Legal Risks of M&A Transactions in a Global Economic Recession

Alta Mahandara

Mergers and acquisitions are strategies that are increasingly popular and are commonly carried out in the startup ecosystem recently in the context of corporate restructuring to improve competency and efficiency. However, mergers and acquisitions are very different concepts. Merger is the process of merging two companies which will then form a new business entity. In contrast, acquisition is the process of taking over a company by another company through purchasing shares.

A. Recession Risks Affect M&A Trends

The global economic recession is a frightening phenomenon for all countries, including Indonesia. Early warnings of a potential global economic recession in 2023 are starting to be echoed by global financial institutions such as the World Bank and the International Monetary Fund (“IMF”). Indications of a global economic recession are gradually emerging in Indonesia, marked by mass layoffs.

Corporate actions that are often carried out in the emergence of a global economic recession are mergers and acquisitions. During the COVID-19 pandemic, the Business Competition Supervisory Commission (Komisi Pengawas Persaingan Usaha, “KPPU”) noted that the number of merger and acquisition notifications, which in 2019 was only 123 notifications, increased to 233 notifications in 2021. This increasing trend of mergers and acquisitions is due to the number of companies having difficultes dealing with the COVID-19 pandemic. So, in order to grow, companies need to expand the market through mergers and acquisitions. The trend of mergers and acquisitions, with the aim of strengthening the capital structure, is very likely to continue to occur in 2023 due to indications of the global economic recession. 

Read More: What is Merger and Why Companies Do It?

B. Hedging in Protecting Investment Assets from the Risk of Loss Amid the Economic Recession

The intensity of mergers and acquisitions usually increases during times of global economic recession, where these corporate actions pose a distinct risk to companies associated with the risk of penalties due to violations of fair business competition regulations. Therefore, companies should intensify control over their own corporate actions to prevent monopolistic practices and unfair competition. In addition, the highly dynamic global economic recession necessitates the need for more extensive due diligence investigations to assess the vulnerabilities of a company’s business. Therefore, it is essential for business actors in carrying out mergers and acquisition to have a deep and thoroughly understanding of the target company’s business and how it can be affected by the global economic recession.

Before carrying out a merger or acquisition, there are at least six legal aspects that companies must pay attention to: 

1. Legal Due Diligence (LDD) Process; 
2. Company data protection in the merger and acquisition process; 
3. Intellectual property rights protection; 
4. Merger control so that the merger complies with the business competition regulation; 
5. Reporting time of mergers and acquisitions, and 
6. Legal protection for third parties in the merger and acquisition process.

Observing those aspects, in facing the global economic recession, the most important thing is that companies in conducting merger and acquisition transactions i.e., selling companies, buying companies and members of joint venture companies must review their agreements and continue to monitor the developing situation. If possible, the parties must also take preventive steps to mitigate risks in anticipation of a worsening global economic situation.

C. Strategies to Conduct M&A From the Perspective of Global Inflation

Inflation is an increase in the price of goods and services that occurs continuously and widely, nationally and globally. Inflation can lead to high prices of inputs or raw materials, decreased income and profits, consumer’s low purchasing power, and economic slowdown. If companies cannot keep up with the rate of inflation, they may go bankrupt (which usually happens to small entrepreneurs).

Mergers and Acquisitions in the midst of global inflation will certainly occur a lot because these corporate actions aim to strengthen the capital structure. However, caution needs to be exercised in conducting both mergers and acquisitions.

To find out more about the legal risk of M&A transactions in a Global Economic Recessions, ADCO Law cordially invites you to attend ADCOTalks – 2023: Thinking Outside Pandora’s Box, on Tuesday, November 29, 2022, live on Zoom.