A corporate acquisition can appear relatively straightforward from the outside. The buyer assesses the target, the parties agree on a price, and ownership of the shares is transferred to the new investor.

In practice, acquiring a company carries considerably broader consequences.

When an investor acquires shares and obtains control of a company, the investor is effectively entering an existing legal and commercial history. That history may include contracts, debt, licences, employment relationships, disputes, security interests, obligations to third parties, and compliance issues that arose long before the transaction.

For this reason, one of the most important stages before an acquisition is legal due diligence, a legal review of the target company designed to establish its actual legal condition and identify risks that may affect the transaction.

Legal due diligence is not simply an exercise in collecting documents. It should answer more fundamental questions: Does the seller legally own the shares being sold? Is the company's business conducted under the appropriate licences? Could key contracts terminate because of the change in control? Are there liabilities that may become the buyer's problem once the transaction is completed?

Acquisitions under Indonesian Company Law

Law No. 40 of 2007 on Limited Liability Companies, as most recently amended by Law No. 6 of 2023, uses the term Acquisition to describe a transaction resulting in a transfer of control over a company.

Article 125 provides that an acquisition may be carried out through the acquisition of shares already issued or shares to be issued by the company, either through the company's Board of Directors or directly from its shareholders.

Where shares are acquired directly from the shareholders, the Company Law specifically requires the transaction to take into account the company's articles of association concerning the transfer of shares and agreements entered into by the company with third parties. Article 128 also requires a direct share acquisition from shareholders to be recorded in an Indonesian-language notarial deed.

This demonstrates why an acquisition should not be regarded merely as a commercial agreement between a buyer and a seller. The target's corporate structure, constitutional documents, share restrictions, and third-party rights may determine whether the transaction can proceed as planned.

1. Corporate Status and Constitutional Documents

The review will generally begin with the legal identity of the target company.

A prospective buyer should verify that the target has been validly established as a legal entity and review its deed of establishment, subsequent amendments, articles of association, company information recorded in the Legal Entity Administration system, capital structure, shareholders, and composition of the Board of Directors and Board of Commissioners.

The history of capital changes and share ownership should also be reviewed to determine whether previous corporate actions were properly implemented.

Problems at this stage do not always involve serious violations.

Even inconsistencies between the company's deeds, shareholder register, government database, and internal records can create difficulties when the acquisition is ready to close.

The review should also identify whether the proposed acquisition requires a General Meeting of Shareholders resolution, approval from a particular corporate body, or another consent required by the articles of association.

2. Share Ownership and Transfer Restrictions

In a share acquisition, one of the most basic questions is whether the seller has a valid legal right to sell the relevant shares.

The shareholder register, ownership documents, history of share issuances and transfers, and any security interests over the shares should therefore be reviewed.

The articles of association or a shareholders' agreement may impose restrictions on share transfers.

These can include requirements to first offer shares to other shareholders, obtain corporate approval, or follow a particular procedure before the transfer can be completed.

Shareholders' agreements may also give certain investors special rights, including rights of first refusal, tag-along rights, drag-along rights, or protections triggered by a change of control.

If these restrictions are identified only shortly before signing or closing, they can significantly disrupt the acquisition timetable.

3. Business Licensing and Alignment with Actual Operations

Business licensing is one of the most significant areas of legal due diligence, particularly where the target operates in a regulated sector.

Since Government Regulation No. 28 of 2025 came into force, it has become the principal framework for risk-based business licensing, replacing Government Regulation No. 5 of 2021. Its implementation through the OSS system is further regulated, among others, by Minister of Investment and Downstreaming/Head of BKPM Regulation No. 5 of 2025.

For due diligence purposes, simply confirming that the target has a Business Identification Number or NIB is not sufficient.

The review should determine whether the registered KBLI classifications correspond to the business activities actually being conducted, whether the applicable risk classification has been followed by the required licences or standard certificates, and whether any supporting business licences, environmental approvals, or sector-specific requirements are required.

The issue becomes more complex where the prospective buyer is a foreign investor.

Presidential Regulation No. 10 of 2021 on Investment Business Fields, as amended by Presidential Regulation No. 49 of 2021, remains relevant in determining whether a business sector is open to foreign investment and whether specific ownership conditions apply.

Accordingly, a company that can lawfully be wholly or substantially owned by domestic shareholders may not necessarily be capable of being acquired under the same ownership structure by a foreign investor.

4. Material Contracts and Change of Control Provisions

A company's value often depends significantly on its contracts.

Agreements with major customers, suppliers, distributors, lenders, landlords, strategic partners, technology providers, and affiliated parties should therefore be reviewed.

One particularly important provision in an acquisition is a change of control clause.

Such a clause may allow the other contracting party to terminate the agreement, require prior consent, renegotiate commercial terms, or treat a change of control as an event of default.

As a result, a target may have a contract that appears to remain valid for several years but is placed at risk by the acquisition itself.

Due diligence should also identify guarantees, negative covenants, exclusivity obligations, restrictions on additional borrowing, and cross-default provisions.

5. Debt, Security Interests, and Encumbrances over Assets

The amount of debt shown in the financial statements is not the only relevant consideration.

From a legal perspective, the buyer needs to understand the basis of the obligation, the identity of the creditor, the assets provided as security, and whether the company has granted fiduciary security, mortgages, pledges, or other forms of collateral.

The review should also determine whether the acquisition itself could trigger early repayment or another contractual consequence.

Key assets should be examined to confirm that the target actually has the legal rights it claims to have.

