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LR 5.6 Reverse takeovers

Application

LR 5.6.1RRP

Categories of reverse takeover to which this section does not apply

LR 5.6.2RRP

LR 5.6 does not apply where an issuer acquires the shares or certificates representing equity securities of a target with the same category of listing as the issuer.

Class 1 requirements

LR 5.6.3RRP

Notwithstanding the effect of LR 5.6.2 R, an issuer with a premium listing must in relation to a reverse takeover comply with the requirements of LR 10.5 (Class 1 requirements) for that transaction.

Definitions

LR 5.6.4RRP

A reverse takeover is a transaction, whether effected by way of a direct acquisition by the issuer or a subsidiary, an acquisition by a new holding company of the issuer or otherwise, of a business, a company or assets:

  1. (1)

    where any percentage ratio is 100% or more; or

  2. (2)

    which in substance results in a fundamental change in the business or in a change in board or voting control of the issuer.

When calculating the percentage ratio, the issuer must5 apply the class tests and LR 10.2.10R (Aggregating transactions)5.

LR 5.6.5GRP

For the purpose of LR 5.6.4R (2), the FCA considers that the following factors are indicators of a fundamental change:

  1. (1)

    the extent to which the transaction will change the strategic direction or nature of its business; or

  2. (2)

    whether its business will be part of a different industry sector following the completion of the transaction; or

  3. (3)

    whether its business will deal with fundamentally different suppliers and end users.

LR 5.6.5ARRP

6A shell company is an issuer whose:

  1. (1)

    assets consist solely or predominantly of cash or short-dated securities; or

  2. (2)

    predominant purpose or objective is to undertake an acquisition or merger, or a series of acquisitions or mergers.

Requirement for a suspension

LR 5.6.6RRP

A shell company6, or in the case of a shell company6with a premium listing, its sponsor, must contact the FCA as early as possible:

  1. (1)

    before announcing a reverse takeover which has been agreed or is in contemplation, to discuss whether a suspension of listing is appropriate; or

  2. (2)

    where details of the reverse takeover have leaked, to request a suspension.

LR 5.6.7GRP

Examples of where the FCA will consider that a reverse takeover is in contemplation include situations where:

  1. (1)

    the shell company6 has approached the target's board;

  2. (2)

    the shell company6 has entered into an exclusivity period with a target; or

  3. (3)

    the shell company6 has been given access to begin due diligence work (whether or not on a limited basis).

LR 5.6.8GRP

Generally, when a reverse takeover between a shell company and a target6 is announced or leaked, there will be insufficient publicly available information about the proposed transaction and the shell company6 will be unable to assess accurately its financial position and inform the market accordingly. In this case, the FCA will often consider that suspension will be appropriate, as set out in LR 5.1.2G (3) and (4). However, the FCA may agree with the shell company that a suspension is not required8 if the FCA is satisfied that:8

6
  1. (1)

    there is sufficient publicly available information about the proposed transaction; or8

  2. (2)

    where the shell company is an issuer which falls within LR 5.6.5AR(2), the shell company has sufficient measures in place to protect investors and so that the smooth operation of the market is not temporarily jeopardised. 8

LR 5.6.9GRP

LR 5.6.10G to LR 5.6.18FR8 set out circumstances in which the FCA will generally be satisfied that a suspension is not required.

Reverse takeover by a shell company: target admitted to a regulated market

LR 5.6.10GRP

The FCA will generally be satisfied that there is sufficient information in the market about the propos ed transaction if:

  1. (1)

    the target has shares or certificates representing equity securities admitted to a regulated market; and

  2. (2)

    the shell company6 makes an announcement stating that the target has complied with the disclosure requirements applicable on that regulated market and providing details of where information disclosed pursuant to those requirements can be obtained.

LR 5.6.11RRP

An announcement made for the purpose of LR 5.6.10G (2) must be published by means of an RIS.

