An initial public offering (IPO) is the process whereby a private company obtains a listing and quotation of its shares on a stock exchange, and involves an offering of new shares and/or shares held by existing shareholders of the company to the general public for subscription/purchase.
A reverse takeover (RTO) involves the acquisition by an existing listed company (the Listed Shell), often one which does not have any significant business operations or one whose existing business is on the decline, of all or the majority of the issued shares in a private company which has a viable business (the Target). The purchase consideration for the acquisition would typically be satisfied (in whole or in part) by the Listed Shell issuing such number of new shares to the existing shareholders of the Target (the Vendors) such that following completion of the acquisition, the Vendors would become the controlling or majority shareholders of the Listed Shell.
It is often perceived that a RTO is a straightforward and expedient alternative for a private company to achieve a listing status (through the Listed Shell) and can bypass the lengthy and complex process of an IPO exercise, and hence is also known as a “backdoor listing”. But is this really true?
This article seeks to explore this notion in the Singapore context of primary share listings on the Mainboard of the Singapore Exchange Securities Trading Limited (SGX-ST or SGX).
Requirements for an IPO
Under the Singapore regime, a company seeking a listing of its shares on the SGX Mainboard would need to satisfy the conditions set out in Rule 2101 (the Listing Criteria) of the Listing Manual of the SGX-ST (the Listing Manual). The SGX-ST retains absolute discretion concerning the admission and listing of a company and may vary or impose additional conditions. The offering process is also regulated by relevant provisions under the Securities and Futures Act (the SFA).
In brief, a typical IPO process involves the following:-
- a detailed due diligence on the company and its related entities (the Listing Group) and its business and assets;
- preparation of a prospectus (a lengthy offering document that sets out disclosures prescribed under the SFA on, inter alia, the Listing Group and its history, business and future plans, its directors and management, relevant financial information and details of the offering);
- review and approval by the SGX-ST of the company’s listing application and draft prospectus;
- lodgment of the prospectus with the Monetary Authority of Singapore (MAS) for a period of exposure for public comment and MAS review;
- if approved by MAS, the final prospectus would be registered by MAS and the offer of the company’s shares for subscription/sale would commence; and
- following the close of the offer, the company’s shares would be listed on the SGX-ST and trading in its shares on the SGX-ST would commence.
The IPO is led by an issue manager (usually a merchant bank or corporate finance house), and involves various other professional parties such as underwriters, auditors and reporting accountants, legal advisors to the company and the underwriters respectively, and public relations advisors. The timeframe for an IPO can be six months or more.
Requirements for a RTO
Companies listed on the SGX Mainboard are required to observe the Mainboard rules set out in the Listing Manual. In particular, acquisitions and disposal of assets by listed issuers would need to comply with Chapter 10 of the Listing Manual. Depending on the relative figure applicable to the acquisition/disposal computed in accordance with certain bases set out in Rule 1006 of the Listing Manual2, an acquisition/disposal may be categorised as a non-discloseable transaction, a discloseable transaction that requires immediate announcement, a major transaction that requires shareholders’ approval or a very substantial acquisition or reverse takeover which needs to comply with Rule 1015 of the Listing Manual.
In the case of a RTO, where a Listed Shell acquires all or a substantial portion of the shares in a Target in consideration for which the Vendors of the Target shares are issued a significant number of new shares in the Listed Shell (usually more than 50% of the enlarged issued share capital), where the relative figure in respect of such acquisition computed in accordance with Rule 1006 of the Listing Manual is 100% or more and/or results in a change in control3 of the Listed Shell, the transaction would need to comply with Rule 1015 of the Listing Manual.
Rule 1015 of the Listing Manual prescribes, inter alia, that the RTO is to be conditional upon the approval of shareholders of the Listed Shell and the SGX-ST, and that the enlarged group is required to comply with the Listing Criteria set out in Rule 210 of the Listing Manual.
