Legal Literacy – Legal due diligence (LDD) is an important aspect in the business world. Companies need to understand matters related to risk management to help make more appropriate and effective decisions, be protected from legal problems, and achieve business goals safely and maximally.

One way to achieve these things is by carrying out LDD. This article discusses in depth the concept of legal due diligence starting from the definition, objectives, types, stages, to its urgency in the business law world.

Term legal due diligence comes from the root word diligence which in Latin is divided into two meanings, namely diligentia quam suis rebus and diligentia exactissima/diligentia boni patrisfamilia.

In English, both are defined as the care that and ordinary person exercise in managing his or her own affairs and a more exacting type of care exercised by the head of a family.

Black’s Law Dictionary defines due diligence as

“...the diligence reasonably expected from, and ordinarily exercised by, a person who seeks to satisfy a legal requirement or to discharge an obligation”

Referring to the opinion of Faizal Kurniawan, a lecturer at the Faculty of Law, Universitas Airlangga, the term legal due diligence (LDD) is defined as an examination activity carried out carefully by a legal consultant on a company or transaction object. This aims to obtain material information or facts that can provide an overview of the company's condition.

The examination in LDD is carried out thoroughly to achieve objective, systematic, and logical verification in accordance with applicable law.

The LDD process includes examining various legal aspects related to the company's business. In this case, there are several main elements in LDD, namely, examination of legal documents, such as reviewing agreements, contracts, permits, and licenses.

LDD can only be carried out by a Capital Market Legal Consultant (KHPM) before determining a legal opinion or legal opinion.

Not only that, LDD also includes checks related to IPR (Intellectual Property Rights), starting from copyrights, trademarks, company patents, to identifying potential problems related to IPR.

Meanwhile, from a financial perspective, the existence of LDD is necessary to evaluate the company's financial condition, namely identifying problems that could potentially impact transactions and business operations.

As for employment, LDD is needed to examine various aspects, such as employment contracts, compensation, and problems related to employees.

Finally, in the field of licensing and/or legal compliance, the LDD process is aimed at examining a company's licensing and compliance with applicable regulations, be it environmental regulations or industry regulations.

LDD is carried out with various objectives, including:

  1. Obtaining legal status for audited documents.
  2. Obtaining information on legal aspects within a company, from assets to certain legal relationships within a company.
  3. Providing insight to interested parties, such as investors in making transaction decisions.
  4. Providing legal views on a policy.
  5. Examining the legality of a company.
  6. Examining the level of compliance (compliance) of a company.
  7. Mitigating potential legal risks.
  8. Providing legal views or legal certainty in transactions carried out by the company.

There are two types of LDD, namely full due diligence and limited due diligence.

  • Full Due Diligence

Full Due Diligence is an audit process of all legal aspects within the company, starting from the articles of association, composition of shareholders, directors, and commissioners, capital and share structure, company assets, permits and approvals, agreements with other parties, insurance, labor, to the existence of legal cases.

This type of LDD is usually used by companies that want to decide to merge, acquire, or consolidate.

  • Limited Due Diligence

Limited Due Diligence is an audit conducted by an individual. In this case, the object to be audited is not a company, but an individual. This type of LDD is generally applied in matters related to licenses, loans, and the acquisition of assets or certain transactions.

In the LDD process, there are several important documents that will be examined, namely:

Company Articles of Association Documents

The articles of association are a written provision that contains the powers and rights that can be exercised by the company's management. Generally, the document contains the company's internal basic regulations that are adapted to the Limited Liability Company Law.

As for the company's articles of association, they consist of the deed of establishment, company structure, list of shareholders, minutes of the shareholders' meeting, and proof of paid-up capital from the company.

Company Asset Documents

These documents consist of land certificates, vehicle ownership documents, documents of share ownership in other companies, and other documents as proof of company assets.

Agreement Documents with Third Parties

These documents consist of debt agreements, agreements with shareholders, and cooperation agreements.

Company Licensing and Approval Documents

These documents consist of a company domicile certificate, company registration certificate, and permits granted by the government.

Company Personnel Problem Documents

These documents consist of company regulations, foreign worker permits, employee social security, employee wages, and work agreements.

Company Insurance Documents

These documents consist of building (property) insurance policies, cooperative policies, stored fund policies, vehicle policies, and so on.

Company Taxation Documents

These documents consist of the company's Taxpayer Identification Number (NPWP), Land and Building Tax (PBB), taxes payable, and so on.

Other Documents

This document contains information about the company's relationship with lawsuits and disputes inside or outside the court.

There are 3 stages in the implementation of Legal Due Diligence (LDD), namely:

  • Planning Stage

The implementation of LDD begins with a general meeting with company stakeholders to find out several things, starting from the objectives, types, to what results are expected from the LDD.

At this stage, a schedule and work plan will also be prepared during the LDD activity, as well as making a list of documents to be examined during Due Diligence and can be submitted in the form of a document request letter.

  • Preparation Stage

This LDD stage is carried out by examining the documents that have been previously prepared by the company. These documents are checked for completeness and it is also possible to carry out examinations up to the court stage to find out the problems or disputes that occur in the company.

  • Report Preparation Stage

When the examination of important and relevant documents has been completed with the aim of carrying out legal due diligence, then a lawyer has an obligation to provide a report of his findings to the client.

That is the explanation related to legal due diligence starting from the meaning, objectives, types, to the stages in the implementation of LDD.