Unconstitutional? What investors need to consider from the Indonesian court decision on the Omnibus Law

Since coming into effect on 4 March 2021 (we previously covered three things investors need to know about Indonesia’s new Omnibus Law in this blog post, as well as the liberalisation of foreign investment in certain sectors in this blog post), many challenges have been brought against the Omnibus Law in Indonesian courts by various interested parties.

While most challenges have since been struck down, one key challenge that was ruled upon by the Constitutional Court in a decision published on 25 November 2021 relates to the procedural aspects of the way the Omnibus Law was brought into force. In its decision, the Constitutional Court agreed with the petitioners that there had been several procedural irregularities which brought into question the legal validity of the Omnibus Law. Key findings include the legal validity of the Omnibus Law itself, being an implementing instrument intended to amend multiple statutes simultaneously, something that had not been attempted before, and was therefore perceived as potentially a legally invalid approach. The Constitutional Court also found that there were discrepancies in the text of the Omnibus Law as finally published, compared to the text in the versions approved by the Indonesian Parliament and signed by the President.

As a result, the Constitutional Court gave the government two years from the date of its decision to correct these issues, failing which the Omnibus Law would be rendered void. In the meantime, the Omnibus Law has remained in force, but the Constitutional Court also ruled that the government must not issue any further implementing regulations or guidance, or take any ‘strategic decisions’ in connection with the Omnibus Law.

Although there is no immediate impact on the Omnibus Law and implementing regulations, from a foreign investor’s perspective, the Constitutional Court’s decision creates medium- to long-term uncertainty.

• In the medium term, both the scope of the requirement that the government must not issue any further implementing regulations or guidance or take any ‘strategic decisions’ under the Omnibus Law, as well as the ability of the Constitutional Court to take enforcement action against the government are unclear. It is also difficult to predict how the relevant government agencies will react to the requirement that the government must not issue any further implementing regulations or guidance or take any ‘strategic decisions’ in this interim period, although many commentators expect these agencies to adopt a ‘wait and see’ attitude.

• In the longer term, it is not clear precisely what the Constitutional Court expects the government to do in order to rectify the procedural irregularities raised. There may also be new legal challenges brought against the Omnibus Law in the future, even after the existing defects identified by the Constitutional Court have been remedied by the government.

Investors in Indonesian businesses will need to carefully evaluate the potential impact that this development, and any potential future ruling on the validity of the Omnibus Law, may have on their businesses and any proposed transactions. Potential restructuring may also be needed in the future (for example, to comply with previously applicable foreign ownership restrictions) if, in the worst case scenario, the Omnibus Law is declared void.