We had a $2 coffee at a West Perth café the other day. Whilst cheap coffees in Perth remain the exception rather than the norm, it is a stark reminder the mining boom is well and truly over. With falling commodity prices and demand, little investor interest and debt simply not an option, many small resource companies are significantly cutting back on their activities, leading to an ever increasing number of ASX listed companies which are more or less dormant. We have recently seen a wave of (mainly) technology companies use struggling ASX listed resources companies as a vehicle to list on the ASX, through a backdoor listing. The popularity of back door listings is indisputable, but why?
Why the popularity?
There are a number of reasons why a backdoor listing may be attractive to an entity seeking to list:
- Cash is King: every business needs cash to survive, operate and grow. To list on ASX, (broadly) a company needs to demonstrate that it is generating sufficient profits, or (more commonly) show that it has sufficient assets, and (after a capital raising if necessary) sufficient working capital to carry out its stated business objectives. Many listings fail at this stage because they fail to raise sufficient funds to meet these requirements. A listed shell with a healthy cash balance will therefore be attractive to an unlisted entity seeking to list as it decreases the amount the combined entity needs to raise as part of the listing (or in rare cases, may even mean that the entity does not need to do a capital raising to list).
- Spread: to list, ASX requires a company to have at least 300 to 400 shareholders (depending on the number of “related parties”) each holding at least $2,000 worth of shares (excluding restricted securities). This is commonly referred to as having sufficient “spread”, and is aimed at ensuring there will be sufficient liquidity in the company’s shares on listing. It is common that an unlisted entity seeking to list will only have a small number of shareholders, and need to rely on a capital raising process to get spread. If a listed shell already has shareholders holding parcels of shares worth $2,000 (or more), a backdoor listing will make it easier for the combined entity to get spread.
- Relaxation of the 20 cents rule: ASX requires that a company conducting a public offer in connection with a listing must do so at an issue price of at least 20 cents. Traditionally, in a backdoor listing process, if a listed entity’s share price has been trading at significantly below 20 cents, it would have to do a consolidation of capital to boost the (implied) share price closer to 20 cents so that it is closer to the capital raising price. ASX will now consider an application for a waiver from the 20 cent rule for backdoor listing capital raisings (and the consolidation requirement) provided certain conditions are met. This allows an entity seeking to list to conduct the public offer capital raising at an issue price as low as 2 cents (ASX won’t allow anything lower than this). This may make it more attractive to investors who may think that it is easier to realise value from their investment (for example, they may consider it more likely that a 2 cent stock will rise to 6 cents, as opposed to a 20 cent stock rising to 60 cents).
Eyes wide open
While there are some distinct reasons why a backdoor listing may be more attractive than a conventional listing, it shouldn’t be assumed that they are necessarily easier than a conventional listing. Think of a backdoor listing as involving all the time and expense of a conventional listing, plus:
- a private M&A transaction: where the listed entity acquires either the shares or business assets of the non-listed entity;
- a Shareholder’s Meeting: the acquisition of the shares or assets of the non-listed entity will typically lead to a change in the nature and/or scale of the listed entity which requires shareholder approval and, depending on the transaction, an Independent Expert’s Report may need to be commissioned (see below);
- an Independent Expert’s Report: if the listed entity issues shares as consideration for the shares or assets of the non-listed entity and this results in a person exceeding the 19.99% takeovers threshold, shareholders will have to approve the acquisition, and the notice of meeting will need to include an Independent Expert’s Report on whether the acquisition is fair and reasonable to other shareholders;
- additional Due Diligence: depending on the circumstances, additional due diligence may be required in a backdoor listing. For example, the unlisted entity may want to conduct due diligence on the listed shell to ensure it is “clean” or the listed entity will want to conduct “purchaser’s” due diligence on the entity being vended in; and
- additional Financials: additional financial information is generally required in a backdoor listing. Where a listed entity is acquiring the shares or business of a company in connection with a listing, ASIC’s view is that the prospectus should generally include audited accounts for the listed entity and any businesses it is acquiring, plus a pro forma showing the effects of the acquisition and offer.
Recent ASIC concerns
ASIC raised concerns with 22 of the 30 backdoor listing prospectuses it reviewed between July and December 2014 and issued stop orders in relation to 6 of them¹. ASIC has stated that they will continue to focus on these prospectuses in the coming months.
ASIC’s key concerns relate to:
where a business is unique, and has a high proportion of intangible assets in their financial statements, the prospectus must be able to explain the business without the use of jargon, and a justification for the valuation of intangible assets must be provided;
- insufficient financial disclosure, including a lack of operating history, lack of audited financial information, and disclosure of information not presented in accordance with accounting standards;
- insufficient disclosure of a company’s business model and use of proceeds;
- disclosure of directors’ history not consistent with ASIC’s policies; and
- risk disclosure not adequate or appropriate tailored to a company’s circumstances.
The above concerns would apply equally to any business seeking to do a conventional listing, but the fact they have been raised by ASIC in the context of backdoor listings perhaps suggests that there may be a misconception that a lesser standard of disclosure applies. This is not the case and entities seeking to list this way should be aware that it will be subject to the same standard of prospectus disclosure as for a conventional listing.