Please see here. This is the first time I am mentioned in a footnote. While there is nothing extraordinary with this, I am happy and appreciate the writer for using one of my articles (written with my partner) as a source of reference for his paper. There are still many things to come from the Capitalist Lawyer, and I'm planning to make all of those things happen.

Today is my 26th birthday, so in this special day, instead of writing and analyzing things, let me tell you some of my wishes and random thoughts on my most beloved subjects, law and lawyers. Enjoy!

1. I believe that laws should be made by professionals not some common people, i.e. the parliament, and I wish that we could achieve that as soon as possible. Of course, the process of recruiting those professionals should be made as democratic and transparent as possible. If not, then we would only have another despotic government.
2. I wish to have a virtual data base that has complete legal references and sources which have been systematically organized and all I need to do to find them is by one click. That would be glorious.
3. I wish that I could have more time in learning all the new things about law. Law is a never ending process, continuously evolving in order to achieve perfection. It is really frustrating that I can't follow all of those new developments.
4. Being a lawyer requires great intelligence, perseverance, persistence, and diligence, but none of them would be helpful if you don't have the passion.
5. Good lawyers love to be challenged, great lawyers surpass those challenges. However, always remember the golden rule of lawyers: Do not take responsibilities more than you are being paid for.
6. Never underestimate the usefulness of inputting your time sheets daily.
7. Commercial pragmatists are the next generation of lawyers, those who can smoothly combine superb legal knowledge with deep commercial understanding of the client's business.
8. Lawyers are consultants and therefore our job is to help our clients in making decisions not to make decisions by ourselves. See the golden rule above.
9. If you're only looking for the money, you should not work as a lawyer, since there are other jobs that will give you better income with less working time. But, if you're looking for a respectable profession that can satisfy your pride, you have come to the right place.
10. If you have worked as a lawyer for years and you still can't gain the trust of your clients, you should stop and pick another career. Without client's trust there would be no business development, no business development means no advance in career, so why bother working as a lawyer?
11. Doing you best is not enough to reach the top. Always try to surpass your own standard and never be satisfied with your performance even when you think that you have reached the top, there is always a room to grow, a room for improvement. Like my partner once said: "I could never be fully satisfied with my associates since I fear that once I tell them how satisfied I am, they would cease to improve their qualities."

If I could only complain one thing on the process of doing an initial public offering of shares in Indonesia, that must be the requirement for a proposed listed company to obtain from its creditors a waiver of any restriction on such company's capacity to pay dividends to its shareholders or any restriction of dividends payment on the subsidiaries level, provided that the proposed listed company income depends on the payment of dividends from its subsidiaries.

You will be amazed to know that this is not based on a strict regulation, rather it came from an unwritten policy of the Indonesian Capital Market and Financial Institution Supervisory Agency ("Bapepam-LK"). According to Bapepam-LK officials, when a company is trying to raise funds from the public, such company should be able to pay dividends to its shareholders since such dividends will become the main source of income for its shareholders. Therefore, any restrictions for dividend payment should be eliminated as well.

Okay, to certain extent the argument makes sense, but such argument is too simple to be used as a reason for forcing those proposed listed companies to obtain a waiver of their dividend payment restrictions. As far as I know, from the investors perspective, there are two main ways to obtain income from the capital market: (i) payment of dividends, or (ii) capital gain, i.e. buy low, sell high. In other words, dividend is not the only source of income, and in practice, not all investors focus on getting the dividends.

Furthermore, waiving the restriction of such dividend payment may significantly affect the possibility of securing a financing from financial institutions. As you may be aware, for companies, there are three ways of raising funds, i.e. (i) debt financing, (ii) equity financing, and (iii) hybrid financing (the combination of debt and equity financing). Some financial institutions would require its debtors to limit their payment of dividends to ensure that the debtors could have sufficient funds to repay their debts to these financial institutions. From my experience, there were some cases where the proposed listed company had to repay its debts because its creditors did not agree to waive the dividend restriction. If the debt is not huge, than that wouldn't be a problem, but if the amount is huge, the company will face a serious problem as getting the creditors approval might not be easy and the financial condition of the company may also be compromised.

