On 1 October 2012, the UK Financial Services Authority introduced new rules on reverse takeovers.1 Essentially, the new rules are intended to prevent “back door” listings of entities which would not otherwise be eligible for listing, whilst ensuring that the regime operates in a proportionate manner in light of the need to protect investors. The key implications of the new rules are outlined below.
Last year NASDAQ, NYSE and NYSE Amex introduced new rules to address similar concerns in the US.2
Definition of “reverse takeover”
For these purposes, a reverse takeover is, essentially, an acquisition by a listed company of another company or business where the assets, profits, consideration or gross capital of the target company/business are greater than that of/for the acquiring company, or an acquisition which would result in a fundamental change in the business of the acquiring company.
When a listed company completes a reverse takeover, the FSA will normally cancel the listing of its shares or other securities, and the company will be required to re-apply for listing. To do so, it will need to prepare a prospectus and to satisfy the relevant eligibility requirements. The latter are essentially the same as on a new listing.
Previously, an acquisition by a UK listed company of another UK listed company was not treated as a reverse takeover. The new rules clarify that companies that have a standard, as opposed to a premium, listing will be subject to the reverse takeover rules. This will prevent a standard listed company from obtaining a “back door” premium listing by effecting a reverse takeover of a premium listed company (which are subject to more onerous eligibility requirements).
Under the old rules, the listing of the acquiring company’s shares would have been suspended on announcement of a reverse takeover unless the FSA was satisfied that sufficient information about the transaction, including about the target, was available to investors. The new rules clarify the circumstances in which the FSA will be likely to accept that sufficient information is available for this purpose. Critically, this includes where the target’s shares or securities are listed:
- on another EU regulated market (e.g., Euronext), if the target issues an announcement confirming that it has complied with the disclosure requirements applicable to that market and provides information on where the relevant information can be obtained; or
on another investment exchange or trading platform, if:
- the target (or, in the case of a company with a premium listing, its sponsor) confirms to the FSA that the disclosure requirements, in relation to financial information and inside information of the relevant exchange/platform, are materially similar to the disclosure requirements applicable to UK listed companies; and
- the target issues an announcement confirming that it has complied with the disclosure requirements applicable to that exchange/platform and provides information on where the relevant information can be obtained.
It should be noted that the confirmation requirement has been introduced in place of a list of “acceptable” markets, which some market participants had lobbied for. It is potentially helpful for US/UK transactions.
Under the new rules, where the target is not listed or where this confirmation cannot be given, a suspension will still not be required if the listed company issues an announcement containing, among other things:
- certain prescribed historical financial information in relation to the target (including profit and loss, balance sheet and cashflow);
- a description of the target, including key non-financial operating or performance measures appropriate to its business;
- a declaration by its directors that the announcement contains sufficient information about the business to be acquired to provide a properly informed basis for assessing its financial position; and
- a statement that it has made sufficient arrangements to ensure that it is able to keep the market informed without delay of any developments in relation to the target company that it would be required to announce (under the FSA Disclosure and Transparency Rules), if the target were already part of the enlarged group.
In those circumstances, where the company has a premium listing, its sponsor must also confirm to the FSA that, in its opinion, it is reasonable for the listed company to give that declaration and statement.
Where the target has a premium listing, it must appoint a sponsor in relation to the reverse takeover, and its sponsor is required to discuss with the FSA whether a suspension is required.