Following an increase in the recent number of backdoor listings on the ASX, ASIC has raised several concerns in relation to these transactions. These comments highlight the importance of receiving quality advice on and properly managing backdoor listing transactions. Partner, Craig Yeung, and Associate, Jarrod Wilksch give their top five tips for managing a backdoor listing and ensuring it is a smooth transaction.
Recent months have seen a surge in the number of companies listing on ASX via the “backdoor”. Reported figures suggest that there have been more than a dozen recent completed backdoor listings with many more transactions either announced or in the works. Many of these transactions have involved technology companies using resources companies with limited operations to achieve listing on ASX.
Speaking at a recent media briefing, ASIC Commissioners noted that backdoor listings raise a number of regulatory and disclosure issues, many of which have not been properly addressed in some recent transactions. In particular, ASIC noted that the incoming businesses often fail to disclose audited financial accounts and frequently provide insufficient disclosure around future business models, plans or funding.
What is a backdoor listing?
ASX Guidance refers to a backdoor listing as a process where someone seeks to have a business listed on an exchange by injecting or transferring the business into a listed entity, rather than the more conventional process of applying for that business itself to be directly listed on the exchange. The listed entity then issues a (usually) large number of shares to the owners of the business that has been transferred.
There are a range of reasons why a company may consider a backdoor listing rather than a conventional listing. For example, sometimes a listed company (usually a “shell” that has limited or no operations) may already have the required spread of shareholders or close to the required spread, which means the business may not have to obtain as many new shareholders than if it had went for the conventional approach. The shareholder spread requirement broadly requires a listed company to have between 300 and 400 shareholders that hold parcels of shares valued at $2,000 or more. The exact number of shareholders required to hold this parcel depends the number of shareholders that are related parties of the company.
Top 5 tips
From our experience in having being involved in a number of backdoor listing and similar transactions, our top five tips for ensuring a smooth transaction are as follows.
- Liaising with ASX - Listed companies that intend to enter into significant transactions (including backdoor listings) need to comply with ASX Listing Rule 11.1. This Listing Rule requires the company to provide full details of the transaction to ASX as soon as possible. ASX may then require the listed company to obtain the approval of its shareholders to the transaction and may require that the company re-comply with the requirements of Chapters 1 and 2 of the Listing Rules as if the entity was applying for listing again. This is a significant obligation which generally takes a number of months to complete. It is therefore in the interests of the listed company to liaise with ASX at the earliest possible opportunity in relation to this Rule. Notifying ASX at an early stage during the negotiations allows the entity to make submissions to ASX on whether or not ASX should exercise its discretion under Listing Rule 11.1, to seek in principle advice before committing to the transaction, and to clarify timeframes.
- Announcing the transaction – As part of the backdoor listing process, the listed company is required to make an announcement to the market regarding the transaction. The announcement must include certain detailed information about the proposed transaction. If ASX is not satisfied with the contents of the announcement, ASX may suspend the company’s shares from trading until it provides ASX with sufficient information. It is therefore important to ensure this announcement “ticks all the required boxes” before it is made.
- Working out the transaction timetable – Nothing kills a deal better than unexpected time delays. Obtaining the approval of shareholders and re-complying with Chapters 1 and 2 of the Listing Rules require a number of documents to be prepared including an acquisition agreement, notice of meeting and in some cases a prospectus. Independent experts reports are often also required. These documents can sometimes take months to prepare. Accordingly, to minimise the risk of any avoidable delays, it is vital that the required documents are identified as soon as possible during the planning of the transaction so the appropriate experts and advisers can be engaged and begin the required work.
- Understand the disclosure requirements – It is important to ensure the notice of meeting and prospectus (if one is being prepared) contain all information and disclosures they are required to include. There are broad tests that apply to the information that must be disclosed in these documents. Given ASIC’s comments regarding recent insufficient disclosures, parties to the transaction should focus on the key areas mentioned by ASIC as well as the other disclosure requirements to ensure they are satisfied. If the notice of meeting or prospectus does not meet these requirements there is a risk that ASIC or certain other stakeholders could seek to put a hold on the transaction or require further disclosures. This has the potential to disrupt the transaction and increase the costs to the companies and others involved.
- Audited accounts – It is important to be aware of what financial statements must be provided to ASX as part of the transaction and any specific requirements for those statements. Broadly, if the listed company is required to re-comply with Chapters 1 and 2 of the Listing Rules then it must generally provide audited copies of its financial statements for the past three years to ASX. Depending on the timing of the transaction, the company may also be required to provide audited or reviewed accounts for the last half year. Reviewed pro forma statements of financial position will also generally be required. Understanding this requirement may be crucial in determining the timetable for the transaction.
The key to the above is for both parties to the transaction to be aware of their obligations and requirements in relation to the transaction and to factor them into any transaction timeline.