Investors who want to subscribe for shares or acquire shares of private companies from another shareholder should consider conducting legal due diligence on the companies before their investments.

One key aspect of legal due diligence are material contracts of the companies. Legal due diligence on material contracts allows the investors to assess the business, liabilities and potential liabilities of the private companies.

The materiality of the contracts may be determined by the nature of the contracts, value of the contracts, impact of the contracts on the companies or a combination of other factors.

The legal due diligence on material contracts should include the following:

1. Whether there is any right of the counter party to unilaterally terminate the contracts or to terminate upon certain events triggered by the subscription or acquisition of shares by the investors, such as change of control or shareholding provisions.

2. Whether there are any liquidated damages, penalties or service level clauses which may lead to loss-making contracts.

3. Whether there are any covenants and exclusivity provisions in the contracts which will restrict how the companies conduct their business.

4. Whether there are any extension or renewal clauses.

5. Whether there are other onerous provisions which may affect the business or financial position of the companies.

Other than the above, what would you look out for in legal due diligence of material contracts? #malaysiancorporatelawyer

#equitycapitalmarkets

#duediligence

This post was first posted on Linkedin on 10 January 2022.