Backdoor listings

Reverse takeovers

A backdoor listing (also called a reverse takeover) occurs when an unsuccessful listed company acquires an unlisted company in exchange for cash or shares in the listed company. The takeover enables the unlisted company to become listed without an initial public offering (IPO), which is why it's known as a backdoor listing.

Here we explain some of the downsides and benefits of backdoor listings.

What is a backdoor listing?

A backdoor listing is another way for an unlisted company and its business to become listed on a share market, such as the ASX, rather than listing through an IPO.

The shareholders of the unlisted company, with the consent of the shareholders of the listed company, take over a significant portion of the listed company, which is often no longer viable and has little assets or activities. The shareholders of the unlisted company will receive shares in the listed company and/or cash in exchange for their share of the unlisted company. 

The merger means that the unlisted company and its business gain listing status on a stock exchange, and the listed company can re-emerge as a new business and work towards creating value for its shareholders. 

The two companies do not need to have similar businesses, for example a new tech company could use the shell of a dormant mining company to gain listed status.

Smart tip

Unlike an IPO, shareholders considering a reverse takeover will need to check both companies to decide if they approve the transaction.

How a company creates a backdoor listing

When a public company announces a backdoor listing, shareholders can expect the company to make a number of further announcements, which they can use to find out about the incoming company and track the process of the reverse takeover. These are the steps each company will take:

  1. The listed public company and unlisted private company enter into an agreement, usually for the listed company to acquire 100% of the unlisted company in exchange for listed shares or cash for shareholders of the unlisted company.
  2. The listed company will seek approval from its shareholders to acquire the assets and business of the unlisted company and issue shares to the shareholders of the unlisted company.
  3. Once the listed company has shareholder approval its shares will be suspended from trading on the ASX. 
  4. The listed company will issue a prospectus offering shares to the shareholders of the unlisted company and to the wider market if they want to raise additional funds.
  5. When the listed company has the required shareholder approvals and raised funds under its prospectus, it must also meet the ASX listing requirements and complete the ASX re-admission process.
  6. The listed company will then recommence trading on the ASX.

The deal can lead to changes in the listed company's ownership, management and operations, as the unlisted company takes over the shell of the listed entity.

The downsides for shareholders

Some of the downsides of backdoor listings are that they can:

  • take longer to complete than a similar IPO
  • cost more than a comparable IPO
  • be more complex for shareholders to understand
  • result in a dilution of the current shareholders' interests in the listed company
  • result in the suspension of trading of the listed company's shares while the company complies with the ASX requirements
  • decrease liquidity as some shareholders may not be permitted to sell their shares within 12 to 24 months of the reverse takeover.

The benefits for shareholders and each company

One of the ASX listing rules that a private company may struggle to comply with is the requirement to have a minimum number of shareholders, between 300 and 400, that each hold at least $2,000 worth of shares.  A backdoor listing is an easy way to create the required broad shareholder base.

From an unlisted company's perspective, a reverse takeover does have a few benefits:

  • Broad shareholder interest is not required and this is particularly important when share markets are underperforming.
  • The shareholder base needed to meet regulatory requirements is easier to achieve.
  • The shell company may have cash or other dormant assets that the new management can use instead of having to raise capital elsewhere.
  • If both companies are running similar businesses then a prospectus may not be required.

The shareholders of the listed company may benefit from an increase in the value of their shares.

Backdoor listings are an alternative to an initial public offering for a company wanting to list on a stock exchange. Mutually beneficial mergers can give new life to a shell company and provide a business the capital to move forward.

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Last updated: 12 Dec 2018