A backdoor listing on the Australian Stock Exchange (ASX) might be an alternative to an initial public offering (IPO) if you’re ready to take your business public. With changes to the ASX Listing Rules now in effect, backdoor listings are a viable option.
What is a backdoor listing?
Under a backdoor listing – also known as a reverse takeover – a listed company acquires the majority assets of an unlisted company in exchange for shares in the listed company. It involves a significant change in the nature or scale of the activities of an ASX listed company.
For example, at the end of the mining boom numerous ‘shell’ companies which no longer had a viable business operation found new life through reverse takeover by disruptive technology companies looking for a new home for their business. The private or unlisted public company targets a shell company with cash and shareholders agreeable to their offer, then ‘sells’ the business to the shell for a combination of cash, shares and debt to an agreed value. The value typically (but not always) reflects the time and cost savings of the shell company’s already being listed.
The appeal of the back door
Historically considered a poor cousin to the IPO, backdoor listings are often an attractive option, especially for technology companies without a large shareholder base.
The advantages of backdoor listings include:
- your company gains an existing spread of shareholders that meets ASX listing requirements
- you may have access to cash inside the shell company, meaning less time and heartache in finding new venture capital
- the market’s response to the listing provides you with an immediate sounding-board for your business model.
Shareholder approval is the key area of recent changes to ASX Listing Rules and Guidance Notes, which are now in effect. A reverse takeover must have 100% approval of the shareholders of the listed ‘shell’ company.
Disposal of the shell company’s operations must also have documented shareholder approval. It is not sufficient to assume such approval by taking possession of the listed company’s assets as part of financing the deal.
The ASX has also made clearer its expectations about the financial information and specific accounts necessary for approval of a backdoor listing.
Risks to consider
Though some hopeful entrepreneurs mistakenly view a reverse takeover as a short-cut to listing, the ASX and ASIC uphold the same level of compliance whether you list via the front door (an IPO) or the back.
Companies investigating backdoor listing must plan for the expenses of documentation and professional advisers during the reverse takeover process. The new listed entity requires between 300 to 400 shareholders with at least $2,000 worth of shares each. The ASX requires a prospectus and proof of assets and profitability that can drain the resources (financial and human) of smaller tech startups. You will need to ensure sufficient working capital for the continued operation of the shell company during the listing process.
While the shell company usually pays for the deal, the liabilities of the shell company as well as its assets are part of the transaction. Due diligence is essential to the process, which can be as time-consuming as an IPO.
That said, some backdoor listings occur at the speculator-friendly price of two cents, compared to an IPO’s minimum 20 cent share price. With capital-raising often an important part of backdoor listings, unlisted companies looking to be listed on the ASX under this option must weigh the benefits against the potential loss of control that a rapid investor spread could entail.
Contact us to talk about your options – our door is always open.
DISCLAIMER: This article is intended to provide general information and should not be relied upon as legal advice. Formal legal advice should be sought if you are concerned about, or require particular advice applicable to your specific circumstances in relation to, any topics covered in this article.