FIELD FISHER WATERHOUSE
IT might have gone under most people’s radar, but new guidance from the UK Listing Authority (UKLA) will have a serious effect on reverse takeovers. Under the Listing Rules, an issuer’s equity shares are generally suspended on the announcement or leak of a reverse takeover unless or until the UKLA is satisfied that there is sufficient information in the market about the proposed transaction. The thinking is that in the case of a reverse takeover the target business will form the majority of the enlarged group, so the market needs sufficient disclosure about the target business to properly price the issuer’s securities.
Until now the UKLA’s approach has been that where the target business was not subject to a public disclosure regime, the UKLA required the issuer to release fully audited financial information on the target business. So until the listed company could produce fully audited financial data for the target going back three years, the issuer’s securities were suspended.
However, some thought that this approach was too onerous and was discouraging listed companies from considering significant transactions. The UKLA appears to have agreed, and has now issued new guidance on what will constitute sufficient information to avoid a listing suspension. Now, the requirement can be satisfied by publishing an announcement which satisfied four conditions.
Firstly, it must include financial information on the whole business to be acquired, covering a period of three years. This should include profit and loss information, balance sheet information and so on. However, this need not be audited. Secondly, in place of the audit the announcement should include a statement that the issuer’s directors consider that the announcement contains sufficient information about the business to be acquired to provide a properly informed basis for assessing its financial position. The announcement should not include any disclosure which attempts to qualify or caveat the statement.
Thirdly, the announcement should also set out the key differences between the issuer’s and target’s accounting policies, relevant non-financial operating or performance measures and a full commentary on current trading. And fourthly, there should also be a public commitment to keep the market informed without delay of any developments concerning the target business that would be required to be released were the enlarged group listed.
Sponsors must provide a private comfort letter confirming that the announcement contains sufficient information about the business. The UKLA retains the right to override the letter and to suspend the issuer’s securities if it subsequently appears that the market could not continue trading on a properly informed basis. The UKLA could take such a view where the target financial information is presented using accounting policies that are significantly different to those of the issuer.
The UKLA will apply this new approach to situations where an issuer with substantive operations wishes to acquire a target that fits within its current business strategy. The new approach will not apply to acquisitions by a cash shell or where the acquisition would fundamentally change the nature or strategic direction of the issuer. In these cases, the issuer’s equity shares will be suspended until a prospectus had been published on the new group.
The UKLA previously allowed issuers to avoid suspension where a new holding company was used to effect a transaction that would have been treated as a reverse takeover were it structured differently.
The UKLA will no longer allow the imposition of a holding company to take an acquisition outside the reverse takeover regime. Where a new holding company is used by a premium listed issuer to effect the acquisition of a larger unlisted business, the issuer’s equity shares will be suspended until the publication of a new applicant prospectus or the minimum information discussed above. This policy change is a sensible, pragmatic move that should allow companies to pursue major transactions with less risk of suspension and ease takeovers.