficient cash. Cash payments generally come from sources of retained earnings (payments made by reducing your own capital), issuing new shares and selling them only to old shareholders.


In this case, the bidding company uses cash for transactions, but most of the cash comes from third-party loans (debt), which are commonly referred to as leveraged buyouts.


Payment through shares occurs when the acquirer’s shareholders surrender a number of their shares to the target company’s shareholders for the price purchased. Companies that make acquisitions with shares must obtain approval from the shareholders.


Due Diligence

Before conducting a business merger or acquisition, it is important for a company to carry out due diligence to assess the feasibility of the target company. Due diligence consists of three types: Legal Due Diligence, Financial Due Diligence, and Tax Due Diligence.

Legal Due Diligence

Usually involves reviewing documents, legal compliance, company assets and business operations, and interviewing business partners and/or employees of the target company employees. In Legal Due Diligence, the following items also need to be verified:

  • General Corporate Matter :
    1. Articles of Association (“ Anggaran Dasar ” or “ AD ”), which consists of the company’s deed of establishment, minutes of the general meeting of shareholders, list of shareholders, organizational structure, list of proof of payment of the company capital and articles of association that is in accordance with the Company Law;
    2. Documents regarding company assets, in the form of land certificates, ownership certificates of motor vehicles, documents of share ownership in other companies;
    3. Agreements made and signed by the company with third parties, for instance, cooperation agreements, agreement with (the) shareholders, agreements with suppliers;
    4. Documents regarding company permits and approvals, which include the company’s domicile certificate, registration certificate, permits and approvals issued by government agencies;
    5. Documents regarding corporate taxes, among others, the company’s Taxpayer Identification Number (“ NPWP ”), documents regarding Land and Building Taxes (“ Pajak Bumi dan Bangunan ” or “ PBB ”), documents regarding payable taxes and others.
  • Employment Matter :

Documents relating to company employment issues, for example, company regulations, documents regarding social security for workers (“ Badan Penyelenggara Jaminan Sosial Ketenagakerjaan or “ BPJS ), documents regarding permits for foreign workers, employment documents regarding permits and reporting obligations, documents regarding labor wages, documents regarding collective labor agreement and also the employment incentives that often come in the form of an agreement that says that the employee will get a set amount of money if they stay with the company for a set period of time.

  • Litigation Matter :
    1. Information and documents regarding or in connection with civil, criminal, commercial, administrative, taxation and industrial relations matters, if any, that involve the company, directors, commissioners, and/or company shareholders;
    2. Information and documents regarding or relating to the settlement, if any, of the cases referred to in point 1;
    3. Decisions issued by judicial bodies and/or arbitration bodies, if any, in which the company, directors, commissioners and/or company shareholders are parties to the litigation and/or are involved in it.

Financial Due Diligence

Focuses on confirming the accuracy of the audited financial statements. Reports checked in financial due diligence are examined to see whether the provided financial data is truly accurate or not. This examination includes various things, namely:

  1. Data on Financial audit results for the last several years;
  2. Latest financial data;
  3. Expenditure plans;
  4. List of debtors and creditors.
  5. Profit margin analysis;
  6. Sales path analysis; and
  7. The ability of the company or business to process existing debts, as well as debt repayment plans. An effective debt management plan is one of the financial management strategies that has been proven to increase profits.

Tax Due Diligence

This is a process carried out to determine the track record of the tax obligations of a company that will carry out a merger or acquisition. Tax due diligence examination can assist in:

  1. identifying the key deal issues in all tax areas: corporate income tax, employee income tax, withholding tax, and value-added tax;
  2. estimating the future tax liabilities; and
  3. appropriately structuring an M&A transaction to ensure a seamless business process.

Definitive Agreement

After the due diligence is completed, the parties can proceed to enter into a definitive agreement, which is known as a merger agreement, share sale and purchase agreement or asset purchase agreement depending on the structure of the transaction. Those contracts focus on six key types of terms:

  1. Conditions, which must be met before an obligation to complete the transaction occurs. Conditions typically include matters such as regulatory approvals and the absence of any material adverse changes in the target business.
  2. Representations and warranties, which are basically the underlying matters or facts as they are presented in the terms of the contract. Most contract representations and warranties clauses start with a sentence stating “The Contractor Represents and warrants that……”. For example, when selling something such as real estate, the seller represents himself as the owner, who has the legal authority to sell the property. He warrants that the property is what he represents. If there is a condition that the representations and warranties by the seller prove to be untrue, the buyer can claim a refund of part of the purchase price, as is common in transactions involving privately held companies. Representations and warranties need to be given by both parties to disclose material information. The seller’s representations and warranties tend to be more extensive because they include information about the target company or business, the stock or assets, and liabilities being transferred. Representations and warranties allocate risk between the parties and serve as the basis for indemnification claims in case of a breach or inaccuracy.
  3. Covenants, which are undertakings made by a party to take or refrain from taking certain actions. The undertakings may take place during the period between signing and closing (provided that they are separate from each other) or after closing.
  4. Termination rights, which may be triggered by a breach of contract, a failure to satisfy certain conditions or the passage of a certain period of time without consummating the transaction, and fees and damages payable in case of termination for certain events (also known as breakup fees). For example, if one party is unable to carry out one of the provisions because there is an important component that cannot or is difficult to find or obtain or if one party is indicated to have committed a breach of the agreement, then the other party can terminate the agreement and immediately sue that one party.
  5. Closing conditions, where the parties will have to agree on a set of conditions that must be satisfied (or waived) before the acquisition can be closed. In an acquisition agreement, the closing conditions are generally divided into conditions of the buyer’s performance and conditions of the seller’s performance. If a party fails to satisfy a closing condition of the other party, then the other party will not be obligated to consummate the transaction.
  6. Indemnification provisions, which provide that an Indemnitor will indemnify, defend, and hold harmless the indemnitee(s) for losses incurred by the indemnitees as a result of the indemnitor’s breach of its contractual obligations in the purchase agreement.


