Undertaking backdoor listings is becoming time critical as a result of ASX’s new policy of automatically removing suspended listed entities (or ‘shells’) from ASX’s Official List after three years of continuous suspension of their securities. The policy is enshrined in ASX’s Guidance Note 33, which took effect on 1 January 2014.
This policy effectively means that a company seeking admission to the Official List potentially has only a three-year window to implement a backdoor listing or reverse takeover transaction, otherwise it will need go through the traditional method of listing via an initial public offering (IPO).
Under the transitional arrangements for ASX’s policy, shells that were continuously suspended for 12 months or more as at 1 January 2014, and have remained suspended up until 1 January 2016, will be automatically removed from the Official List on 4 January 2016.
A ‘shell’ is the term given to either a dormant listed entity (normally a small cap company) whose securities have either been suspended for a continuous period of time, or otherwise to a listed entity which is lacking a viable business model and, as a result, its securities are trading significantly lower than their initial issue price. Over the past several years, shells such as these have been found predominantly in the mining sector and, following the resources boom, a significant number of these listed entities have been dormant awaiting a stimulus or a ‘second life’ from unlisted entities seeking to list on the ASX through what is known as a ‘backdoor listing’ (or ‘reverse takeover’).
Backdoor listings generally refer to the process where an unlisted entity with a viable or developing business (albeit often not at such a level as to enable it to easily meet the criteria for listing under the ASX Listing Rules), goes public by using an existing shell rather than going down the traditional path of an IPO. In practice, this typically involves the shell acquiring the shares or assets of the unlisted company in exchange for the shell’s securities and/or cash.
Often unlisted companies choose to undertake a backdoor listing instead of an IPO as they are thought to be easier, faster and less costly. Before making this decision, companies proposing to list through the back door should keep in mind some key considerations set out below.
A defining trait of most backdoor listings is that the shell ends up acquiring the unlisted company’s asset or business and morphs into a new commercial entity – usually one with different business activities, company name, board composition and the majority of its shareholder base. As a result, it is almost inevitable that there will be a significant change to the nature and/or scale of the shell’s existing business activities which will need its securityholders’ approval before the shell and the unlisted company can enter into the transaction to give effect to the backdoor listing.
Despite the shell already being listed on the ASX, a key consideration for backdoor listings is that ASX may require the shell to, again, comply with the same admission requirements for a ‘front door’ listing (i.e. a traditional IPO), including the following:
Where the shell proposes to acquire the unlisted company’s business/assets which results in a significant change to the nature/scale of its activities, and offer new securities as part of that transaction, a prospectus to the same standard of a prospectus prepared for an IPO may be required. However, where new securities are not offered as part of the transaction, ASX may accept an information memorandum in lieu of a prospectus. One of ASX’s key objectives for this requirement for a prospectus or an information memorandum is to ensure that the market has sufficient information about the shell following the back door transaction and the trading in its securities occurs on a reasonably informed basis.
To be eligible for admission to the Official List through a traditional IPO, companies are required to have a minimum of 300 to 400 unrelated securityholders (depending on the percentage of related parties holding securities in the shell), each holding a parcel of at least $2,000 worth of securities. Small or private companies may find it difficult to meet this minimum spread requirement, and one significant benefit of a backdoor listing can be that the unlisted company will have access to the shell’s existing shareholder base to assist with satisfying this requirement. This could potentially be a significant saving in terms of cost and time for the unlisted company, as it will avoid it having to undertake an often costly and lengthy marketing or publicity exercise to build its shareholder register that an underwriter or lead manager would normally run in an IPO process.
However, any issue of new shares by the shell as part of the “back door” transaction will have a dilutionary effect on the existing shareholders, so it is important to assess how many of the existing shareholders will continue to hold at least $2,000 worth of securities after the transaction. Shareholders holding less than $2,000 worth of securities after the dilution will not count towards spread.
Company performance – profit test or assets test
As noted above, ASX will normally require that the shell confirm its compliance with either the ‘profit test’ or ‘assets test’ as part of its backdoor listing application (which is similar to that of a traditional listing application). As part of complying with either test, the shell will need to provide:
- audited annual financial statements and audited or reviewed half-yearly financial statements for the last three financial years prior to its resumption of trading (unless it has been complying with its periodic disclosure requirements, in which case the ASX may not require its financial statements); and
- a reviewed pro forma statement of financial position showing the effect of the proposed acquisition of the unlisted company’s business/assets which will cause a significant change to the nature and/or scale of the shell’s business activities.
Further, the ASX may also require copies of the unlisted company’s financial statements (together with an audit report or review) for the last three full financial years.
Minimum share price – the 20 cent rule
ASX will usually require that the shell’s securities have an issue or sale price of at least 20 cents per security.
If the shell intends to undertake a capital raising as part of its backdoor listing, ASX may grant the shell a waiver from this 20 cent rule, which is welcome news since the shell’s securities will most likely be trading below this price. As a condition of any waiver, the shell must, however, not offer its securities for less than 2 cents per security and must obtain a separate approval from its securityholders as part of the backdoor listing. Should ASX not grant such a waiver, the shell will be required to restructure its share capital, such as by consolidating its securities, to meet the minimum 20 cent price.
Although this waiver is at ASX’s discretion, our experience is that ASX would not require the shell to restructure its capital should the restructure cause further structural, timing and other impediments in conjunction with the proposed capital raising.
For shells not proposing to undertake a capital raising as part of its backdoor listing, the 20 cent rule does not apply. Rather ASX will exercise its discretion on a case by case basis following the shell’s re-admission.
Backdoor listings or reverse takeovers remain a viable strategic option for companies seeking an alternative way of listing to the more traditional IPO process. However, such companies, as well as suspended listed companies looking for a ‘reverse takeover revival’, will need to act quickly so that they do not fall outside of the 3-year window of continuous suspension before the suspended shell company is automatically removed from the Official List. ASX may agree to a short extension before automatic removal if the shell is in the final stages of completing a transaction which will result in the resumption of the trading of its securities, but forward planning should be done to avoid the need for this request.