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To Reverse Takeover or not?

Picture the scenario where a thriving private company aspires to be listed on a stock exchange, but at the same time does not want to resort to an initial public offering (IPO). An often considered alternative to this lengthy ordeal is the process of a Reverse Takeover (RTO), which is a type of merger that is frequently used by private companies to avoid an IPO and become publicly listed.

A RTO can be accomplished whereby a listed company may purchase an unlisted company, normally by acquiring shares in exchange for shares for the listed company. The unlisted company then in effect becomes the majority shareholder of the listed company and seeks to remove the board of the listed company. The new board of directors then proposes a change of name of the listed company to be renamed to the old unlisted company name.

On the face of it, the transaction appears to be one where a listed company is simply purchasing an unlisted company, whereas in actual fact this process allows the unlisted company to use the ‘shell’ of the listed company and achieve listing through a process called ‘backdoor listing’. The chief advantage of ‘backdoor listing’ is that it provides a more time efficient and cost effective way to list a private company on the stock exchange.

A non-exhaustive list of advantages why a private company may elect to use a RTO can be found below.

1. A substantial percentage of private companies struggle to satisfy the imposed listing conditions through an IPO. The publicly listed company that the private company wishes to acquire has already satisfied the listing conditions, which in effect simplifies the process of listing considerably;

2. Purchasing a listed public company provides the private company with a tangible asset, whereas an IPO generally results in large costs of listing go to third parties;

3. In contrast to an IPO, using a RTO can significantly lessen the issue of share dilution, as original shareholders maintain control of the listed public company;

4. Using a RTO generally provides original shareholders of private companies with favourable Capital Gains Tax (CGT) conditions.
A potential disadvantage may be that the listed public company may have pre-existing liabilities such as ongoing obligations or unpaid creditors, whilst these issues are generally discoverable during the due diligence phase, it is important to note that change of ownership does not absolve the company form pre-existing liabilities.

The Corporations Act 2001 does not expressly prohibit RTOs. It is however envisaged that in certain circumstances shareholders of a bidding company may not be given sufficient opportunity to approve a RTO, which could in effect dilute shares and have an effect on the control of the company. The ASX Listing Rules impose certain requirements for shareholder approval, which is why the Australian Securities Investment Commission (ASIC) expects to be kept informed of any RTO proposals so as to consider the requirement of shareholder approval.

Tips

  • Drafting clear and protective Heads of Agreement is essential to ensure adequate due diligence can be conducted; and
  • Conducting comprehensive due diligence on past liabilities and contractual obligations imposed on the listed company is essential, prior to proceeding with the acquisition

MCLP has been involved with several RTOs and has acted for both listed and unlisted companies. Feel free to contact us for a free consultation on (02) 9262 5495 or (03) 8899 7870; visit our WebsiteLike our Facebook Page.

This article is not legal advice and should not be relied upon as legal advice. All articles found on this website are intended to provide informative information, nevertheless, in many instances legislation and case law has been simplified and/or paraphrased. If you would like personal legal advice based on your current circumstances, you should contact MurdockCheng Legal Practice for a free consultation.