INITIAL PUBLIC OFFERING FROM THE LEGAL PERSPECTIVE

By Kyle Phang Yuen Yi, assisted by Teoh Chia How


HOW TO HIT THE IPO JACKPOT?

Successful listing on stock exchange and initial public offering (“IPO”) are perceived as golden pot at the end of rainbow for businesses, small medium enterprises and even corporate juggernauts. Many successful corporate leaders have shared their stories on how a successful IPO catapulted their company (and personal wealth) to new height.

A successful IPO is indeed rewarding and enticing. However, the listing process is a trying and challenging one. One of the most important factors of an IPO is the due diligence process. The two primary objectives of due diligence process are (a) to ensure that the applicant is in compliance with the relevant laws; and (b) to ensure that disclosures made to the public are complete, true and accurate in order to allow the public to make informed judgment when subscribing for the applicant’s IPO shares. The due diligence process in Malaysia is guided by the Due Diligence Conduct for Corporate Proposals issued by Securities Commission Malaysia (“SC”). In general, the scope of due diligence could be ramified into three categories: - financial, legal and business.

A due diligence working group comprises of representatives from the applicant, principal advisors, reporting accountants, lawyers, independent market researches and company secretary (“DDWG”) will be composed to assist an applicant in the IPO process. The roles of the DDWG include conducting due diligence on the applicant and preparing the relevant submission documents including a prospectus. In this regard, the experience and level of expertise of the DDWG is also very integral in making the IPO process a less treacherous one.

AM I READY FOR IPO?

The path to a successful IPO, whether it will be an uphill task or a smooth sail, will depend extensively on an applicant’s readiness. An applicant with good compliance track records will require significantly less time before they could strike the gong as compared to another applicant which are falling short in term of compliance matters. For the latter, the respective DDWG members will require more time and efforts to identify and thereafter rectify non-compliance(s) of the applicant. The lawyer(s) involved in an IPO (“IPO Lawyer”) is no exception.

An IPO Lawyer is entrusted by the DDWG to conduct due diligence on the applicant (including all its subsidiary(ies) and associated company(ies), if any) from a legal perspective. Thereafter, the IPO Lawyer is required to generate a legal due diligence report that details the applicant’s legal related matters and statuses.
From a broad perspective, an IPO lawyer will examine, amongst others, the following legal matters of an applicant.

1. Corporate Secretarial Related Matters: An IPO Lawyer will need to ensure that the applicant is valid and existing, and to ascertain that all relevant filings of the applicant’s secretarial records have been properly conducted and maintained. Whilst examining all these secretarial records, this will also afford an IPO Lawyer better insight into the business and corporate affairs of the applicant. For example, from the applicant’s minutes and resolutions, an IPO Lawyer will be able to ascertain whether there has been management continuity in the applicant, and whether the promoters and/or directors exercise sufficient control (whether legally or financially) over the applicant.

2. License, Permit and Approval: It is essential that the applicant obtained and maintains all licenses, permits and approvals required for the operation of its business, and complies with all conditions contained therein. It is a common fallacy that as long as a company is conducting its day-to-day business without disruption from any authorities, then it is deemed to have complied with all relevant laws and in possession of all required Licenses. The truth may be the opposite. It is not uncommon that, despite being in the business for umpteen years, applicant may have fallen short of some integral Licenses without their knowledge. In addition, an IPO Lawyer will also examine whether the applicant had encountered any previous difficulty during renewal of any License. Should there be any, then an IPO Lawyer will scrutinize the cause of such difficulty and whether it may amount to a potential future risk.

3. Banking facilities: An IPO Lawyer will make the necessary enquiries with bank to confirm the status of the applicant’s accounts, i.e. whether they are satisfactorily maintained or there are track records of defaults. In addition, an IPO Lawyer will examine the financing documents to suss out if there is any financial covenants or equity restriction therein which may impact the IPO. In addition, an IPO Lawyer will also need to ensure that the applicant possesses adequate financial muscles to sustain its financial position independently without extrinsic supports such as guarantees from the promoters and/or directors.

4. Properties: Properties related compliance always poses a stumbling block to an IPO process. An application is required to maintain a valid certificate of completion and compliance (“CCC”) or certificate of fitness (“CF”) for the property(ies) occupied or owned. The aforesaid certificate will need to correspond with the concomitant building plan as any deviation of the latter may invalidate the certificate. During site visit by the authorities, SC will deploy an asset valuation audit team to examine an applicant’s buildings compliance. Although lawyers are not industrial expert in respect to buildings or structures, however, an experienced IPO Lawyer will be able to vouch the compliance status vide physical examination of the current state of a building against the relevant drawings being made available to them.

