What Is a Reverse Takeover - Assignment Example

Reverse Takeover by Student’s Name Course code+name Professor’s name University name City, State Date of submission Reverse Takeover QUESTION 2 A reverse takeover (also referred to as reverse merger, backdoor listings or reverse IPO) is a means of going public by the private companies. This way is typically less costly in terms of procedures involved. A conventional way i.e. the initial public offering (IPO), usually, is more complex and costly. The investment bank is hired by the private companies to do paper work, issue shares to the public, underwrite and assist the authorities in deal reviewing. The bank also advices on the initial pricing that is appropriate and further help in the interest establishment especially in the stock. The customary IPO primarily combines the function for raising capital with the procedure for going public. A reverse takeover separates the two functions. This makes it a strategically attractive option for the private companies’ investors and managers. In a backdoor listing, majority of public company’s (also known as Shell Company) shares are acquired by the private company’s investors. The purchasing entity is then merged with the company. Shell companies are used as vehicles through which the deals transacted by financial institutions and investment banks completed. The process of registration can further be made simpler and less costly by registering small shell companies with SEC before the deal begins. The deal is then consummated when shares are traded between the private company and the public shell. The acquirer finally is transformed to a public company. Companies in Australia, types and their fundamental characteristics, their incorporation and directors’, shareholders’ and officers’ are all under the Corporation act 2001. The Act has set rules governing how: Deregistration and wounding up of the companies should be handled Registration requirements and financial reporting of the companies Meetings held by the company directors Some chapters that are key in the Act deal also with issuing and offering of shares, schemes managed investments regulations and issuing of licenses of financial products and services to the providers, prohibitions on insider trading and setting out of takeovers regime that change transaction and companies listed or other large privately trading companies. Corporation Act 2001, chapter 6 regulates the list of takeovers listed in the Australian Stock Exchange (ASX). ASX rules together with the regulations control the takeover to a very minimal extent. The act relates to voting shares that are listed in the public entity, non-voting shares together with other securities. This might include securities that can be converted, over issued options, unissued securities and other securities. Securities and shares with holders above 50 and which are not listed publicly in incorporated companies of Australia are also regulated by the Act. There exists a set of principles that underpins turnover regulations. This is aimed at protecting security holders ensuring equality of the security holders, fairness and transparency on the control of public company transition. All these principles are listed in section 602 of the 6th chapter of the act. The Act provides that: Reasonable time is required for the order to be considered. Efficiency, competition, knowledge about the market is required for control acquisition. Reasonable time required for proposal consideration. The identity of the bidders should be known to the directors and stakeholders targeted. Enough information should be availed for ease of access to the merits. Stakeholders targeted should be in a position to enjoy equal and reasonable opportunity that flows from the proposal. Australia has various aspects of turnovers. Chapter 6 has various provisions for regulation of the above named principles. The principles further forms a platform essential in prohibiting take over. The principles also sometimes challenge the takeovers panel decisions concerning takeovers. Basic Takeover Prohibition The basic property of the 6th chapter of the corporations act is takeover prohibition generally. These are the contents of section 606 of this chapter. Any person is prohibited by the act in Australia from relevant interest acquisition if only by acquiring, the following happens: There will be an increase in the voting power of any person within the company. The increase value is from below 20% to a value more than 20%. The voting power of any person within the company that is between 90% and 20% would increase not unless the Corporation Act’s section 611 permits the acquisition expressly. QUESTION 4 There exist rules and regulations governing the way a company proceeds with the Initial Public Offering (IPO). This is legal procedure that allows privately held corporation to be become a public entity. When the company goes public, it is listed to trade publicly on the stock exchange market. The IPO procedure is a lengthy that requires both time and money. There are certain se standards that a company must meet for it to be issued an IPO. For the purpose of avoiding IPO and the complex procedures involved in their acquisitions, most private companies opt to follow a more convenient process to acquire the same status as a public entity hence the name “back door listings” Thus, a backdoor listing is the process through which a private company becomes listed as a public entity without necessarily having to go through the Initial Public Offering (IPO). Private Corporation can avail the stock publicly by acquiring a publicly owned company. Companies in the back door listings can either decide to merge or maintain both the original and new in what we refer to as Shell Corporation. Back door listings works in a very simple way. However, few countries have introduced regulations to restrict the entire process. A company that has traded publicly already can be purchased by a privately traded company wishing to go public. This is a much quicker way of becoming a publicly traded entity without necessarily going through the IPO procedural requirements. Corporations making purchase can typically choose on a few of the required procedures on completion of the backdoor listings. The new and original companies are maintained under one shell corporations by some corporations. Some corporations purchase businesses with limited potential to gain publicity and later shut the down a newly formed company. Potential costs and benefits to the private firm The process of a private company becoming public is generally simplified. The use reverse merges usually keeps the capital either lower or constant. Reverse takeovers take few weeks for the legal procedures to complete. This is advantageous to the management since time and energy spent is greatly minimized. Much of the time will be devoted towards company prosperity. Normally, it takes months or even a full year for conventional IPOs to materialize. Traditional IPO procedure is too long. The company undergoing the process is not assured to finish. Much time can be spent by the managers when planning a conventional IPO. However, unfavorable market conditions towards the proposed offer mean wasted efforts for the time spent. If the reverse takeover is pursued, the risk is minimized. A reverse merger is the only mechanism through which a private company can be converted to a legal entity. The capital raising and go-public functions are both combined in a conventional IPO process. This was earlier mentioned in the discussion above. The dependency on the market conditions is minimal for the process that involves reverse merger. Thus, market conditions will have less bearing on the offer since mechanism for conversion is exclusively a function of the reverse merger. Furthermore, the company does not propose on the idea of raising the capital. Undergoing the whole stock turnover process helps in the realization of the benefits that accrue when a private company becomes a public entity. The main difference between an IPO and the reverse merger is that no new capital in the later. The private company does not raise capital as for the case of the IPOs. Equity placement a company that underwent public through reverse merger is by calling for both private and public equity. It is known that going public through reverse merger damages the reputation of the company as it is seen as entering the market through back door. Potential costs and benefits to the Listed Company Public companies enjoy greater liquidity through trading with the private companies. Private companies whose revenue is usually above $100 million are normally attracted to the idea of being a company that trades publicly. There are exit alternatives that are usually convenient. This enables initial investors to gain an option to liquidate their investments. The company enjoys an infusion of additional capital whenever warrants are imposed by the stakeholders. Reverse mergers give the company an option to issue any additional stock via secondary offerings. This is because of the capital markets greater accessibility. A reverse takeover can at times drive price up which is a prime advantage to the public companies. Public companies usually trade at higher multiples than private companies do. Price is driven up by means of liquidity increase since both the investing and public institutions have easy access to the stock of the company. Moreover, backdoor listings provide options that are more strategic in pursuing growth that my include acquisitions and mergers. Public companies can also be able to acquire target companies. This is because they are able to use the company’s stock since they are like stewards that acquire the company. Liquidity of public shares enables the management to retaining their employees by attracting them through stock incentives. Public companies are never completely clean. They at times have liabilities such as pending law suits or seriously damaged financial statements. This is a potential problem of the reverse merge commonly known as non-clean shell. References Read More