Reverse Takeover – An attractive shortcut?

Reverse takeover (“RTO”) is a type of merger that allows a private company to obtain a listing status without having to go through the traditional route of filing a prospectus and undertaking an initial public offering (“IPO”). RTO is also commonly known as “back-door listing”. The private company’s shareholders use their shares in the private company to exchange for shares in a listed company (the “Listco”). The Listco is usually one where its major shareholders have, for whatever reasons, the intention of privatising the existing business of the Listco.

A RTO circular will need to be drafted and provided to the existing shareholders of the Listco to convene a general meeting to, inter alia, seek shareholders’ approval for the RTO which involves a change of business and issuance of new shares, a whitewash resolution to waive the mandatory takeover obligation imposed by The Singapore Code on Take-overs and Mergers, change of name of the company, change of directors and disposal of the existing business of the Listco.
Upon completion of the RTO, the Listco will indirectly own the assets and liabilities of the private company and the shareholders of the private company will gain majority control of the Listco. Concurrently, the management and owners of the private company will replace the management of the Listco.

The RTO mechanism is often considered an attractive way of listing as it is perceived to be more efficient, less cumbersome and costs less than an IPO. In a RTO, the appointment of an underwriter is not required and thus results in the saving of underwriting fees.

Conventional IPOs are also more risky for companies as the deal depends on market sentiments. The underwriter, which is not required in a RTO, may choose to withdraw or postpone the IPO when market sentiments are poor. In most cases, a RTO is not dependent on market sentiments and is less likely to be affected by an unstable market.

RTO also allows a private company to become listed with less shareholding dilution than through an IPO as the company can go public without raising additional funds. Consequently, this would result in better control by the new owner over the listed shell. However, since the company does not acquire any additional funds through the RTO process, it would need to undertake separate fund raising, if deemed necessary. Another drawback is that the RTO involves negotiation between the listed company and the private company which may be protracted if the parties find it difficult to reach an agreement.

Going public has many benefits, such as, increased valuation, having the option to use listed shares as consideration to acquire other companies and assets, the ability to incentivise employees through the adoption of an employee share option scheme, liquidity of shares, prestige associated with listing and the ease of raising capital. RTO is thus increasingly garnering attention as an easier and more efficient shortcut to gain entry into the equity market.

By Ms Wong Joy Ling
Foreign Counsel,
Legal Associate, Corporate Practice
Ph: (65) 6322-2234
Fax: (65) 6534-0833
E-mail: wongjoyling@loopartners.com.sg

and Ms Eileen Ng
Legal Associate (Corporate Practice)
Ph: (65) 6322-2283
Fax: (65) 6534-0833
E-mail: eileenng@loopartners.com.sg

Loo & Partners
88 Amoy Street, Level Three, Singapore 069907