5. Insurances: An IPO Lawyer will examine the type of insurance policies subscribed by the applicant. In addition, an IPO Lawyer will also seek confirmation from the insurers on whether the coverage is adequate and whether there was any previous claim made by the applicant. Any previous claim may connote that the applicant is predisposed to a certain type of risk and a corresponding disclosure may need to be made in the prospectus for the public’s knowledge.

6. Intellectual properties: With many companies having listed or interested in being listed, the authorities are constantly seeking a differentiating factor in each applicant. More often than not, such competitive advantage of an applicant emanates from a certain type of technology that it possesses, or its brand name that is well famed. To this end, an IPO Lawyer will examine whether the applicant has sought the necessary protection to secure such proclaimed competitive advantage from being duplicated or replicated by other competitors, such as vide the registration of patent and/or trademark.

7. Litigations: An IPO Lawyer will seek confirmation from the lawyers engaged by the company for any litigation matters involving the applicant, whether as a plaintiff or a defendant. Any litigation could also in turn amount to contingent liabilities of the applicant. More importantly, if the litigation involves any matter that goes to the root of the applicant’s business (e.g. any legal dispute with respect to the applicant’s product), then this may adversely impact the applicant’s merit for the IPO. Inversely, if the applicant is actively pursuing against its debtor, this may also raise an eyebrow on the applicant’s ability in collection of its trade receivables which will also adversely affect its credit-aging.

8. Related party transactions: The authorities are always putting their best foot forward in ensuring that a listing vehicle is not being abused as a conduit to benefit the promoters of an applicant through public funding. For example, the applicant may have entered into a contract with the promoter’s related companies with such terms that are not transacted at the detriment of the applicant. To this end, an IPO Lawyer is required to identify all companies that the promoters or their connected persons are involved in, whether as a shareholder or director, and to further examine whether there is any transaction between the applicant and these companies. If there is any, an IPO Lawyer has to ascertain that such transaction was conducted on an “arm’s-length” basis. In addition, the promoters are expected of a high level of devotion of their time and commitments towards business of the applicant with the view of yielding best possible returns to the public. On this note, an IPO Lawyer will also examine whether the promoters are involved in any similar or competing business as the applicant that may give rise to a potential conflict of interest.

We acknowledge that summarising the entire IPO due diligence process in an article like this is indeed an over-simplification. The IPO process is way more intricate, complex and detailed. An IPO Lawyer is required to look into a greater plethora of areas (e.g. the applicant’s employment related matters, material contracts, statutory payments, corporate governance etc.) together with all other working group members to identify any potential issues that might impact the IPO process. These issues, depending on their nature and magnitude, could be a mere dent in the armour or an Achilles heel that obstructs the entire IPO.

Upon completion of the due diligence process and finalisation of the submission documents including the prospectus, these documents will be submitted to the relevant authorities for their approval and clearance. Should the authorities have any comments or any ambiguity which they wish to make clear on the submission documents, then queries will be posted to the working group for further clarifications. The DDWG will then devise replies to these queries. However, if the authorities are unsatisfied with the replies, they may query further and this process could run over for an extended period of time, thereby delaying the IPO process.

WHY AM I PAYING THE IPO LAWYER?

The authorities are constantly enhancing the due diligence standards and disclosure requirements in order to safeguard public interest. Some of the requirements by the authorities are not entrenched in writing. As such, such requirement will be unbeknownst to IPO Lawyer that lives “by the book”. However, an experienced IPO Lawyer will be more acquainted with such “unwritten rules” and be able to advise the client more efficiently.

On this note, there are two distinguishing traits between a better and more experienced IPO Lawyer vis-a-vis an average and less experienced IPO Lawyer. First, the former is more precise and thorough in conducting legal due diligence. By leaving no stone unturned, this will drastically reduce the queries that might be raised by the authorities. Secondly, the former will also be able to foreordain the query that might be raised by the authorities and also able to device a reply satisfactory to the authorities. As such, having an experienced IPO lawyer is crucial to ensure that legal issue will not thwart the IPO process and thereby saving precious time.

Here at Teh & Lee, we distinguish ourselves from “scavenging due diligence lawyers” that merely seek and identify issues. We constantly strive to formulate customised solutions to any identified issues to the best of our abilities.

Teh & Lee has more than 20 years of experience in corporate advisory works especially in respect of capital market related matters including IPO. We are thankful yet proud to be involved in more than 70 successful listings in Malaysia, Singapore, Hong Kong, Australia and Taiwan over the past years.

Please do not hesitate to make an appointment with us should you require our IPO related services, or to do a “health-check” on the legal affairs on your esteemed company for your prospective IPO in the future. We will be most glad to help.

 “The mantra of our business is to make life less difficult for our clients.”

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This publication is intended for our clients’ general information only and should not be taken as legal professional advice. If you have any questions or require advice based on specific facts, please contact us.