Post-closing transition

The Buyer or the bidding company certainly has an incentive to conduct a smooth transition, as they are looking to benefit from the acquired company or the target company. To help prepare for a smooth transition, one of the helpful tips is to create an integration plan.

The integration plan should be considered before the bidding company puts in an offer, and the estimated ease or difficulty of integration should be reflected in the terms of the deal. For a target company, preparing well in advance of a sale will help make the integration easier. Integrating two companies is a difficult and time-consuming process. It will most likely take longer and cost more money than planned, and some clients and employees will likely leave. It takes a lot of effort to find a good deal and complete a transaction, but all that effort and value can be lost if the integration process is not successful. In planning for integration, it is necessary to arrange the structure covenants in post-closing, which consist of:

Litigation support

Litigation support is defined as the process of providing consultation and support services to attorneys or others in regard to current and pending cases.


A non-competitive clause is a clause that stipulates that workers agree not to work as employees or agents of a company that is willing to act as a competitor or is engaged in the same line of business for a certain period of time after the date of termination or termination of employment.

Non-solicitation of employees

Non-solicitation is a provision in an employment contract or deed of release which prevents employees from soliciting or enticing away the customers, workers or suppliers of their employer for a specified period of time after their employment ends.

Employment matters

Employment matters are provisions that usually specify the conditions of the relationship between an employer and an employee including but not limited to compensation and expectations. This type of agreement is also referred to as employment contracts, which are often executed for a specified period of time.


A confidentiality clause (also referred to as a nondisclosure agreement) is a clause where an individual or enterprise guarantees to deal with particular data as a commercial secret and guarantees to not disclose that information to others without proper authorization.


Post-closing price adjustment

Post-closing adjustment provisions focus on the liabilities and assets of the target company, which may fluctuate during business operations. Many post-closing misunderstandings arise simply because the parties to the agreement have different views on the purpose of the purchase price adjustment. For instance, the bidding company tends to assume that the basic purpose of the purchase price adjustment is to compensate the target company or the bidding company for changes in net assets resulting from the business operation between the reference balance sheet date, which is used in setting the purchase price, and the closing date.

The target company often thinks that the adjustment provision is a means of ensuring that net assets are delivered at the closing date. But the actual purpose is to bridge the gap between the target value determined at the time of signing the transaction documents and at the time of closing the transaction. Also, both the bidding company and the target company, when drafting the provisions, should be clear and unambiguous on the purchase price adjustment.

Price Adjustment Mechanism

Most acquisition transactions with post-closing purchase price adjustment provisions require the seller to calculate an estimated adjustment immediately prior to closing. This estimate is used to determine closing payments. In most adjustments, the buyer and its accountants prepare a detailed calculation of the post-closing adjustment and deliver it to the seller within a specified time after closing. After the buyer delivers its calculation of the adjustment, the seller and its accountants normally have a certain time to review the buyer’s calculation, to request and review supporting records, and to make written objections to the buyer’s calculation.

Dispute resolution

Typical disputes in M&A transactions include:

  1. Issues relating to disclosure, such as allegations of misrepresentation;
  2. Unlawful dilution of shareholdings;
  3. Breach of contract (“ wanprestasi ”);
  4. Financial issues such as calculation of completion accounts, triggers for the deferred payment consideration, purchase price adjustment mechanisms and earn-out provisions.

In Indonesia, alternative dispute resolution (“ ADR ”), arbitration, and litigation are the methods to resolve M&A disputes.

  • ADR

The Arbitration Law recognizes consultation, negotiation, mediation and conciliation as other forms of ADR. If a settlement cannot be reached through negotiation, the most common forms of ADR are mediation. However, when dealing with large commercial transactions such as M&A, the parties usually choose and apply various forms of ADR (particularly negotiation and mediation). There is a trend to include these mechanisms as a first step in the dispute resolution clause. If the settlement through ADR is unsuccessful, the parties usually settle the dispute through arbitration or litigation.

  • Arbitration

The parties may agree to proceed to arbitration either before or during a dispute. An arbitration agreement must be prepared in writing and contain an arbitration clause. Separate agreements may also need to be entered into after a dispute arises. The arbitration clause should state that the parties intend to settle any dispute through arbitration under the arbitration rules and at the seat of arbitration. The disputing parties and the chairman of the district court may appoint a sole arbitrator or an arbitral tribunal. In Indonesia, the Indonesian National Board of Arbitration (“ Badan Arbitrase Nasional Indonesia ” or “ BANI ”) is a national arbitration board and has its own rules. BANI was established by the Indonesian Chamber of Commerce and Industry in 1977.

  • Litigation

A civil proceeding brought before the Court can be classified either as a claim, which relates to the submission of a dispute to the Court for adjudication, or as a petition, which means a request to the Court to make a declaration. A common ground for civil claims is breach of the M&A Contract (“ wanprestasi ”).


ADCO Law earns the trust to represent clients from multinational companies to emerging entities across a wide range of industries to achieve their business objectives in Indonesia.

By combining commercial sensibilities and legal expertise, ADCO as a Law Firm Jakarta assists the clients to structure, organize and implement their business ventures and investments, including structuring, financing, and securing investments as well as establishing new foreign companies in Indonesia. Should you have more queries regarding this matter, please do not hesitate to contact us.

Dendi Adisuryo

Liza Mashita

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This publication has been prepared for general informational purposes only to provide clients with information on recent legal developments and is not intended as legal advice or opinion.