A factory, land, vehicles, machinery, software, or other assets used by the business may not necessarily be owned outright by the target.

Some may be leased, pledged as security, owned by an affiliate, or used under a licensing arrangement.

6. Litigation and Potential Claims

Due diligence should not be limited to cases already before a court.

The review should also consider demand letters, contractual disputes, regulatory investigations, employment disputes, arbitration proceedings, tax disputes, consumer claims, and other circumstances that could reasonably develop into a legal claim.

The monetary amount of a dispute is not the only measure of materiality.

A claim of relatively limited financial value may still be significant if it could result in the suspension of a licence, restrict the use of a key asset, disrupt a strategic contract, or create substantial reputational consequences.

7. Employment and Management

Article 126 of the Company Law expressly requires an acquisition to take into account the interests of the company, minority shareholders, employees, creditors, business partners, the public, and healthy business competition.

Employment therefore should not be reviewed merely by counting the number of employees.

Legal due diligence may cover employment agreements, company regulations or collective labour agreements, employee status, compensation arrangements, social security obligations, industrial relations disputes, foreign employees, and management incentive arrangements.

Contracts with members of senior management and key employees may also warrant separate attention where their continued involvement is important to the value of the business.

8. Intellectual Property, Technology, and Data

In a technology-driven or brand-based company, the most valuable assets may not be land or machinery.

Trademarks, copyrights, patents, domain names, software, databases, technology licences, algorithms, and other intellectual property may constitute a significant portion of the company's value.

A buyer should therefore establish whether the target actually owns those assets or holds sufficient rights to use them.

For example, important software may have been developed but remain legally owned by a founder personally. The principal brand may not be registered in the company's name. Source code may have been developed by contractors without a clear assignment of intellectual property rights.

For businesses that process material amounts of personal data, compliance with Law No. 27 of 2022 on Personal Data Protection may also form an important part of the review.

9. Beneficial Ownership and Ownership Structure

The ownership shown in a shareholder register may not always reveal the person who ultimately controls or economically benefits from the company.

Indonesia applies corporate beneficial ownership disclosure requirements under Presidential Regulation No. 13 of 2018, which remains in force.

In an acquisition, beneficial ownership checks can help the buyer identify the individuals who ultimately control or benefit from the target and expose nominee structures, undisclosed affiliations, or inconsistencies that should be addressed before closing.

This is also relevant to counterparty verification, anti-money laundering compliance, and overall transaction risk assessment.

10. Does the Acquisition Need to Be Notified to KPPU?

Not every acquisition must be notified to the Indonesian Competition Commission, or KPPU. Competition issues should nevertheless be assessed during transaction planning.

KPPU Regulation No. 3 of 2023 currently governs the assessment of mergers, consolidations, and acquisitions of shares and/or assets that may result in monopolistic practices or unfair business competition.

Where the applicable criteria and thresholds are met, a notification obligation may arise after the transaction becomes legally effective.

KPPU states that the general thresholds include combined assets exceeding IDR 2.5 trillion and/or combined sales exceeding IDR 5 trillion, subject to specific rules for the banking sector. A notifiable transaction must generally be notified no later than 30 business days after it becomes legally effective.

For this reason, KPPU analysis should ideally be undertaken before closing, even though the Indonesian notification system is generally post-closing.

The buyer should know in advance whether the transaction is notifiable and whether the proposed structure presents material competition concerns.

Due Diligence Findings Should Influence the Transaction Documents

The objective of legal due diligence is not simply to produce a lengthy report. It is to assist the parties in making decisions.

Due diligence findings may influence the purchase price, transaction structure, closing timetable, and provisions of the Share Purchase Agreement or other transaction documents.

Issues that can still be resolved before closing may be included as conditions precedent.

Risks that cannot be eliminated entirely may be allocated through representations and warranties, indemnities, liability caps, payment retention, escrow arrangements, or other contractual protections.

For example, if a licence must be corrected, the buyer may require the correction as a condition to closing.

If an ongoing dispute is identified, the seller may be required to provide a specific indemnity.

Where a liability was not reflected in the agreed valuation, the finding may support a purchase price adjustment.

In some cases, legal due diligence may reveal a level of risk that the buyer is unwilling to accept, resulting in a restructuring of the transaction or a decision not to proceed.

Not Every Finding Has the Same Level of Risk

An effective due diligence report should distinguish between administrative issues that can readily be corrected and issues that could materially affect the transaction.

An inconsistency in an address contained in one corporate document carries a very different level of risk from a dispute over ownership of the shares being acquired.

Similarly, an overdue corporate filing should not necessarily be treated in the same manner as the absence of a principal licence required for the target to conduct its core business.

Due diligence findings are therefore more useful when they are classified according to materiality, potential impact, and the recommended corrective action.

This approach enables management and investors to focus on matters that genuinely require attention before the acquisition is completed.

Conclusion

Legal due diligence is an important part of an acquisition because the buyer is not simply purchasing shares.

The buyer is acquiring control over a company together with its contractual history, liabilities, licences, employees, assets, and legal risks.

A review conducted before closing gives the buyer an opportunity to understand those risks before control changes hands.

For sellers, due diligence can also identify matters that should be corrected before the company is presented to prospective investors.

There is no single due diligence checklist that can be applied identically to every company.

The scope of the review should reflect the target's business sector, transaction structure, size, regulatory environment, and risk profile.

Ultimately, effective legal due diligence is not merely about confirming that documents exist. It should explain which legal risks will accompany the company after the acquisition and how those risks should be addressed in the transaction.