Advisers who prepare timetables and set out the steps for IPO should take note of this.

A common pre-IPO restructuring step involves shareholders of an operating company (“Shareholders“) entering into a sale and purchase agreement (“SPA“) to sell their shares in the operating company to a new company, in consideration of issuance of shares of the new company to the Shareholders.

The new company is incorporated to undertake the listing exercise and will be converted to a public company prior to its listing.

The Shareholders are usually directors of both the operating company and listing company, which together form the listing group. The directors who are also the Shareholders must declare their interest in the SPA for the pre-IPO restructuring pursuant to s 221 of the Companies Act 2016 (“Companies Act”).

Section 222(1) of the Companies Act prohibits a director of a company who is interested in a contract entered into by the company from voting on the contract.

To avoid a situation where no existing directors may pass resolution to approve the SPA, directors’ resolution to approve the execution of the SPA should be passed and the SPA should be executed before the listing company is converted to a public company.

This falls within the exception in s 222(2)(a) of the Companies Act, which provides that s 222(1) does not apply to a private company which is not a subsidiary to a public company.

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First posted on Linkedin on 27 December 2021.