Pre-IPO Legal Due Diligence for an ACE or LEAP Market Listing

Two reviews, often close together

A company heading for a listing usually meets legal due diligence twice. The first is the pre-IPO investor's review before it puts money in. The second is the review for the listing itself, carried out by the company's legal counsel as part of the due diligence working group led by the Sponsor (ACE Market) or the Approved Adviser (LEAP Market). The two cover much the same ground, so problems found in the first can be fixed before the second starts.

For an overview of the work involved and the deal documents, see the firm's page on investment, private equity and pre-IPO legal due diligence.

Who leads the listing review

The ACE Market is sponsor-driven. The Sponsor assesses whether the company is suitable for listing, and Bursa Malaysia approves the listing. Since 1 January 2022, Bursa Malaysia, rather than the Securities Commission, has registered ACE Market prospectuses.

The LEAP Market is open only to sophisticated investors. The company appoints an Approved Adviser, who assesses its suitability by making reasonable due diligence enquiries and prepares the information memorandum and the listing application. Bursa Malaysia approves the listing, and the information memorandum is deposited with the Securities Commission.

The Malaysian Investment Banking Association's Malaysia Equity Capital Markets Due Diligence Guide describes the usual role of legal counsel: advising on the scope of legal due diligence, carrying it out on the company and its Malaysian subsidiaries, preparing a legal due diligence report, and telling the working group about anything that may need disclosure. The guide is not law, but it is widely used as a reference for what a careful review looks like.

What the legal review covers

Share capital and corporate history. Every allotment of shares since incorporation is traced. Under section 75 of the Companies Act 2016, directors need the company's prior approval to allot shares, and section 75(4) makes an issue of shares in breach of the section void. Section 78 requires a return of allotment to be lodged with the Companies Commission of Malaysia (SSM) within fourteen days, and section 85 gives existing shareholders pre-emptive rights over new shares, subject to the constitution. Gaps here are a frequent finding and are easier to fix early.

Ownership and control. Who owns the shares, including any nominee arrangements, and whether existing shareholders' agreements give anyone rights that would conflict with the new investment or with listing.

Group structure. Subsidiaries, how and when they were acquired, and whether any restructuring is needed before listing. A private company that plans to list must first become a public company.

Material contracts. Major customer, supplier, distribution and joint-venture contracts, with particular care over change of control, assignment, exclusivity and termination clauses that a new investor or a listing could trigger.

Borrowings and security. Loan documents, security over the company's assets, and any lender consent needed for a new shareholder or a listing.

Licences and permits. Whether the business holds every licence it needs, and whether any licence carries conditions on shareholding or on a change of control.

Property, employment and intellectual property. Titles and tenancies for the premises; key employment contracts and any employee share scheme; and whether the company owns the trade marks, software and other intellectual property it relies on.

Disputes and compliance. Court, winding-up and bankruptcy searches, claims threatened or pending, personal data and anti-corruption compliance, and related-party dealings with directors or major shareholders.

Points for the pre-IPO round itself

A pre-IPO round is usually documented by a share subscription agreement, a shareholders' agreement and an amended constitution, with a disclosure letter against the warranties. Three points deserve care.

• Rights that end on listing. Investor rights such as board seats, vetoes over reserved matters and pre-emption on transfer usually cannot survive as they stand once the company is listed. The shareholders' agreement should say which rights fall away and when.
• Moratorium on shares. The ACE Market Listing Requirements impose a moratorium on shares held by certain shareholders and, in some cases, by pre-IPO investors who come in shortly before the listing application. An investor should understand how long its shares may be locked up.
• Financial assistance. Section 123 of the Companies Act 2016 restricts a company from giving financial assistance for the purchase of, or subscription for, its own shares. Section 126 sets out a procedure that allows it for a company whose shares are not quoted on a stock exchange, so any arrangement in which the company helps fund an investor's shares needs checking.

Offers of shares before the listing

Under the Capital Markets and Services Act 2007, an offer of shares in a private company is an excluded offer under Schedules 6 and 7, so it does not need a prospectus. Once the company converts to a public company ahead of listing, an offer of its shares needs a prospectus registered under section 232 unless it falls within an exclusion, such as an offer to sophisticated investors. The timing of the conversion and of any pre-IPO round should be planned with this in mind.

What a company can do now

• Collect every resolution and return of allotment since incorporation, and check them against the register of members.
• Gather signed copies of the material contracts, licences, title documents and tenancies in one place.
• List any related-party dealings and any disputes, however small.
• Check the constitution and any existing shareholders' agreement for pre-emptive rights and consents a new round would need.

For more on the documents, see the firm's articles on key terms in an investment agreement and private equity due diligence in Malaysia.

Where these rules come from

• Companies Act 2016, sections 75, 78, 85, 123 and 126: ssm.com.my.
• Capital Markets and Services Act 2007, sections 229, 230 and 232 and Schedules 6 and 7.
• Bursa Malaysia, ACE Market Listing Requirements and FAQs: bursamalaysia.com.
• Bursa Malaysia, FAQs on LEAP Market Advisers: bursamalaysia.com.
• Securities Commission Malaysia, notice on registration of ACE Market prospectuses: sc.com.my.
• Malaysian Investment Banking Association, Malaysia Equity Capital Markets Due Diligence Guide: miba.com.my.

Common questions

Who carries out legal due diligence for an ACE Market listing?

The company's legal counsel, working within the due diligence working group led by the Sponsor. It reviews the company and its Malaysian subsidiaries, prepares a legal due diligence report and helps verify the prospectus.

Is legal due diligence needed for a LEAP Market listing?

Yes. The Approved Adviser must make reasonable due diligence enquiries to assess whether the company is suitable, and legal counsel usually reviews the legal position of the company to support that assessment and the information memorandum.

What legal problems often come up before a listing?

Gaps in share capital records come up often: allotments without the prior approval section 75 of the Companies Act 2016 requires, missing returns of allotment, or pre-emptive rights not observed. These are easier to fix early.

Can a pre-IPO investor sell its shares as soon as the company lists?

Not always. The ACE Market Listing Requirements can impose a moratorium on shares held by some pre-IPO investors, so an investor should check how long its shares may be locked up before it invests.

Does a pre-IPO round need a prospectus?

An offer of shares in a private company is an excluded offer under the Capital Markets and Services Act 2007. After conversion to a public company, a registered prospectus is needed unless an exclusion applies, such as an offer to sophisticated investors.