Australian capital markets are witnessing a resurgence of backdoor listings.
Backdoor listings were largely unregulated and consequently relatively easy, popular and frequent during the dot com boom of the late 90s and early 2000s. However when the bubble burst, ASX faced criticism over the ease in which tech companies had been able to list and as a result significantly tightened the regulatory regime.
The significant headwinds, in terms of availability of capital and changing conditions in the resources sector, facing mining stocks especially those in the junior or explorer space, has seen the appetite of speculative investors shift towards technology, industrial and other start-up stocks that do not necessarily have the capital requirements of junior explorers.
This shift in investment appetite, combined with the increasing number of struggling listed mining companies and budding tech companies, has fuelled the fire for backdoor listings during the last 24 months, which are being promoted by recent relaxations to ASX policy to facilitate back door listings. For more information on the recent changes made by ASX, please see our alert on ASX’s changes to Guidance Note 12 published on 8 October 2014.
In this alert, Partner Michael Hansel, Senior Associate Alex Davies, and Associate Katherine Hammond explain the basic concept of a backdoor listing, its advantages and the regulatory framework around these transactions, and provide five tips to consider if you are looking to undertake a backdoor listing transaction.
To skip straight to our Five tips for undertaking a backdoor listing, click here.
What is a backdoor listing?
The term “backdoor listing” (or “reverse takeover”) typically refers to a process where an unlisted company (NewCo) with a flourishing business is acquired by a listed company (ListCo) which typically has dwindling business operations and assets (except perhaps some cash).
To effect this, the shareholders of NewCo sell all of their shares to ListCo in exchange for shares in ListCo and/ or cash, and the result is that NewCo becomes a wholly owned subsidiary of ListCo such that the NewCo business is effectively listed, being run by the already listed entity.
A backdoor listing may be compared with a conventional listing (or “front door listing”), where an unlisted company simply complies with the conditions of initial listing prescribed in Chapters 1 and 2 of the ASX Listing Rules (Listing Conditions) and applies to be admitted to the official list of the ASX.
Backdoor listing style transactions are regulated under the ASX Listing Rules which require that if a listed company proposes to make a significant change to the nature or scale of its activities, it must first provide full details of the transaction to the ASX.
A significant change to “nature” means a major change to the character of a company’s business activities or its main undertaking.
By significant change to “scale”, ASX means a substantial or sizeable change (up or down) to the size of the entity’s business operations, and has adopted a benchmark of 25%.
A typical back door listing transaction will generally involve a significant change to the nature of the listed company’s activities, for example where a company switches from mining exploration to software or technology development. ASX has also indicated that it will likely require recompliance with the Listing Conditions in circumstances where, for example, a copper exploration company is changing its nature to coal or iron ore exploration on the basis that the new undertaking is not consistent with the activities that procured initial shareholdings.
When notified, ASX then has a number of options, but generally where the notified transaction is a backdoor listing, it will require the company to obtain shareholder approval of the transaction and re-comply with the Listing Conditions, before completing the transaction and being readmitted to the official list of ASX.
The recent changes to ASX’s policy means that a number of the Listing Conditions may now be easier to satisfy for a backdoor listing.
Advantages of backdoor listing
Key advantage of a backdoor listing include that:
- the non-listed entity is able to utilise a significant portion of the listed entity’s share register for the purpose of satisfying the Spread Test in the Listing Conditions;
- NewCo may gain access to any cash sitting on the balance sheet of ListCo for its business;
- a backdoor listing transaction will potentially enable shareholders of struggling ListCo to preserve some of the value and the liquidity of their shares, which would otherwise be lost if ListCo were to de-list or be liquidated; and
- a backdoor listing may now, subject to shareholder approval and an ASX waiver, be undertaken at a share price of 2 cents (or more) rather than the usual 20 cent minimum; this would enable a company to avoid the dilutionary consequences to existing shareholders of a capital consolidation to bring the price up to 20 cents.
Five tips for undertaking a backdoor listing
If your company is considering undertaking a backdoor listing, you should consider the following:
1) Engage with ASX early
A company that is thinking about entering into a transaction that may involve a significant change to the nature or scale of its activities should engage with the ASX as soon as practicable during negotiations.
ASX has a certain degree of discretion as to whether shareholder approval and/or re-compliance with the Listing Conditions will be required. There may be some scope to make successful submissions to ASX that the transaction does not in fact constitute a significant change to the nature or scale of activities (for the reasons discussed above) and should not require shareholder approval and/or re-compliance with the Listing Conditions, which may save the company substantial time and money.
Early engagement with ASX will enable a company to make submissions and seek in principle advice from ASX as to the requirements it will impose, and then finalise an optimal structure for the transaction.
HopgoodGanim is experienced in backdoor listing transactions and can assist your company in making submissions and liaising with the ASX in this regard.
2) Know your value
A threshold matter to be agreed between a company looking to backdoor list and a listed shell company will be the relative value between the listed company and the unlisted back door prospective.
Therefore you must have in mind a realistic, transparent and justifiable value proposition for your business.
3) Get your house in order
To assist in that value proposition and also to expedite the backdoor listing transaction generally, it is important that a private company (or public unlisted company) starts thinking like a publicly listed company and gets its house in order. This can include things like:
- getting the financials prepared in a form that can be reviewed by a third party;
- ensuring that the key employees of the business are retained;
- divesting any assets that are not pertinent to the operations in question;
- clearing away or quarantining any outstanding regulatory or counter-party issues;
- ensuring that the corporate structure is in a form that can be sold (e.g. if any shareholders have pre-emptive rights); and
- setting up a data-room to enable a potential counterparty to conduct due diligence.
4) Think about structure
Key matters that NewCo will need to negotiate and decide on are:
- Board and Management: Who will be on the Board of the listed company; will any of the directors of ListCo remain?
- Consideration: will the consideration to the vendors of the company/business assets being backdoor listed be cash or shares? Are the assets “classified assets” pursuant to the Listing Rules (for example, an asset that cannot be readily valued)? If so, the consideration can only be “restricted securities”.
- Raising further capital: will the company need to raise further capital as part of the transaction in order to satisfy the Listing Conditions?
- Shareholding split: how much of ListCo will existing shareholders and directors hold, compared to vendors and new shareholders (if the company is raising further funds)?
5) Have you found the right shell?
Some things to look for when you’re picking a shell company include:
- Shareholder concentration and willingness. Will ListCo satisfy the “Spread Test” (a Listing Condition)? How difficult will shareholder approval be to obtain approval for the proposed backdoor listing transaction?
- Prevailing share price. What is the share price that the company has been trading at? Until recently, if it was below 20 cents, you would need to factor in a capital consolidation (which is highly dilutionary on existing shareholders). With ASX’s new policy, if it is at least 2 cents, you can now seek a waiver from ASX and then you will just need shareholder approval.
- Cash balance. How much cash will it have at re-listing and how quickly will it use that cash after it lists? It may be important to factor in a public offering in order to satisfy the Listing Conditions.
- Corporate image and corporate governance record. What reputation does the listed shell have?
- Financial statements. ASX will insist that the listed company rectifies any default in lodging or having audited or reviewed the company’s financial statements prior to re-listing.