A corporate lawyer on why time is running out for backdoor listings

Photo credit: The Register

Undertaking backdoor listings is becoming time critical as a result of the Australian Securities Exchange’s (ASX) new policy of automatically removing suspended listed entities (or ‘shells’) from ASX’s Official List, after three years of continuous suspension of their securities commenced on 1 January 2016.

This policy effectively means that a company seeking admission to the Official List (using such shells) potentially has only a three-year window to implement a backdoor listing or reverse takeover transaction, otherwise it will need to go through the traditional method of listing via an initial public offering (IPO).

Under this policy, it is estimated that the ASX has removed over 20 shells from the Official List since the beginning of 2016, with more shells to be removed if their securities have remained suspended for a continuous period of three or more years.

Backdoor listings

A ‘shell’ is the term given to either a dormant listed entity (normally a small cap company) whose securities have either been suspended for a continuous period of time, or to a listed entity lacking a viable business model and, as a result, its securities are trading significantly lower than their initial issue price.

The ASX has removed over 20 shells from the Official List since the beginning of 2016.

Over the past several years, shells such as these have been found predominantly in the mining sector and, following the resources boom, a significant number of these listed entities have been dormant awaiting a stimulus or a ‘second life’ from unlisted entities seeking to list on the ASX through what is known as a ‘backdoor listing’ (or ‘reverse takeover’).

Backdoor listings generally refer to the process where an unlisted entity with a viable or developing business (albeit often not at such a level as to enable it to easily meet the criteria for listing under the ASX Listing Rules), goes public by using an existing shell rather than going down the traditional path of an IPO. In practice, this typically involves the shell acquiring the shares or assets of the unlisted company in exchange for the shell’s securities and/or cash.

Often unlisted companies choose to undertake a backdoor listing instead of an IPO as they are thought to be easier, faster and less costly. Before making this decision, companies proposing to list through the back door should keep in mind some key considerations set out below.

Key considerations to note before listing through the back door

Shareholder approval

A defining trait of most backdoor listings is that the shell ends up acquiring the unlisted company’s asset or business and morphs into a new commercial entity – usually one with different business activities, company name, board composition and the majority of its shareholder base. As a result, it is almost inevitable that there will be a significant change to the nature and/or scale of the shell’s existing business activities which will need its security holders’ approval before the shell and the unlisted company can enter into the transaction to give effect to the backdoor listing.

ASX requirements

Despite the shell already being listed on the ASX, a key consideration for backdoor listings is that ASX may require the shell to, again, comply with the same admission requirements as for a ‘front door’ listing (i.e. a traditional IPO).

In this case, the incoming company will need to weigh up any other benefits that the dormant shell brings, such as cash reserves, experienced directors or management or as discussed below, the ease in achieving spread. Some of the admission requirements include the following: