EMLI Training-Legal Due Diligence for Acquisition Deal in Indonesian Mining Projects

Legal Due Diligence for Acquisition
Deal in Indonesian Mining Projects
By: Dendi Adisuryo (ADCO Attorneys at Law)
1

AGENDA OF DISCUSSION
 Introduction to acquisition
 Acquisition deals flow
 Stages in and Characterictic of mining projects
 Roles of legal due diligence
 Workflow of legal due diligence
 Preparing due diligence checklist
 Key areas for legal due diligence review
 Corporate legal standing
 Mining Concession
 Compliance to requirement under mining laws and regulations
 Third Party Comitment
 Assets
 Disputes
 Overlapping matters
Legal Due Diligence for Acquisition Deal
in Indonesian Mining Projects 2

AGENDA OF DISCUSSION
 Key areas for legal due diligence review
 .....
 Overlapping matters
 Environment
 Frequent findings
 Preparing legal due diligence report
 How LDD Report will affect the deal?

INTRODUCTION TO ACQUISITION
WHAT’S THE ACQUISITION?
 Acquisition may be defined as an act of one enterprise of acquiring, directly
or indirectly of SHARES, voting rights, assets or control over the
management, of another enterprise
 Acquisition is a legal action taken by a legal entity or an individual to take
over shares in a company which will change the control of the Company
(Article 1 (11) of Company Law)

ACQUISITION RATIONALE
 Enhance, build and preserve markets
 Achieve rapid business growth
 Secure new resources
 Develop globally-competitive companies
 Establish a new business unit
 Supporting tools for core business unit
INTRODUCTION TO ACQUISITION

ACQUISITION DEALS FLOW
Information
memorandum
Approach
target
Joint statement on terms
and/or procedure
Final acquisition
agreement
Confidentiality
agreement
Due
diligence
Closing

Parties Involved in Acquisition
2
Financing
Buyer Seller
Lead advisor
Corporate
Lawyer
Due Diligence
$

STAGES IN MINING PROJECTS
Exploration /
project
evaluation
Development
and
construction
Production
Sale and
Marketing
IUP Exploration IUP OP

CHARACTERISTIC OF MINING PROJECTS
Industry Characteristic:
1. Relatively high uncertainty and high cost
2. Unrenewable resources
3. Remote area
4. Environment impacts
5. Heavy regulated industry

ROLES OF LEGAL DUE DILIGENCE
Obtaining objective information
Identifying legal risks
Arguments for negotiations
Transaction structuring
Determining conditions precedent to transaction
Determining holdback amounts in transaction

in Indonesian Mining Projects
11
LEGAL DUE DILIGENCE WORKFLOW
START UP
Management
Meeting
Information
Gathering
Analysis The Report
 Term of
Reference
 Initial
manageme
nt meeting
 Site visit
 Reassure
management that
LDD will not
disrupt
commercial
activities of the
target
 Establish timings
and reporting
 Review initial
proposed
transaction
structure
 Obtain person in
charge in the
data room
 Gather info from
dataroom/documen
t provided
internet and other
resources
 Close liaison with
the target’s official
financial/environm
ent/technical
counsel
 Obtain infofrom
government
agencies
 Site Visit
 Legal issues
 Legal
consequences
 Legal Solution
 Clear, easily-
read document
 Address what
the commercial
people need to
know
 Timely manner
 Good news is
nice, but the
truth is the aim
 Presentation to
client
 Q & A
 Next stage of
the transaction
Post Report

 What’s the DD check list?
 When to be served?
 Do we have to obtain all of the documents in the list?
LEGAL DUE DILIGENCE CHECKLIST

Obstacles to Due Diligence in Indonesia
 No sophisticated public data base
 Reluctance to present full package of documents
 Delays in gathering and presentation of documents (from usually remote
sites)
 Differences: so many interdisciplinary issues (e.g. forestry, transportation,
overlapping, counterfeited documents
 More important than in developed countries – not purely a data room
exercise
 Legal uncertainty – clear title (in licenses, buildings, property)
 Lawsuits: difficult to access
 Representations and warranties may be useless because sellers are often
“big” local person

 Corporate legal standing
 Mining Concession
 Compliance to requirement under mining laws and regulations
 Third Party Comitment
 Assets
 Disputes
 Overlapping matters
 Environment
KEY AREAS FOR LEGAL DUE DILIGENCE REVIEW

 Corporate legal standing
 Establishment
 Capital structure (eg. change of capital structure, minimum capital requirement
for PMA Co)
 Shareholding composition
 Company management
 Authorities of management and corporate approval
 Domicile of the company

 Mining Concession
 Issuer and date of issuance
 Sequence of license, renewal or extension
 Genuity of license
 Clear and clean status
 Expiry of license
 Riights and obligation under the license
 Location of the mine
 Coverage area

 Compliance to requirement under mining laws and regulations
 Financial obligation (eg. dead rent, royalty, other PNBP)
 Reporting obligation
 Working plan and budget
 Certain activity to be approved by issuer
 Supporting licenses (eg. hauling road, jetty, stockpile)
 Requirements under local government regulation (perda)