I always believe that capital market regulations should focus on transparency, on how disclosures about the condition of publicly listed companies should be made, not on how they should perform or doing its business activities, that is the role of the management and that is why they are being paid. Forcing proposed listed companies to waive their dividend restrictions is essentially the same with limiting their choices between debt and equity financing, and I am sure that this is not efficient!

In my opinion, the most important thing is that the proposed listed companies have disclosed in their prospectuses that they have several debts and in those debts, they are being limited to pay dividends (fully or partly). If proper disclosures have been made, it is up to the investors decision on whether to invest in such companies or not. That would be the ideal things to have in Indonesia.

Unfortunately, this Bapepam-LK unwritten policy has not been revoked until today. The only thing that we could do now is to lobby Bapepam-LK and make them understand on this issue. Protecting Indonesian investors is very important, but we should also do that in a proper way, not by limiting the options of publicly listed companies, which in some cases, is actually counterproductive.

In the third and also the last part of my article, we will discuss the actual implementation of Kelsen's theory of law and why such theory matters. If you have read all of my previous related posts and you are still reading this post, I must first congratulate you for your persistence and patience. I hope this article would be useful to help you in understanding the basic characteristics of the law. 

In my opinion, the most important contribution of Kelsen's theory is the theory that the validity of the laws does not depend on their contents or the values represented by those contents but on: (i) how they were established (i.e. whether they were made based on a correct mechanism set out by higher norms), and (ii) the validity of the higher level's norms which enable those laws to be created. What are the implications? No matter how bad a law is drafted or no matter how ridiculous a law is, as long as the above requirements have been satisfied, a valid law is always a law and people should obey such law. 

Now, before you claim that I am a supporter of despotic governments who issue laws without any check and balance mechanism, please hold your tongue. If we know and understand that a valid law is still valid even though it is a very, very bad law, we must do our best to prevent such thing from occurring. Kelsen's theory is very useful here because it brings us to the cold reality, i.e., there is always a chance that a law is a bad law, and when such bad law is validly issued, it will become a valid bad law. Then, whether people like it or not, they would need to obey such bad law. 

Of course people can always disobey that law, but then they would live under the mercy of the officials who implement such law. While there are also mechanisms to review those bad laws in some countries, until a final and binding verdict is issued, those bad laws are still deemed to be valid, and there is no guarantee that the results would be in favor of those who oppose the enactment of such laws. 

The next important contribution from Kelsen's theory of law is the theory that essentially, law is the product of men, it is not created by divine powers or supreme intellects. While this concept has been already recognized under the positive theory of laws, Kelsen brings the concept to the next level. Again, this has a deep relationship with his concept about the validity of the law. By rejecting the theory that law is derived from specific values created by divine powers or morality, Kelsen established the concept that the validity of the law is not related to its content. I couldn't less agree. The reason is simple, we can easily assess whether a law is made through the correct mechanism but we can't asses the correctness of a moral or religious value that becomes the underlying principle of the law. Determining the validity of the law based on its values would be horrendous because we do not have a universally acceptable standard and people could always challenge the validity of the laws by too many reasons. 

There are also other consequences of Kelsen's theory. I know that some prominent legal scholars believe that laws should reflect the values of the society where the laws were enacted. To certain degree, that might be correct, but not always. Imagine the new Qanun in Aceh that permits stoning for adultery. You can see my related post here. The Qanun makers stated that the Qanun is issued in accordance with the cultural believe of the Aceh's society. Assuming that this is true, can we accept this kind of law as the right one? I would say no! And I believe that most people would say the same. According to Kelsen's theory, the Qanun is a valid law. But how about those who believe in the relationship between law and society. Would they have the same view about the validity of this absurd Qanun? Kelsen's theory enables us to have a scientific method in assessing the validity of the law and we should be grateful for that. 

