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
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
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.
Unlike an IPO, shareholders considering a reverse takeover will
need to check both companies to decide if they approve the
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:
- 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.
- 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
- Once the listed company has shareholder approval its shares
will be suspended from trading on the ASX.
- 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.
- 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
- The listed company will then recommence trading on the
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
Some of the downsides of backdoor listings are that they
- 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
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
- 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.
Last updated: 03 Apr 2018