Recycling is an important feature of the Australian securities market. For small and micro-cap listed entities, the ability to re-emerge as a new business has always been an important part of the local market. Recognising the importance of renewal and recycling, ASX has published revised rules relating to back door listings. The basic plan for most companies proposing to implement back door listings is to use the shell of a struggling listed entity as a vehicle to bring a new business to the market.
As The Australian Financial Review has pointed out, there were 26 back door listings in 2011 and eight in the first quarter of 2012. This compares with a peak of 32 in 2000. We understand that currently ASX has been advised of, or is considering, over 35 potential back door listings, relating largely to floating technology related businesses.
On 30 September 2014, ASX published a revised version of Guidance Note 12 (GN 12), which provides substantially more insight on how ASX approaches the regulation of this important area of the capital market and ASX’s expectations for notices of meetings and re-listing documents (particularly financial information). The revised version of GN 12 also allows for greater scrutiny of pre-listing capital raisings, and relaxes the 20 cent rule. The need to keep the post-transaction value at 20 cents has long been a problem for those planning a back door listing.
WHAT IS A BACK DOOR LISTING?
Back door listings most often involve micro-cap entities and private businesses. The listed shell buys the business and, in exchange, issues the vendors with securities or cash. This usually changes the company’s operations and ownership, leads to new management and directors and dilutes the shell company’s current shareholders. The back door listing has the practical effect of creating a new vehicle. Capital is often raised through a placement, which is carried out in connection with the listing.
Our experience supports The Australian Financial Review’s report of research by Peter Lam of UTS Business School that larger back door listings tend to perform better than smaller ones, mainly because more substantial assets are vended into the listed shell, and that back door listings accompanied by capital raisings do better. We have also seen that most often these deals need support from a placement, which suggests to other investors that “smart money” is backing the deal.
KEY CHANGES AND MATTERS OF EMPHASIS
GN 12 affirms that ASX may require entities to seek shareholder approval for transactions such as back door listings, which result in a significant change to the nature or scale of a listed entity’s activities and to re-comply with the primary admission requirements to obtain readmission. The rules are broadly the same if the entity uses the market’s front door through an IPO process. Some of the key changes to back door listing procedure arising out of the revised GN 12 are explored below.
The 20 cent rule
“The 20 cent price rule has long been a costly frustration for back door listings. Its relaxation will be welcomed by the small and micro cap companies”
If ASX requires a listed company that is implementing a back door listing to re-comply with the primary admission requirements, it will usually impose a requirement that the value of the company’s securities be at least 20 cents (or the strike price must be 20 cents or more for options) when re-listed.
Practically, this has meant that, in conjunction with any capital raising, a company trading on ASX at materially less than 20 cents, will need to consolidate its securities to ensure the value per security increases to at least 20 cents.
The 20 cent rule imposes an additional level of structural and procedural complication to the transaction process, with a commensurate increase in transaction costs (without any ostensible benefit to the listed entity’s security holders). Indeed, ASX’s revisions to GN 12 acknowledge that:
“…where an entity’s securities have been trading on ASX at less than 20 cents, having to undertake a consolidation or other restructure to facilitate compliance with the 20 cent rule prior to, or in conjunction with, a capital raising can impose structural, timing and other impediments to completion of the transaction that might otherwise be of benefit to an entity and its security holders. “
For many years we have been discussing these issues with ASX and we are heartened to see that new GN 12 relaxes this requirement. ASX will now consider a request to waive the application of the 20 cent rule if the issue price is not less than two cents, has been specifically approved by security holders and ASX is satisfied that the entity’s proposed capital structure will be compliant with the ASX Listing Rules.
Additionally, new GN 12 suggests that ASX will give relief where a listed entity has made a genuine attempt to consolidate its securities in order to comply with the 20 cent rule but a material drop in the market price before re-admission sees the value per security drop below 20 cents.
Similarly, if options are being issued as part of the transaction, they may not need to have a 20 cent strike price except where the number of options to be issued is disproportionate to the number of ordinary securities on issue.
