To Disclose, Or Not to Disclose, that is the Question

As an equity capital market practitioner, this is one of the most common questions that I encounter - a question that is seemingly simple, yet often brings forth huge debates and serious repercussions when answered wrongly.

In an Initial Public Offering (IPO), the underpinning law in Malaysia that governs disclosure of information in a Prospectus is the Capital Market and Services Act 2007. The key provisions are sections 212 and 232. These provisions provide broad overarching guidance on the fundamental question of disclosure - requiring an Issuer to ensure that he or she does not (a) provide information that is false or misleading; (b) information from which there is a material omission; or (c) engage in, aid or abet conduct that is misleading or deceptive or likely to mislead of deceive. The punitive effect of breaching these provisions is hefty back-to-back fines of up to RM3 Million and 10 years jail for every breach.

With that in mind, how does an IPO-bound company decide whether a piece of information needs to be shared with potential investors in its Prospectus or not? The law provides no exact prescriptive formula for this – and rightly so.

The question of whether to disclose certain information to potential investors is very much a question of fact and degree. Is it misleading not to disclose a failure to secure work permits for your five expatriate IT software engineers? What if you had 500 foreign employees with no work permits instead of 5? Are you obliged to disclose to potential investors, your director’s past involvement in other companies involved in fraud or dishonesty? What if he was not involved? What if the fraud or dishonesty were merely alleged but unsubstantiated? Should you disclose a piece of information on an incident that occurred after your Prospectus is issued but before the close of the offer period? What if the incident may potentially result in a material negative impact on your financial results post listing?

There are no straight answers to the above questions. Every potentially disclosable event has its own specific context which must be carefully considered before a decision is made. The cost of making a wrong decision is not just the RM3 Million fine and 10 years jail, but the potential exposure to civil suits by irate investors. (See Maybank Trustees Bhd (formerly known as Aseambankers Malaysia Bhd) v AmTrustee Bhd & Ors and other appeals [2020] 4 MLJ 405)

As a potential Issuer embarking on an IPO, it is important to know that you are not responsible for making these decisions alone.

The law requires you to have, and you will need to have, a team of advisers at your disposal, who are responsible alongside with you, to guide and advise you on the contents of your prospectus and to ensure that the right decisions on disclosure are made. The success of your IPO offering, the speed and efficiency of your journey there, and the future sustainability of your listed company very much depends on the team you choose. Careful selection of your principal adviser, financial, legal and other advisers should be based on their track record, resources and understanding of your specific industry, and is a crucial, if not fundamental step towards a successful offering and more importantly, a healthy, trouble-free equity story post-IPO.