Reverse takeover by a shell company: target subject to the disclosure regime of another market

LR 5.6.12GRP

The FCA will generally be satisfied that there is sufficient publicly available information in the market about the proposed transaction if the target has securities admitted to an investment exchange or trading platform that is not a regulated market and the shell company6:

  1. (1)

    confirms, in a form acceptable to the FCA, that the disclosure requirements in relation to financial information and inside information of the investment exchange or trading platform on which the target's securities are admitted are not materially different from the disclosure requirements4; and

  2. (2)

    makes an announcement to the effect that:

    1. (a)

      the target has complied with the disclosure requirements applicable on the investment exchange or trading platform to which its securities are admitted and provides details of where information disclosed pursuant to those requirements can be obtained; and

    2. (b)

      there are no material differences between those disclosure requirements and the disclosure requirements under DTR.

LR 5.6.13RRP

Where a shell company6 has a premium listing, a written confirmation provided for the purpose of LR 5.6.12G (1) must be given by the shell company's6 sponsor.

LR 5.6.14RRP

An announcement made for the purpose of LR 5.6.12G (2) must be published by means of an RIS.

Reverse takeover by a shell company: target not subject to a public disclosure regime

LR 5.6.15GRP

Where the target in a reverse takeover by a shell company6 is not subject to a public disclosure regime, or if the target has securities admitted on an investment exchange or trading platform that is not a regulated market but the shell company6 is not able to give the confirmation and make the announcement contemplated by LR 5.6.12 G, the FCA will generally be satisfied that there is sufficient publicly available information in the market about the proposed transaction such that a suspension is not required where the shell company6 makes an announcement containing:

  1. (1)

    financial information on the target covering the last three years. Generally, the FCA would consider the following information to be sufficient:

    1. (a)

      profit and loss information to at least operating profit level;

    2. (b)

      balance sheet information, highlighting at least net assets and liabilities;

    3. (c)

      relevant cash flow information; and

    4. (d)

      a description of the key differences between the shell company's6 accounting policies and the policies used to present the financial information on the target;

  2. (2)

    a description of the target to include key non-financial operating or performance measures appropriate to the target's business operations and the information as required under Annex 1 Section 10 (Trend information) of the PR Regulation (see PRR Appendix 2)7 for the target;

  3. (3)

    a declaration that the directors of the shell company6 consider that the announcement contains sufficient information about the business to be acquired to provide a properly informed basis for assessing its financial position; and

  4. (4)

    a declaration2 confirming that the shell company6 has made the necessary arrangements with the target vendors to enable it to keep the market informed without delay of any developments concerning the target that would be required to be released were the target part of the shell company6.

    2
LR 5.6.16RRP

An announcement made for the purpose of LR 5.6.15 G must be published by means of an RIS.

LR 5.6.17RRP

Where a shell company6 has a premium listing, a sponsor must provide written confirmation to the FCA that in its opinion, it is reasonable for the shell company6 to provide the declarations described in LR 5.6.15G (3) and (4).

LR 5.6.18RRP

Where the FCA has agreed that a suspension is not necessary as a result of an announcement made for the purpose of LR 5.6.15 G the shell company6 must comply with the obligation under article 17(1) of the Market Abuse Regulation3 on the basis that the target already forms part of the enlarged group.

Reverse takeover by a shell company which falls within LR 5.6.5AR(2): other circumstances where a suspension is not required

LR 5.6.18AG

8The FCA will generally be satisfied that a shell company which falls within LR 5.6.5AR(2) has sufficient measures in place to protect investors and so that the smooth operation of the market is not temporarily jeopardised such that a suspension is not required where the following conditions are met:

  1. (1)

    at the date of admission the aggregate gross cash proceeds received by the shell company in consideration for the listed shares issued by it to public shareholders was at least £100 million;

  2. (2)

    the shell company has adequate binding arrangements in place with an independent third party to ensure that the aggregate gross cash proceeds received in consideration for any listed shares that it has issued, or issues, to public shareholders are protected from being used for any purpose other than:

    1. (a)

      to provide the consideration for a reverse takeover which has been approved by:

      1. (i)

        its board in accordance with (4); and

      2. (ii)

        its public shareholders in accordance with (5);

    2. (b)

      to redeem or purchase listed shares held by public shareholders following the exercise of the right to be redeemed or purchased referred to in (7);

    3. (c)

      to be distributed to public shareholders if that a reverse takeover has not been completed by the date specified in (3); or

    4. (d)

      to return capital to public shareholders in the event of a winding up of the company,

    provided that a specified amount or proportion of such proceeds may be excluded from the amount which is protected, and may be retained to be used by the shell company to fund its operations, where that amount or proportion has been disclosed in the prospectus published in relation to the admission to listing of the shell company’s shares;