The following is a summary of the key steps in a RTO:-
- negotiation of and entry by the Listed Shell and the Vendors into a sale and purchase agreement in relation to the sale of the Target shares;
- a detailed due diligence on the Target group and its business and assets by the Listed Shell and, in some cases, a due diligence by the Vendors on the Listed Shell (particularly if the Listed Shell has remaining assets and businesses);
- in connection with the seeking of shareholders’ approval for the acquisition, the Listed Shell will need to prepare and issue a circular to shareholders. The circular will, inter alia, contain a description of the transaction, disclosures on the Target group’s and its history, business and future plans, its directors and management, prescribed financial information of the Target group and enlarged group, and will need to be reviewed and approved by the SGX-ST. The required level of disclosure in the circular in respect of the Target and enlarged group is very similar to a prospectus of a company seeking direct listing via an IPO;
- the RTO will involve the issue by the Listed Shell of a significant number of new shares to the Vendors that will usually cross the threshold for triggering a mandatory takeover by the Vendors for all the shares in the Listed Shell under the Singapore Code on Takeovers and Mergers (the Code)4. As such, the Vendors will need to seek a waiver (the Whitewash Waiver) from the Securities Industry Council from making such mandatory takeover offer;
- it is also common that one of the transaction conditions is for the existing business and assets of the Listed Shell (if any) to be disposed off concurrently with the completion of the acquisition of the shares in the Target Company (the Disposal);
- after the Listed Shell has obtained approval from its shareholders at its extraordinary general meeting convened for such purpose, the parties may proceed to complete the acquisition; and
- following completion of the acquisition, the Listed Shell may need to carry out a separate share placement exercise in order to comply with the minimum shareholding spread requirements prescribed under the Listing Criteria, or for fund raising purposes.
The professional advisors involved in a RTO usually include a financial advisor to be appointed by the Listed Shell, an independent financial advisor which is required to advise on the Whitewash Waiver, auditors and reporting accounts, legal advisors to the Listed Shell and the Vendors, and a placement agent/underwriter (if there is a share placement). The timeframe for a RTO is similarly about six months or longer.
IPOs versus RTOs
From the above, it is apparent that a RTO bears many similar features to an IPO, including the need for a detailed due diligence exercise, the preparation of a prospectus/circular that contains SFA prescribed disclosures and financial information, compliance with the Listing Criteria, the requirement for SGX approval and a similar timeframe for completion.
In fact, a RTO exercise could potentially be more complicated than an IPO for various reasons, including the following:-
- there are more parties involved, namely the Listed Shell and the Vendors, each with their own management and directors and their respective legal advisors (as opposed to just the company, its management team and its advisors in the case of an IPO). This increases the likelihood of disagreements and differing opinions on various matters, such as the terms of the acquisition agreement and the valuation of the Target group;
- the need for the Whitewash Waiver;
- where there is a Disposal, this needs to be separately structured and approved by shareholders of the Listed Shell. In many cases, the Disposal is made to the former controlling shareholder of the Listed Shell and would be an interested person transaction that needs to comply with the requisite Listing Manual rules; and
- there may be legacy issues with the Listed Shell (for example, the Listed Shell could be on the SGX Watchlist or in judicial management) which need to be resolved.
Of course, there are potential commercial reasons or advantages as to why parties may in certain cases want to consider a RTO instead of an IPO. For instance:-
- an IPO is typically more exposed to market conditions, whereas this may not be the case for a RTO especially if there is no share placement or the share placement portion is very small;
- where the Vendors already hold a significant stake in the Listed Shell and are seeking to revive it through the injection of another viable business owned by them;
- there could be potential synergies between the existing business of the Listed Shell and Target’s business; or
- where fund raising is not the main objective of the listing exercise and the Listed Shell has a ready shareholder base and spread that already meets the Listing Criteria.
Between 1 January 2010 to 30 April 2013, approximately 19 Mainboard RTOs were announced on the SGX-ST, out of which only six were successfully completed as at 30 April 2013. While there is no similar publicly available data in relation to IPOs, the foregoing does illustrate that the RTO route is no assurance of a successful listing.
It is therefore submitted that a RTO is not the straightforward and expedient alternative to an IPO that it is sometimes made out to be, and parties exploring a listing should consider carefully which would be the more suitable alternative for them and seek appropriate professional advice.