Last, but not least, Kelsen's theory of law helps us to understand the nature of the hierarchy of laws which is very useful when we need to analyze different ranks of law and determine the validity of a law's provision. In Indonesia, Kelsen's concept has been implemented in Law No. 10/2004 on the Stipulation of Regulations where it states the basic hierarchy of Indonesian regulations and stipulates that the power of a regulation corresponds with its level in such hierarchy. There are a huge number of laws out there and there is always a possibility that some laws contravene other laws. 

This is especially right when we are dealing with the laws of a developing country where the laws are not well harmonized. Without a clear concept of the hierarchy of law, we would be confused in determining which law should be applied where there were two or more contradicting laws. By using the hierarchy of laws and the fact that this concept has been implemented in Indonesian regulations, we would have a solid basis in determining the applicability of valid laws in accordance with its level in the hierarchy, i.e. lower level laws cannot have provisions that contravene the provisions of the higher level laws. If such contravening provisions exist, the provisions of the lower level laws should be deemed as inapplicable. I encourage all lawyers to learn and to fully understand this concept as this is one of the basic skills in doing their job analyzing the regulations. 

We have discussed some important implementations of the Pure Theory of Law and I hope that the discussion can enlighten us with respect to the nature and function of law. In the end, law is the product and tool of men, and therefore, it is up to us to make a law that can bring the greater goods to the society. We also know the danger of having a valid bad laws and we must do our best to prevent such thing from ever happening. Therefore, in the future, I hope, that the drafting of laws could be done by professional legal drafters supported by greater participation of the society.

I can't stop laughing with this great piece of article from Greg Mankiw. Sigh, if only the Nobel Committee also gives Nobel Prize in laws, I should also be able to make this parody, hahaha. Anyway, it's a very good parody which questions why Obama is named as the winner of the Nobel Peace Prize. Enjoy, and don't forget to see the link in his post.

Here is a very concise article about the role of the Government. A must read for those who would like to understand policies differences between the "big" and "small" government. I can understand why most people will be in favor of the "big" government" during the term of crisis. We love saviors aren't we? For most of us, those smart looking officials seem to have all what it takes to save the country (and ahem, I'm not referring to the officials of my country).

Well, you better think again. I agree that the government must have a role in the development of a country, or else why we need to have a government in the first place? But we must also acknowledge the limitations of the government. They are, after all, made from the people and they definitely could not know and understand everything, including the entire risks and benefits of their policies. A good government should know when to stop making policies to avoid over regulation which could turn into a mess in the long term, or even in the short term.

By the way, hat off to Mr. David Brooks for his intelligent and easy to understand analogy.

In the first part of my article, we have discussed the basic concepts of Hans Kelsen's Pure Theory of Law. In this second part, we will discuss the concept of Norms, and the relationship between efficacy and validity of the law.

Norms, the Hierarchy of Norms, and the Basic Norm 

A discussion on Kelsen's theory of law wouldn't be complete without discussing the Norms. As I've said previously, according to Kelsen, the law can be viewed as a specific social technique and as a norm. What is a norm? Kelsen describes norm as a rule expressing the fact that somebody ought to act in a certain way, without implying that "anybody" really wants the person to act that way. Further, Kelsen also defines norm as an impersonal and anonymous command (this is made by Kelsen to counter argue John Austin's definition of law, i.e. law as a command from a sovereign). 

From his definition, we can conclude three important concepts: (i) a norm is a rule that provide certain "guidelines" to its intended subject whereas such intended subject is ought to follow such "guidelines", (ii) a norm is neutral, it is not representing the will and interest of certain people or entity, and the most important thing is (iii) the validity of the norm is not related to the entity which stipulate such norm (that's why it is considered as an impersonal and anonymous command) but on the validity of the norm which gives authority to such entity. 

