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Key Matters To Look Out For In An IPO – Conflict Of Interest Edition

During an Initial Public Offering (IPO) process, the promoters would have a proposed group structure (Group). Often, the directors and substantial shareholders of the Group (Key Persons) may have involvements outside of the Group including amongst others, shareholdings, directorships, partnerships and business ownerships.

As such, it is important to identify as to whether a conflict of interest (COI) situation may arise from the involvement of the Key Persons outside the Group. This alert summarises the common COI situations to look out for prior to or when undertaking an IPO exercise and the mitigating factors that may be applicable in respect of such COI.

1.What Is the Relevance Of COI In An IPO Process?

In the case of a Main Market listing, pursuant to the Equity Guidelines issued by Securities Commission Malaysia (SC), an applicant is required to assess all aspects of its business to determine whether there are COI situations. An applicant must resolve, eliminate or mitigate all COI situations. The SC may reject proposals submitted by the applicant if there are COI situations that are not satisfactorily addressed.

Separately, in the case of an ACE Market listing, a sponsor must also assess the suitability of an applicant seeking admission to the official list of Bursa Malaysia Securities Berhad (Bursa Securities). In assessing whether an applicant is suitable for listing, a sponsor must make due and careful enquiries and consider all relevant matters, including the nature and extent of COI or potential COI, if any.

The Equity Capital Markets Due Diligence Guide issued by the Malaysian Investment Banking Association further requires the principal adviser to enquire as to whether the directors, promoters, key senior management and key technical personnel of the applicant:

(a)Have businesses outside the Group which are similar or may otherwise compete with the Group.

(b)Have businesses or investments which may influence the market of the Group.

(c)Have similar businesses in a geographical location which is not a current market of the business of the Group but which may be a future market of the business of the Group.

(d) Own assets which the Group depends on for its business.

(e)Own assets which may be used to compete with the business of the Group.

(f)Have other priorities and are not able to spend enough time to manage the business of the Group.

A potential COI, once identified, may be a matter of disclosure in the offering documents or it may substantially affect the business of the applicant or potentially result in the applicant not being suitable for listing. Following the identification of COI or potential COI, the principal adviser will be required to discuss with the applicant and its directors and management on the relevant arrangements to mitigate any COI which may arise.

2.What Constitutes As A COI Situation For The Purposes Of An IPO?

Pursuant to the SC Equity Guidelines, situations that are likely to give rise to COI include circumstances where interested persons:

(a)Have an interest in a competing business with that of the applicant’s or its subsidiary companies.

(b)Conduct or have interest in business transactions involving goods or services, either directly or indirectly, with the applicant or its subsidiary companies.

(c)Provide or receive financial assistance to or from the applicant or its subsidiary companies.

(d)Lease property to or from the applicant or its subsidiary companies.

The Guidance on COI recently issued by Bursa Securities further states that generally, COI refers to situation where:

(a)The interests of the said person (who is often a person in a position of trust), interfere, or appear to interfere, with the interests of the listed issuer or its subsidiaries.

(b)The said person has interests that may make it difficult to perform his or her role objectively and effectively.

Bursa Securities further states that COI involving the said person is not limited to direct financial interest but also include an indirect financial interest, non-financial interest (e.g. arising from relationships whether family, business or professional interests) or competing loyalties or interests.

3.What Are The Disclosures Required In Respect Of COI Situations In The IPO Prospectus?

Pursuant to the Prospectus Guidelines issued by SC, a COI situation arises when the Key Person has a direct or indirect interest in any entity which is:

(a)Carrying on a similar trade as the corporation.

(b)A customer or supplier of the corporation.

and when a COI situation arises, the following must be disclosed in the prospectus:

(a)Name of that entity.

(b)Principal activity of that entity.

(c)Name of the director or substantial shareholder involved.

(d)Nature and extent of his interest in that entity and the extent to which he is involved in the management of that entity either directly or indirectly.

(e)Steps taken to resolve, eliminate or mitigate the COI.

In the event that there are factors to demonstrate that the Key Person is not in a COI situation, such mitigating factors are to be explained.

In addition, should an expert be named in the prospectus, it is required that declaration(s) of experts, who has existing or potential interest in the corporation or COI vis-à-vis the corporation are included (Expert COI). The declaration should include the descriptions of the Expert COI situation as per items (a) to (e) mentioned above as well as steps taken to address the same. In the event that there is no Expert COI situation, an appropriate negative statement is to be included.

4.What Are The Mitigating Factors In Respect Of Potential COI Situations?

The following factors are examples of situations which are generally not considered as COI:

(a)The Key Person’s policy or objective is only for investment purposes and its role or action is limited to formulating corporate or business strategies for its portfolio of investee companies which do not create a conflict with the corporation’s business or operations. In addition, the Key Person does not participate in the day-to-day management or operations of its investee companies.

(b)Where the Key Person’s business may potentially compete with the corporation, there is a clear delineation of business, such as differences in target customer segments, geographical presence, products or services sold or separate management teams.


In conclusion, when a COI situation arises during an IPO process, it should be noted that the same would be required to be resolved or otherwise mitigated.

14 July 2023

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