 Third Party Comitment
 Coal/mineral sale agreement
 Exclusivity, duration, committed volume, price adjustment, payment methode, quality
and quantity determination, exit clause
 Services / contractorship agreement
 Scope of work, service fee, fall and rise, exclusivity, evaluation based on performance
indicator, parties responsibility
 Joint Venture/Joint Operation/ Shareholder agreement
 Scope of cooperation, parties’ responsibilities, rights of first refusal, quorum, minority vs
majority roles, tag along vs drag along, capital injection, pre agreed matters, changes of
control
 Financing agreement
 Indebted amount, security, prepayment, change of control, covenants, breach of
agreements, debt reschedule / restructurisation
 Marketing agreement
 Exclusifity, commited amount, price determination, pre shipment payment,

 Assets
 Types of assets
 Ownership title
 Land compensation?
 Encumbrances
 Property rights
 List of property – owned, occupied, leased
 Supporting documents of ownership, occupation or leasing
 Physical checking to BPN – Lurah for land properties
 Appraisal or valuation of assets

 Disputes
 Court searches in PN, PTUN, PHI, P Niaga, BANI, PN Jakarta Pusat
 Court search cannot reach potential disputes
 Disputes in international arbitration forum?
 Court search – must be authorized by the targeted company through a
formal PoA
 Cost may vary, depends on where, who, how big is the company, time
frame
 No full reliance to court search result
 Potential dispute
 Always asked for indemnity in the definitive agreement

 Overlapping matters
 Overlapping with other mining concession
 Overlapping with HGU other right over surface land
 Overlapping with forestry concession
 Overlapping with other types of concession / license (eg. oil & gas)
 Confirmation in form of:
 Letter (unlikely)
 Situation map (most common):
 Sample of overlap with HGU
 Sample of overlap with KP/IUP
 Sample of overlap with forestry concession

 Environment
 AMDAL requirement – time line
 RPL – RKL documents
 Mining voids
 Mining accidents
 Environment claim
 Review mining log book kept by Chief Mining Engineer (Kepala Teknik Tambang)

 Corporate Matters
 The shares have been transfered to other parties
 Unreported amendment to the AoA
 Approval from the Minister in place after issuance of the KP/IUP
 Lack of deed of shares transfer
 Absence of spousal consent
 Lack of corporate approval for certain transaction
 Absence of shareholder registry
 Absence of annual general meeting of shareholders
FREQUENT FINDINGS

FREQUENT LDD FINDINGS
 General matters
 Lack of reports document
 Absence of approved work plan and budget
 Less payment of deadrent or royalty
 Mining operation within forestry area without IPP
 Mining operation within forestry area only based on “recommendation” from local
government
 Absence of environment regular report
 Sale of coal under HBA price
 SKAB (sale report) is significantly different with production report
 No sale and purchase or right release documentation for land clearance
 Land clearance conducted by other party other than IUP holder
 Discrepancy in overlapping issues (especially related to overlap with forestry
concession holder)
 No financial statement
 Target company has not submited any annual tax return

FREQUENT LDD FINDINGS
 Contractual
 Long-term contract with onerous provisions and no possibility to adjust
 Contract with its affiliated party
 Contracts with no-perfect provisions
 Agreement to pay “royalty” to un-disclosed party
 Exclusife offtake agreement or marketing agreement
 One-sided services agreement
 Service agreement not in line with Permen 28 / 2009
 Long term coal sale contract with fixed / caped price

PREPARING LEGAL DUE DILIGENCE REPORT
 Golden rules:
 Findings
 Legal consequences
 Proposed action
 A glancing through a LDD Report

HOW LDD REPORT WILL AFFECT THE DEAL?
 Subtance of the report:
 Information of the target company
 Risk identification
 What to do with the risk:
 Transfer of risk
 Limit the risk
 Absorb the risk
 Reject the risk

 Target to be achieved in M&A deal negotiation
 Price
 Terms
 Time frame
 Warranties
 Remedies

 Drafting acquisition agreement
 Definitions and Interpretation
 Sale and Purchase
 Consideration
 Condition
 Pre-Completion and Post-Completion Obligations
 Completion
 Warranties
 Indemnities
 Share Purchaser’s Undertakings
 Security for Claims
 Share Purchaser’s Rights to Terminate
 Confidentiality
 Governing Law and Dispute Resolution
 Notices
 Miscellaneous

The contents of this presentation are intended for informational
purposes only and are not in the nature of a legal opinion or
advice. They may not encompass all possible regulations and
circumstances applicable to the subject matter and readers are
encouraged to seek legal counsel prior to acting upon any of the
information provided herein.
© Adisuryo Prasetio & Co
2012

DendiAdisuryo
Practice Description
He specializes and has practical experience in energy and mining projects
and the banking/finance sector. He also has broad experience in
assignments related to foreign capital investments and corporate
restructuring.
Lawyer/Consultant Biographies
Please contact us if you have any questions regarding our firm:
Adisuryo Prasetio & Co
Setiabudi Building 2 6th Floor
Jl. HR. Rasuna Said, Jakarta 12920
Jakarta Selatan - Indonesia
Telp: +6221-52903034
Fax: +6221-52903035
email: dendi.adisuryo@adisuryo.com

Legal Due Diligence of Mining
Projects in Indonesia
32

EMLI Training-Legal Due Diligence for Acquisition Deal in Indonesian Mining Projects

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EMLI Training-Legal Due Diligence for Acquisition Deal in Indonesian Mining Projects