Reviewing a Term Sheet Before You Sign: What Malaysian Founders and Buyers Must Check

A Malaysian term sheet is usually headed "non-binding," but that heading does not decide the outcome on its own — under section 10(1) of the Contracts Act 1950, an agreement is a contract once there is free consent, competent parties, lawful consideration and a lawful object, regardless of what the parties called it. In practice, almost nothing agreed at term sheet stage gets reopened once the long-form shareholders' agreement is drafted, so the review that matters happens now: valuation, liquidation preference, anti-dilution, reserved matters and exclusivity. This article sets out what a founder receiving a term sheet, or a buyer issuing one, must check before signing.

Most founders have never negotiated a term sheet before they receive their first one, whether it follows an earlier letter of intent or arrives directly from an investor mid-way through an equity fundraising process. The document is short — often four or five pages against a fifty-page shareholders' agreement — and the headline valuation is easy to read. The clauses that actually decide what a founder keeps on exit are shorter, denser, and easy to sign past.

Is a term sheet actually binding in Malaysia?

Section 10(1) of the Contracts Act 1950 sets the test for every agreement, term sheet included: "All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void." There is no separate carve-out in the Act for a document labelled "non-binding" — the label is evidence of intention, not a legal shield on its own.

Malaysian courts have repeatedly looked past a document's label to what the parties actually agreed and how they behaved afterwards. A term sheet that stays short, uses conditional language ("shall negotiate", "subject to definitive documentation") and expressly reserves the material commercial terms for later agreement is in the safest position to remain non-binding. One that reads like a completed deal — a fixed price, no conditions, parties proceeding as though bound — risks being enforced regardless of its heading.

Certain clauses are drafted to bind immediately even inside an otherwise non-binding term sheet, and are usually enforced as written: confidentiality, exclusivity or no-shop, governing law and dispute resolution, and cost allocation. Read every term sheet as two documents in one — a non-binding commercial framework, and a short list of clauses that bind the moment it is signed.

What a term sheet actually locks in

Every material term below ends up inside the long-form shareholders' agreement largely unchanged, which is why it needs to be right at term sheet stage, not fixed later.

Liquidation preference — the term that decides the outcome

Liquidation preference determines who is paid first, and how much, when the company is sold or wound up — before the remaining proceeds are shared among ordinary shareholders. A 1x non-participating preference returns the investor's original investment (or an agreed multiple) ahead of everyone else, then steps aside. A participating preference returns that same amount first and then also shares in what is left on top of it — a structure that can leave founders with meaningfully less than their headline equity percentage implies once a sale happens below the valuation everyone expected.

Model the liquidation preference against a downside sale price, not just the valuation in the term sheet. A term that looks immaterial at the agreed valuation can determine the entire outcome at a lower one.

Anti-dilution and what the Companies Act actually allows

Anti-dilution protection is a commercial promise in the term sheet, but implementing it still runs through the Companies Act 2016's mechanics for issuing shares — a term sheet cannot override the Act.

Section 72 permits a company to issue preference shares only if its constitution authorises it, and permits redemption only where the shares are fully paid and the redemption is funded from profits, a fresh issue of shares, or capital — redemption out of capital additionally requires a solvency statement from every director under section 113, lodged with the Registrar. Section 75 separately requires prior shareholder approval by resolution before directors can allot shares, grant rights to subscribe, convert a security into shares, or allot shares under an option or agreement, subject to narrow exceptions for pro-rata offers to existing members, bonus issues, promoter allotments, and shares issued as consideration for an acquisition where members were given fourteen days' notice. An allotment made in contravention of section 75 is void, and the consideration given for the shares is recoverable.

The practical consequence: an anti-dilution mechanism agreed in a term sheet has to be built into the constitution or the shareholders' agreement in a form the Act actually permits, with the correct approvals obtained before the protective shares are issued — not assumed to apply automatically because the term sheet says so.

Class rights, and how investors change the deal later

Liquidation preference, anti-dilution and most reserved matters are not free-standing promises — they are usually drafted as rights attached to a class of shares, which puts them inside the Companies Act's class rights regime rather than ordinary contract variation.

Section 91 of the Companies Act 2016 provides that rights attached to a class of shares can be varied only in accordance with the company's constitution, or, where the constitution is silent, with the consent of that class — either a written consent representing at least 75% of the class's total voting rights, or a special resolution passed by that class. Section 93 then gives shareholders representing at least 10% of the class's voting rights a window of thirty days from the variation to apply to the court to have it disallowed, if the variation would unfairly prejudice them.

