Back-door listing, also known as a reverse takeover or RTO, broadly refers to a situation where a listed company sells its major assets or shareholding, leaving behind a listed “shell” into which the new buyer normally injects their own business, as part of the acquisition deal. This enables the buyer to secure listing status without passing the normal application process.
Back-door listings are attractive for a number of reasons; for buyers, they save on time and costs for listing and offer an opportunity to those who would normally otherwise not qualify for a new listing and for sellers, they provide additional funds since such listings often attract a premium.
Although back-door listings are allowed in Hong Kong, the intention was largely because they provided a means for restructuring of distressed listed companies. However there has been a failure to distinguish between rescue and non-rescue situations and the Hong Kong Exchanges and Clearing (“HKEX”) has long objected to back-door listings as they are more likely to be used by buyers to circumvent the listing rules.
Accordingly, as part of its efforts to compete with, and eventually surpass, NASDAQ as the favoured destination for the listing of tech stocks, the HKEX has taken several measures to clean up the market and tighten regulations in Hong Kong including widespread listing reform implemented in April and most recently, by issuing a consultation paper in June 2018 containing proposals for several new rules to crack down on back-door listings and related “shell companies”.
The proposed new rules include prohibiting listed companies from making any major disposals of assets or shareholdings within three years following a change of control and more stringent reviews of potential buyers to ensure that they are duly qualified. There is also a transitional period of 12 months to allow listed issuers to take the necessary corporate actions so that they are in compliance with the new rules once they take effect.
The Securities and Futures Commission, Hong Kong’s regulator for all things related to securities, including the activities of the HKEX, has stated that they support the HKEX proposals which they consider are in line with other market reforms implemented in Hong Kong in recent years.