Following Kelsen's way of thinking, the validity of a norm (let us call it as Norm No. 1) shall be determined by the validity of the norm having the authority to create/establish Norm No. 1 (let us call this second norm as Norm No. 2) in accordance with the procedures stipulated by Norm No. 2. Logically, Norm No. 2 should have a higher level than Norm No. 1 and both should exist in the same order/system. If not, how can Norm No. 2 create and determine that Norm No. 1 is valid? Thus we've seen the birth of the Hierarchy of Norms. Pretty simple, eh? The process shall be repeated until we reach the highest level of the Hierarchy of Norms, where we will find the Basic Norm. What are the characteristics of the Basic Norm? 

Let me give you an example: Why we stick with the 1945 Constitution and consider it as the basis of all laws stipulated in Indonesia? It is not a sacred document created by God, in fact it is a document made by a bunch of people that we call as the Indonesian founding fathers, which was later amended by the Indonesian parliament. It was once replaced by another constitutions and then we returned to use it using a decree of a president which is obviously has a lower status than the constitution. Yet, we're still using the 1945 Constitution and we still believe that all regulations in Indonesia should not contravene the 1945 Constitution and that all regulations in Indonesia obtain their validity since the 1945 Constitution allows the stipulation of laws and regulations. Yes, 1945 Constitution can be considered as a Basic Norm, but is it valid because it corresponds with justice or the interest of all Indonesian people? Not necessarily. It was not even drafted by the entire Indonesian people, rather it was made by a committee whose most members were appointed by Japanese government. It is without doubt that some Indonesian people might have different views with the idea of such committee and the content of the 1945 Constitution. Even the drafters of the 1945 Constitution and its amendments could have different views among themselves when they draft the 1945 Constitution. 

So why? Why we still use the 1945 Constitution? The answer lies in Kelsen's theory, the 1945 Constitution is valid and becomes the source of all Indonesian laws because we assume that the 1945 Constitution is valid. That is the only logical explanation, the principle of legitimacy. That's why Kelsen acknowledged in his "General Theory of Law and State" that the Basic Norm of a legal order can be replaced by a revolution which include the so-called coup d'etat. 

Validity and Efficacy of the Law 

Before we move on, let me explain first the meaning of efficacy. Efficacy of the law means the effectiveness of such law with respect to its effect to the society, i.e. the degree to which the law is being actually complied by the society. It is common for us to see laws which are so ineffective that the existence of those laws mean nothing to the society, and other type of laws which are very effective and have a high rate of compliance. The main question is, can we consider a law that is not efficacious as a valid law? In Kelsen's opinion, consistent with his theory, the efficacy of the total legal order is a condition for the validity of the relevant Norms, but not the reason for their validity, because the validity of a Norm depends on whether it is created in a constitutional way or not (please refer to above discussion on the Hierarchy of Norms). Therefore, the degree of compliance of law does not affect the validity of such law. In other words, it is possible for us to have a valid law which has a low degree of compliance or no compliance at law. 

One example that I could think of would be the regulation that obliges companies that have trade business licenses (SIUP) to submit periodical reports to the Department of Trade. Based on my experience, the percentage of non-compliance for this particular obligation reaches 99.9999%. Pretty amazing! 

There is more to it. Kelsen also acknowledged that a law/norm wouldn't be valid anymore if the total legal system has lost its efficacy. Theoretically, this is correct. Suppose the current Indonesian legal system loses its efficacy, say because of a revolution, where the 1945 Constitution is entirely dismissed and replaced, and the government has been toppled up. Unless there is a new constitution having a transitional provision which says that the remaining laws remain to be valid, we would lose the legal basis to consider that such remaining laws are still valid. However, since the possibility of having such worst case scenario is very rare, we could stick to the basic principle of the Pure Theory of Law, i.e. the efficacy of the law does not affect the validity of such law. I believe that this is a very important concept having significant practical implications, and we shall further discuss such implementation in the last part of my post, where we shall also discuss the implementation of other parts of Kelsen's Pure Theory of Law.