For foreign investors, local partners are key to navigating Southeast Asia’s diversity

Given Southeast Asia’s diverse cultural and political landscape, it is critical that foreign investors work alongside local partners to navigate the intricacies of deal-making in the region’s various markets.

“It’s important to know what the temperature is like [in every market],” said Adrian Chee, partner at law firm Rajah & Tann Asia.

He was speaking at a panel discussion titled ‘Strategic Legal Insights for PE/VC Transactions: Dispelling Myths, Driving Innovation, and Navigating SEA’s Complex Landscape’ at the Asia PE-VC Summit 2024 organised by DealStreetAsia in Singapore on September 17.

Chee and his co-panellists agreed that it is a “good rule of thumb” for investors to have a local partner to navigate areas they may be less familiar with.

In Malaysia, for instance, while the government is supportive of foreign capital that flows into the country, it has issued guidelines that cap foreign equity participation in certain sectors such as telecommunications and oil & gas.

This, Chee says, can make things “tricky” for foreign investors, making support from local experts essential.

It’s arguably more so the case in Indonesia, Southeast Asia’s largest market. The varied levels of economic, educational and political development across different cities and provinces in the archipelago can make it “frustrating” for foreign investors to execute deals here.

“You cannot compare the situation in Java with that in East Indonesia. So you need someone who can help you interpret the policies and then communicate your intention, particularly to your target company,” said Indonesia-based Mita Kartohadiprodjo, Partner, Corporate/Mergers & Acquisitions, Rajah & Tann Asia.

What’s more, the country is oftentimes prone to legal uncertainties and is also known to be inconsistent when it comes to enforcement of rules and policies. This makes it essential to not only find local partners but also highly credible ones.

For dealmakers, one of the rules often put to test is the one around the nominee structure—a legal structure in which one entity acts as a shareholder of a company on behalf of another. This arrangement is seen as a way for foreign investors to circumnavigate foreign ownership restrictions, by appointing a local nominee to hold shares on their behalf.

Indonesian regulations prohibit businesses from using a nominee arrangement. However, it is common to find local legal advisors advising companies to bend the law given the “relaxed” enforcement of the rule. 

“We know that there are a lot of firms that adopt a more lenient approach to that, saying it [the nominee structure] is not really ‘prohibited’ but just ‘not recognised’ in Indonesia,” explained Kartohadiprodjo.

“If you come to us, we would advise you to adopt [alternative] structures or a loan structure. While it may not give you the benefit of a direct equity investment, you will be on the safe side, because at any given moment the policy can change and relationships can sour,” she added.

While a nominee structure is illegal in jurisdictions like Indonesia and Thailand, these issues arise less frequently in the context of Singapore which has foreign investment friendly policies makes the city-state a haven for foreign investment. Earlier this year, Singapore ranked first in the Economist Intelligence Unit’s business environment ranking.

In the context of venture capital fund raising, Joyce Ng, General Partner at Singapore-based VC firm iGlobe Partners said her firm has been seeing a few deals using SAFE [Simple Agreement for Future Equity] notes. “A lot of founders… don’t want to spend a lot of money on their documentation, and bringing in lawyers, right? So, I think SAFE is something that most companies would do,” said Ng.

Given the ease of doing business in the city-state, there is a temptation among new players to look past local legal partners and turn to technology instead for assistance. 

Singapore recently hosted the Tech Law Fest, an event celebrating and discussing the tech advances in legal practices. The event pulled around 1,700 attendees, which is indicative of the buzz and popularity surrounding legaltech.

However, Chee believes that even though the advancement of technology is extremely useful and should be embraced, it would not be able to replace the human touch in the legal realm. “There’s still a lot of value that advisors like ourselves can provide to clients, especially if we have a relationship with a client that has gone a long way. I think no technology can replace that relationship,” he said.

“AI is not going to replace lawyers or humans anytime soon. It’s the AI-enabled lawyer that will replace those that are not AI-enabled,” said Terence Quek, Deputy Head, Mergers & Acquisitions, Rajah & Tann Asia.

Building and maintaining relationships is of the essence for legal practitioners, not only in their interaction with clients but also with the regulators, opined Tracy Ang, Deputy Head, Mergers & Acquisitions, Rajah & Tann Asia, who moderated the panel discussion.

She recalls an instance in which a founder of a company had been deemed to have run afoul of the Singaporean regulators, putting them, and her client, an investor into the company, in a sticky situation. However, she and her firm managed to resolve the issue with the regulator, largely owing to her firm’s ability to address concerns of the regulator and the level of trust her firm has built up over the years in its interactions with  the regulator.

“I think that’s where, and I’m proud to say this, the standing of Rajah & Tann as a firm greatly helped with the regulators,” she said. “In the end, I think they do look at the reputational history of a firm.”

The following transcript of the discussion has been edited for brevity and clarity.

Tracy Ang: Terence, you act for a lot of companies who are funding. Would you like to maybe share what you’ve seen in terms of features that are not in your typical VIMA [Venture Capital Investment Model Agreement] documents? 

Terence Quek: A couple of years back, we were acting for a sovereign wealth fund, and they wanted something that was not that common back then—we call them super pro rata rights. Of course, it’s quite a common feature now. If you are very keen on the company and you want to get a bigger share in the next round of financing, that’s when things are still rosy.

Tracy Ang: Joyce, you’ve seen some fairly interesting developments on the use of SAFE [Simple Agreement for Future Equity] notes in your deals?