  3. (3)

    the shell company’s constitution:

    1. (a)

      provides that if the shell company has not completed a reverse takeover on or before the date which is 24 months from the date of admission it will:

      1. (i)

        cease operations on the date which is 24 months from the date of admission; and

      2. (ii)

        distribute the amount protected and referred to in (2) to public shareholders as soon as possible after the date specified in (i);

    2. (b)

      may provide that the period of 24 months referred to in (a) can be extended for a further period of up to 12 months provided that any such extension is approved by the public shareholders of the shell company before the end of the period referred to in (a);

    3. (c)

      may provide that the period of 24 months referred to in (a), or the extended period referred to in (b), can be extended for a further period of up to 6 months where, before the end of the period referred to in (a) or (b), as applicable:

      1. (i)

        the approval of shareholders for a reverse takeover has been obtained but the reverse takeover has not completed;

      2. (ii)

        a general meeting to obtain the approval of shareholders for a reverse takeover has been convened;

      3. (iii)

        the shell company has made an announcement that:

        1. (A)

          a general meeting to obtain the approval of shareholders for a reverse takeover will be convened for a date which is specified in the announcement; and

        2. (B)

          a notice to convene the general meeting referred to in (A) will be sent to shareholders within a specified time following the announcement; or

      4. (iv)

        an agreement for a reverse takeover has been entered into but the reverse takeover has not been completed and the shell company has not made an announcement in accordance with (iii),

      provided that any such extension is notified to a RIS before the end of the period referred to in (a) or (b), as applicable.

  4. (4)

    the shell company’s constitution:

    1. (a)

      provides that the shell company must obtain the approval of its board for a reverse takeover before it is entered into; and

    2. (b)

      ensures that the following do not take part in the board’s consideration of the reverse takeover and do not vote on the relevant board resolution:

      1. (i)

        any director who is, or an associate of whom is, a director of the target or of a subsidiary undertaking of the target; and

      2. (ii)

        any director who has a conflict of interest in relation to the target or a subsidiary undertaking of the target;

  5. (5)

    the shell company’s constitution:

    1. (a)

      provides that the shell company must obtain the approval of its shareholders for a reverse takeover either:

      1. (i)

        before the transaction is entered into; or

      2. (ii)

        if the transaction is expressed to be conditional on that approval, before it is completed; and

    2. (b)

      ensures that any founding shareholder, sponsor or director does not vote on the relevant resolution;

  6. (6)

    the shell company’s constitution provides that where any director has a conflict of interest in relation to the target or a subsidiary undertaking of the target, the shell company must publish, in sufficient time before shareholder approval for a reverse takeover is sought, a statement by the board that:

    1. (a)

      the proposed transaction is fair and reasonable as far as the public shareholders of the shell company are concerned; and

    2. (b)

      the directors have been so advised by an appropriately qualified and independent adviser;

  7. (7)

    the holders of the listed shares have the right to require the shell company to redeem or otherwise purchase their shares for a pre-determined amount, which is exercisable:

    1. (a)

      at the discretion of the holder prior to completion of a reverse takeover; and

    2. (b)

      whether or not the holder voted in favour of the reverse takeover on any shareholder resolution to approve the transaction;

  8. (8)

    the shell company has disclosed the matters set out in (2) to (7) in the prospectus published in relation to the admission to listing of the shell company’s shares.

LR 5.6.18BR

8In LR 5.6.18AG:

  1. (1)

    founding shareholder” means a shareholder who founded or established a shell company;

  2. (2)

    public shareholder” means a shareholder who is not a founding shareholder, a sponsor or a director;

  3. (3)

    sponsor” means a person who provides any of the following to a shell company:

    1. (a)

      capital or other finance to support the operating costs of the shell company;

    2. (b)

      financial, advisory, consultancy or legal services;

    3. (c)

      facilities or support services; or

    4. (d)

      any other material contribution to the establishment and ongoing operation of the shell company.

LR 5.6.18CR
  1. (1)

    8In order for the FCA to be satisfied for the purposes of LR 5.6.8G(2), the shell company must provide a written confirmation from the board to the FCA that:

    1. (a)

      the conditions set out in LR 5.6.18AG have been met; and

    2. (b)

      the conditions set out in LR 5.6.18AG(2) to (7) will continue to be met until a reverse takeover is completed.