This cuts both ways at term sheet stage. An investor's protective provisions, once drafted as class rights, cannot be quietly diluted by a majority shareholder later without going through this process — which is the protection the investor is negotiating for. Equally, a founder should understand that the company's ability to unwind a badly negotiated protective provision is genuinely constrained once it is issued as a class right, not just commercially awkward to raise.

Reserved matters — a real veto or window dressing?

Reserved matters set out which decisions the company cannot take without investor consent — new share issues, related-party transactions, changes to the business, further borrowing, hiring or removing senior management. A short, precisely drafted list protects the investor's specific risk without stalling the business. A long, broadly worded list can require investor sign-off on ordinary operating decisions, which slows the company down and gives the investor leverage well beyond what the investment size would suggest.

Ordinary shareholder decisions in a Malaysian company pass by simple majority; the higher bar — a special resolution requiring at least 75% of the votes cast — is reserved for matters the Act itself treats as fundamental. A reserved-matters list that requires investor consent for decisions well below that threshold is a negotiated position, not a statutory default, and each line item should be tested against what the business genuinely needs to move quickly on.

Exclusivity and no-shop — the clause that usually is binding

Exclusivity clauses restrict the company from soliciting, negotiating, or accepting a competing offer for a fixed period after signing. Because exclusivity is a discrete, self-contained promise with its own consideration — access to a negotiating window — it typically satisfies the section 10(1) test on its own, even where the rest of the term sheet is expressly non-binding. Breaching it while the rest of the deal is still being negotiated can expose the company to a claim, independent of whether the investment ever completes.

Check the exclusivity period against a realistic timeline for due diligence and documentation, not the timeline the investor proposes. An exclusivity period that expires before the long-form documents are ready leaves the company with no leverage if terms shift late in the process.

What it costs to skip the review

A term sheet signed without a proper review does not fail immediately — it fails at the point that matters most, when the company is sold, raises again at a lower valuation, or a reserved matter blocks a decision the board needs to make quickly. By then the terms are inside the constitution and the shareholders' agreement, and reopening them needs the same class consent or special resolution thresholds the investor's own protections rely on. The realistic options at that point are living with the term or renegotiating from a materially weaker position than the one available before signature — which is why a structured term sheet review belongs before the signature, not after.

Frequently Asked Questions

The term sheet says it is non-binding. Do I still need it reviewed?

Yes. Section 10(1) of the Contracts Act 1950 looks at substance, not the label, and several clauses inside a "non-binding" term sheet — confidentiality, exclusivity, governing law — are usually enforced regardless. Commercially, terms conceded here are rarely reopened once the long-form documents are drafted.

What is the single most important term to check?

Usually the liquidation preference. It decides who gets paid first on a sale and how much, and a participating preference can leave founders with materially less than their equity percentage implies once a sale happens below the expected valuation.

What are reserved matters, and can they be changed later?

Decisions requiring investor consent. If drafted as rights attached to a class of preference shares, changing them later needs the class consent or court process under sections 91 and 93 of the Companies Act 2016 — not a simple board decision.

Is anti-dilution protection automatic once agreed?

No. It has to be implemented through a share issue or constitutional mechanism the Companies Act 2016 actually permits, with the correct director and shareholder approvals under sections 72, 75 and 76 — a term sheet promise does not implement itself.

How quickly can a term sheet be reviewed?

Usually within days, not weeks — term sheets are short by design. The constraint is normally the exclusivity period the investor has proposed, which should be checked against a realistic documentation timeline before it is agreed.

Getting the term sheet checked before you sign

A term sheet reads like a summary. It functions like the actual negotiation, because almost every material term inside it survives unchanged into the shareholders' agreement. Legal That Works advises Malaysian founders and buyers on term sheet review and negotiation — translating each provision into what it will mean at the next round and at exit, modelling the liquidation preference and anti-dilution terms against a downside scenario, and giving a ranked negotiation position before you sign. If you have a term sheet with a deadline attached, get it reviewed before that deadline, not after.

This article is for general information only and does not constitute legal advice. Every transaction and every set of facts is different. Obtain specific advice from a qualified adviser before acting on any part of it.

Related guides

• Letter of Intent for fundraising: crucial terms

• What is equity fundraising?

• Shareholders agreements in Malaysia: the essential legal framework

• The realities of equity fundraising in Malaysia