Joyce Ng: In Singapore, I’ve done a few deals that use SAFE. Many founders, especially those in early stages, don’t want to spend a lot of money on their documentation, and bringing in lawyers, right? So, I think SAFE is something that most companies would do, based on the YC [Y Combinator] kind of style.

As a venture capital firm, we [iGlobe Partners] have a lot of corporate governance. We have to report back to our investors. So, under the SAFE document for us as a firm, we still go for terms like the board observer seats where you are expected to be giving us the information rights and all this. So, I think SAFE is something that we have been using quite often.

Tracy Ang: Terence, do you now more commonly see SAFE investors requesting information rights and board seats?

Terence Quek: Absolutely, maybe not so much the board seats at this point, but yes, observer rights so that they can keep a pulse on what’s happening with the company.

Tracy Ang: That leads to the question of the challenges in structuring deals in Southeast Asia. Mita will share some of her insights on the challenges that she’s seen in her deals.

Mita Kartohadiprodjo: Southeast Asia comprises many countries that have different legal systems and also different cultures so it’s hard to execute deals in Southeast Asia with a one-size-fits-all approach. So, for each country, we have to see the cultural context and political context. In this matter, Indonesia is quite different from Singapore or Malaysia, because we are not a common law system. Indonesia is quite a vast archipelago. And the population of Indonesia right now is 270 million. So we are the world’s fourth most populous nation. 

What we see is that, some investors find it frustrating to execute deals because, firstly, we have to acknowledge that there is a gap between the investor side and the Indonesian side. Indonesia remains a developing country, with development varying across regions. You cannot compare the situation in Java with that of the East Indonesia region. So, you need someone who can help you interpret the policies and then communicate your intention, particularly with your target company. If you want to invest in say a family-owned company that is not in Java, then there are a lot of barriers that you need to overcome: the language, and how to communicate to them in a manner that is courteous, polite, and not be seen as offensive. I think we lawyers have an important role there. Also, we need to be the bridge between you and the regulator, as much as we are a centralised government, the regional governments have the authority to determine their own policies and regulations.

Tracy Ang: Terence, you’ve probably done a few deals where issues around structures like the nominee structure have surfaced. Do you still see that commonly?

Terence Quek: We typically have to navigate this because there have been deals that have been aborted in Thailand as well as Indonesia because of such structures. There’s just no way around it. You can’t get a clean opinion. So that’s one end of the spectrum where the deals just gets aborted. The other end of the spectrum is where we have some of the more bullish VC funds, who are okay to work with a different law firm that is more comfortable giving a sufficiently robust legal opinion to say that chances are, such a structure is not unenforceable. 

Tracy Ang: Mita, our domain expert, you probably have the final word on this one in terms of the risk of such structures:

Mita Kartohadiprodjo: The nominee structure in Indonesia, well, our firm adopts a conservative view on this. We think that the investment law spells out that it is prohibited to be carried out in Indonesia… every company must declare who their UBO (ultimate beneficial owner) is. 

But as Terence said, we know that there are a lot of firms that adopt a more lenient approach, saying it is not prohibited but is just ‘not recognised’ in Indonesia. We also know that there are firms that are willing to also produce a clean opinion saying that is something that is only ‘not recognised’. And then the enforcement is also quite relaxed on that.

If you come to us, we would advise you to do (alternative) structures such as MCB or a loan structure. While it may not give you the benefit of a direct equity investment, you will be on the safe side, because at any given moment, the policy can change and relationships can go sour.

Tracy Ang: I think we tend to think Singapore is a much easier environment to navigate. What are your views on the challenges in the Singapore market?

Terence Quek: I think Singapore is a cakewalk for doing deals, compared to the rest of Southeast Asia, because more often than not, I’ve encountered situations that require me to stop work because of kickbacks and other ABC issues in other jurisdictions.

Tracy Ang: Adrian Chee, we’ll turn to you to inform us on the regulatory challenges in Malaysia.

Adrian Chee: In all my years in transactions, a key part is having a good feel of how the regulator looks at the deal. It’s really important to be able to know what the temperature is.

The regulator tends to want to do the right thing and be investor-friendly. But the devil is in the details of the guidelines that they issue. Where they do require some cap or some limit in terms of foreign equity participation, that’s when it gets tricky.

I think most of us, if we’re going to a new market, it’s unlikely that we want to go in just by ourselves. It’s usually a good rule of thumb to find local partners that can help you navigate the market, and look out for you as to the things that they may not be familiar with. And that’s especially true in the Malaysian context.

Tracy Ang: Dessert topic: what’s your view on the legal sector going forward?

Adrian Chee: I would say that legal tech is an area that we cannot ignore. Maybe in Malaysia, it’s not quite as advanced as it would be in Singapore, but I would say that it’s starting to make its presence felt. So the sooner that practitioners like myself embrace technology and have it embedded in our practices, I think the better off we will be.

That said, I think the concerns that people express about technology replacing humans in this field are overstated. I think there’s still a lot of value that advisors like ourselves can provide to clients, especially if we have a relationship with a client that has gone a long way. I think no technology can replace that relationship. So, I’m quite confident that we’ll still have a role to play, and we’ll be able to guide our clients in ways that an AI model cannot do just yet.

Terence Quek: One parting word: AI is not going to replace lawyers or humans anytime soon. It’s the AI-enabled lawyer that will replace those that are not AI-enabled.