While listed entities will need to apply for a waiver to access the relief, we believe that this softening of the 20 cent rule will translate into potential transaction savings for listed entities by eliminating the time and procedural requirements of implementing a security consolidation from the back door process and removing the security holder and market confusion that often follows a consolidation.
Disclosure in meeting documents and re-quotation documents
“The new requirement for certain financial information on the business being back door listed to be reviewed or audited aligns the requirements to the IPO requirements.”
A listed entity contemplating a back door listing must obtain security holder approval. The meeting documents need to be approved by ASX. In addition, to facilitating re-quotation on ASX, the listed entity must issue a prospectus or PDS (if a new issue of securities is involved) or an information memorandum (which has equivalent disclosure to a prospectus) which provides detailed information on the new business being back door listed.
ASX has indicated that, as a general rule, it will now expect the inclusion of 3 years (or less if ASX agrees) of audited financial statements of the new business to be provided before re- quotation. Like a back door listing using the “assets test”, audited historical accounts are required only if they are available.
ASX will also now require the pro forma statement of financial position, which aims to show the financial impact of the acquisition of the new business on the listed entity, to be reviewed by an auditor or independent accountant. Again this is consistent with the IPO requirements for a reviewed pro forma.
ASX prefers that the notice includes a pro forma statement of financial position that has been at least “reviewed” by an auditor or independent accountant in shareholder meeting documents. If not available at that time, it will be required in the prospectus, PDS or information memorandum lodged prior to re-listing.
Companies seeking to back door list assets should also consider ASIC’s disclosure requirements, particularly those for disclosure of the business model and plan, adequate financial disclosures and in some cases a valuation of the new business.
ASX approval to monitor pre-listing capital raising
“ASX has sent a warning shot across the bow in relation to raising substantial amounts of capital to spend on a transaction which remains subject to shareholder approval.”
Raising cash to cover the costs of getting a transaction to the stage of security holder approval under Listing Rule 11.1.2 or achieving re-compliance with the admission requirements under Listing Rule 11.1.3 is fine. However, ASX considers it inconsistent with the spirit and intent of the Listing Rules to raise substantial amounts of capital to spend on a transaction or activity that requires security holder approval or re-quotation, ahead of it having met those requirements.
A number of other items have been included in new GN 12, which help to clarify ASX’s practice and procedure in applying the relevant Listing Rules.
Escrow: ASX warns that it will be carefully examining whether a listed entity has issued any securities for cash shortly before or after the announcement of the relevant transaction. It seems clear that these securities may be classified by ASX as restricted securities and subject to escrow.
Need for capital: GN 12 details the content requirements for information memoranda that ASX may accept in lieu of a prospectus or PDS if an entity is not making an offer of securities as part of, or in conjunction with, a significant change to the nature or scale of its activities. The entity will be required to include a statement that the entity has not raised any capital for the three months before, and will not need to raise any capital for three months after, the date of issue of the information memorandum and ASX has firmly stated that it will “scrutinise carefully” any capital raising undertaken by the target entity during the six month period to determine if it breaches the spirit of this requirement.
Minimum spread requirements: In the usual course, where an entity seeks re-admission to official quotation and has conducted a concurrent capital raise, ASX will determine whether a holder’s securities have a value of at least $2,000 to satisfy the minimum spread test by reference to the issue price of the securities under the prospectus or PDS. GN 12 highlights that ASX reserves the right to use a different measure in circumstances where it considers that the issue price under the prospectus or PDS fails to fairly reflect the market value of its main class of securities.
The revisions to GN 12 are useful in demonstrating ASX’s willingness (in certain circumstances relating to back door listings) to be pragmatic when it comes to technical compliance with the listing conditions ordinarily imposed.
Corrs has practical and recent experience in negotiating and agreeing a variety of deal structures with ASX in the context of transactions falling within the subset of back door listing and is extremely well placed to advise on the often complex legal and procedural issues posed by these types of transactions.