How about a refresh on a Reverse Takeover?

In Brief

Who knows what oppor­tu­ni­ties are ahead of us for the 2016 year, but being pre­pared is a very good place to start! How about a Reverse Takeover?

  1. What is a reverse takeover?
Put sim­ply, a reverse takeover (RTO) is the acqui­si­tion of a pub­lic com­pa­ny by share­hold­ers in a (usu­al­ly small­er) pri­vate company.

An RTO can be effect­ed by the pri­vate company’s share­hold­ers sell­ing their shares in the pri­vate com­pa­ny to the pub­lic com­pa­ny in exchange for the issue of shares in the pub­lic com­pa­ny. Alter­na­tive­ly the pri­vate com­pa­ny can sell its busi­ness to the pub­lic com­pa­ny in exchange for the issue of shares in the pub­lic com­pa­ny to the pri­vate company.

An RTO is often con­sid­ered as an alter­na­tive to an ini­tial pub­lic offer­ing (IPO), and where the tar­get pub­lic com­pa­ny is list­ed, an RTO can also be known as a back­door listing’.

2. What are the advantages?

A back­door list­ing’ is gen­er­al­ly con­sid­ered to be a cheap­er, eas­i­er and quick­er way to list a com­pa­ny on a stock exchange. There are also a num­ber of oth­er rea­sons for using an RTO, including:
  • it may result in less share dilu­tion (and there­fore greater con­trol) in the com­pa­ny for the orig­i­nal share­hold­ers, than in a typ­i­cal IPO;
  • to avoid trig­ger­ing a change of con­trol clause in a key contract;
  • to cir­cum­vent the block­ing pow­er of a dis­sent­ing shareholder;
  • to min­imise expo­sure to mar­ket con­di­tions in listing;
  • the list­ed com­pa­ny will already like­ly sat­is­fy cer­tain con­di­tions for list­ing that the pri­vate com­pa­ny may strug­gle to achieve through an IPO (par­tic­u­lar­ly the pre-exist­ing spread of the list­ed company’s share­hold­er base);
  • share­hold­ers of the pri­vate com­pa­ny are usu­al­ly eli­gi­ble for cap­i­tal gains tax rollover relief if cer­tain con­di­tions are satisfied;
  • the funds expend­ed to pur­chase the list­ed com­pa­ny will pro­vide a tan­gi­ble asset (in con­trast to an IPO where the major costs of list­ing go to third par­ties and are lost).

3. What are the disadvantages?

An RTO does have some dis­ad­van­tages rel­a­tive to an IPO. These include:
  • a poten­tial pre­mi­um on the price of the list­ed com­pa­ny (the price of the list­ed com­pa­ny is often greater than the val­ue of its net tan­gi­ble assets);
  • expo­sure to pre-exist­ing con­tin­gent lia­bil­i­ties of the list­ed com­pa­ny, such as unpaid cred­i­tors, employ­ee lia­bil­i­ties and ongo­ing con­trac­tu­al obligations;
  • the pos­si­bil­i­ty of the Aus­tralian Secu­ri­ties Exchange (ASX) requir­ing that shares issued to some or all incom­ing share­hold­ers be sub­ject to manda­to­ry escrow.

4. What are the key steps?

Some key steps that may be required before acquir­ing a pub­lic list­ed com­pa­ny include:
  • a poten­tial pre­mi­um on the price of the list­ed com­pa­ny (the price of the list­ed com­pa­ny is often greater than the val­ue of its net tan­gi­ble assets);
  • find­ing a list­ed shell com­pa­ny and either buy­ing con­trol of the list­ed shell com­pa­ny for cash or tak­ing con­trol of the list­ed shell com­pa­ny by vend­ing in the busi­ness of the pri­vate company;
  • seek­ing buy-in’ from the board and major share­hold­ers of the pri­vate company;
  • sign­ing a heads of agree­ment out­lin­ing the key terms of the acquisition;
  • com­plet­ing due dili­gence on the list­ed company;
  • exe­cut­ing a for­mal legal agree­ment relat­ing to the takeover;
  • fol­low­ing the re-com­pli­ance require­ments under the ASX List­ing Rules;
  • hold­ing a gen­er­al meet­ing of share­hold­ers to approve changes in the nature and scale of the com­pa­ny as a result of the RTO under ASX List­ing Rule 11.1 (or in rela­tion to oth­er approvals required under the ASX List­ing Rules);
  • rais­ing cap­i­tal to grow the busi­ness and issu­ing a full prospec­tus (if necessary);
  • for­mal­ly rein­stat­ing the company’s secu­ri­ties to quo­ta­tion on the ASX.

5. Do you need share­hold­er approval?

Whilst RTOs are not pro­hib­it­ed by the Cor­po­ra­tions Act 2001 (Act), the Takeovers Pan­el (Pan­el) may declare unac­cept­able cir­cum­stances’ have occurred in rela­tion to an RTO, where the share­hold­ers of the bid­ding com­pa­ny are not giv­en the chance to approve it, par­tic­u­lar­ly where the RTO has a mate­r­i­al effect on con­trol’, or pre­vents rival bids.

ASIC strong­ly sug­gests that it is informed if an RTO is being con­tem­plat­ed in order to con­sid­er whether share­hold­er approval is required.

6. What are the direc­tor’s duties?

In an RTO direc­tors are bound by the same fidu­cia­ry and statu­to­ry oblig­a­tions that reg­u­late their con­duct generally.

Direc­tors’ duties are par­tic­u­lar­ly rel­e­vant where board action pre­vents alter­na­tive bids for the com­pa­ny and that action is not approved by shareholders.

7. What about regulation?

The ASX List­ing Rules impose a require­ment for share­hold­er approval on list­ed com­pa­nies in cer­tain circumstances:
  • Under List­ing Rule 7.1, a list­ed com­pa­ny is pro­hib­it­ed from issu­ing, in any 12 month peri­od, ordi­nary secu­ri­ties which rep­re­sent more than 15% of the issued ordi­nary share cap­i­tal of the com­pa­ny (sub­ject to var­i­ous exemptions).
  • In rela­tion to RTOs, Excep­tion 5 in List­ing Rule 7.2 exempts issues under an off-mar­ket bid or scheme of arrangement.