The recent changes made by the ASX to its Guidance Note 12 have aroused interest in companies getting their shares listed without travelling down the compliance path associated with a prospectus initiated Initial Public Offering (IPO). This article explains the difference between a back door and a front door listing and advises on what changes the ASX has introduced to the back door listing procedure.
What is a back door listing?
In essence, a small or dormant existing ASX listed company agrees to acquire another company (unlisted) which has attractive tenements, property, intellectual property etc. The ASX listed company swallows the unlisted company and the unlisted company’s shareholders receive (as purchase consideration) shares in the ASX listed company. Typically, the number of new ‘purchase’ shares which are issued overwhelm the existing number of listed shares on issue so that the listed company undergoes a change in control. Market jargon often refers to a back door listing as a reverse takeover, reverse merger or reverse IPO. The logic in the attractiveness of the process is that it does not have the fanfare of an IPO prospectus and is regarded as a cheaper process because it only involves restructuring the share ownership of the listed company. However, because back door listings rely on certain discretions exercisable by the ASX, in many instances the ASX requires the ASX listing to be reapplied for and for a compliant prospectus to be issued.
What is a front door listing?
This is the typical IPO. The company seeking listing has to meet capital requirements, have approved corporate governance policies etc. and formally apply for ASX listing, usually subject to the issue of a prospectus to raise the required capital and to get the minimum shareholder spread needed. Like with a back door listing, there is substantial due diligence to be undertaken and the prospectus usually requires two or more experts’ reports. It is more often than not the case that the cost of doing a front door listing is around the same cost as a back door listing. A back door listing disadvantage is the risk involved in using a small or dormant company as the infrastructure for the listing because this means considerable financial due diligence needs to be made to ensure liabilities (particularly contingent liabilities) are uncovered. Invariably, the back door listing process requires a shareholders’ meeting to approve the acquisition and, in recent times, the ASX has insisted on the issue of a new prospectus and for the formal listing process to be recomplied with.
How does ASX Guidance Note 12 impact?
This Guidance Note took effect on 30 September 2014. The ASX has taken a sensible approach to the re-regulation of back door listings through this Guidance Note. The ASX is ‘gatekeeper’ and as such can choose to exercise or not exercise discretions to accommodate a listing. These are the highlights of the Guidance Note:
- Normally the minimum share price for a listing is 20 cents per share. If the listed company has a market share price of between 2 cents and less than 20 cents per share, the ASX may allow the issue of new shares at the prevailing share price. In the absence of a favourable exercise of ASX discretion, the existing shares would need to be consolidated so that they correspond in value to new shares to be issued. Likewise with existing options on issue, the ASX can relieve the listed company from the need to have a minimum 20 cents per share exercise price and instead allow for a lesser exercise price consistent with the allowed minimum value of shares.
- Obtaining shareholder approval from the listed entity’s shareholders for the ‘back door’ listing is often a non-negotiable requirement. This arises when there are significant changes to the nature or scale of the listed company’s activities. If no new shares are to be issued, an information memorandum can take the place of a prospectus. Normally three years of prior audited financial statements are required for disclosure. A pro-forma statement of financial position (incorporating the company to be swallowed) is usually required and this will also serve to meet the ‘assets test’ and working capital requirements for readmission of the company to the ASX official list.
- The usual escrow restraints will apply for shares issued as purchase consideration.
- Typically, after restructuring, the listed company must emerge with at least 400 non associated shareholders who hold a minimal share parcel value of $2,000. The ASX has indicated that it is flexible in terms of the $2,000 figure and the market value of shares. (It is possible for a lesser shareholder spread than 400 to apply but this depends on the percentage of closely held shares retained by founders/promoters).
The Listing Rules behind the Guidance Note (LR 11.1 to 11.3) are not amended by the Guidance Note. This means that:
- ASX can require a listed company to have its shareholders approve a significant change to the nature or scale of the company’s activities.
- ASX can require a listed company to seek readmission under the listing rules if it undergoes a significant change to the nature or scale of the company’s activities.
The primary attraction of considering a back door listing may be the fact that the chosen ASX company has a large spread of shareholders, minimal financial impediments and is prepared to contribute something advantageous to the party wanting a back door listing. The ASX’s Guidance Note 12 gives proponents of back door listings a few favours and some added certainty on what the ASX may want as quid pro quo for allowing a back door listing to proceed.
Back door listings don’t attract the same fan fare as IPO prospectuses as the listed company basically becomes ‘recycled’ as it re-emerges after the successful acquisition. However, to be kept in perspective is the benefit which shareholders of a smaller languishing ASX listed company receive. Instead of their shareholding languishing in the doldrums, a back door listing gives the company a ‘second chance’ and the acquisition behind the move reinvigorates the future of the listed company. Many would say this is a ‘win/win’ situation.