  2. (2)

    The shell company must provide to the FCA evidence of the basis upon which it considers that it meets the conditions set out in LR 5.6.18AG, if requested to do so.

LR 5.6.18DR
  1. (1)

    8Where the FCA has agreed that a suspension is not necessary as a result of the shell company meeting the conditions set out in LR 5.6.18AG and having provided the written confirmation set out in LR 5.6.18CR, the shell company must make an announcement of the reverse takeover.

  2. (2)

    The announcement must include:

    1. (a)

      a description of the business carried on by the target;

    2. (b)

      hyperlinks to all relevant publicly available information on the target;

    3. (c)

      all material terms of the proposed transaction, including the expected dilution effect on public shareholders from securities held by directors, sponsors or founding shareholders, or from new securities issued or expected to be issued as part of the transaction;

    4. (d)

      the proposed timetable for the transaction;

    5. (e)

      an indication of how the target has been, or will be assessed and valued by the shell company, with reference to any selection and evaluation process for prospective target companies set out in the prospectus published in relation to the admission to listing of the shell company’s shares; and

    6. (f)

      any other material details and information which the shell company is aware of, or ought reasonably to be aware of, about the target or the proposed transaction that an investor in the shell company needs to make a properly informed decision.

  3. (3)

    If any of the information set out in (2) is not known when the announcement required by (1) is made:

    1. (a)

      the announcement required by (1) must also identify the information set out in (2) which has not been included in that announcement; and

    2. (b)

      the shell company must make an announcement of such information as soon as it is known or the shell company becomes, or ought reasonably have become, aware of it and in any event in sufficient time before shareholder approval for the reverse takeover is sought.

LR 5.6.18ER

8An announcement made for the purposes of LR 5.6.18DR must be published by means of an RIS.

LR 5.6.18FR

8The shell company must contact the FCA as soon as possible if at any time after the written confirmation referred to in LR 5.6.18CR has been provided to the FCA any of the conditions set out in LR 5.6.18AG(2) to (7) are no longer met to request a suspension of listing.

Cancellation of listing

LR 5.6.19GRP

The FCA will generally seek to cancel the listing of an issuer's equity shares or certificates representing equity securities when the issuer completes a reverse takeover.

LR 5.6.20GRP

LR 5.6.23 G to LR 5.6.29 G set out circumstances in which the FCA will generally be satisfied that a cancellation is not required.

LR 5.6.21RRP

Where the issuer's listing is cancelled following completion of a reverse takeover, the issuer must re-apply for the listing of the shares or certificates representing equity securities and satisfy the relevant requirements for listing, except that for an issuer with a premium listing, LR 6.2.1R(3) and LR 6.2.4R(2)6 will not apply in relation to the issuer's accounts.

LR 5.6.22GRP

Notwithstanding LR 5.6.21 R, financial information provided in relation to the target will need to satisfy LR 6.2.1R(3) and LR 6.2.4R(2)6.

Acquisitions of targets from different listing categories: issuer maintaining its listing category

LR 5.6.23GRP

Where an issuer acquires the shares or certificates representing equity securities of a target with a different listing category from its own and the issuer wishes to maintain its existing listing category, the FCA will generally be satisfied that a cancellation is not required on completion of a reverse takeover if:

  1. (1)

    the issuer will continue to be eligible for its existing listing category following completion of the transaction;

  2. (2)

    the issuer provides an eligibility letter setting out how the issuer as enlarged by the acquisition satisfies each listing rule requirement that is relevant to it being eligible for its existing listing category; and

  3. (3)

    the issuer makes an announcement or publishes a circular explaining:

    1. (a)

      the background and reasons for the acquisition;

    2. (b)

      any changes to the acquiring issuer's business that have been made or are proposed to be made in connection with the acquisition;

    3. (c)

      the effect of the transaction on the acquiring issuer's obligations under the listing rules;

    4. (d)

      (where appropriate) how the acquiring issuer will continue to meet the eligibility requirements referred to in LR 5.6.21 R; and

    5. (e)

      any other matter that the FCA may reasonably require.

LR 5.6.24RRP

An announcement or circular published for the purpose of LR 5.6.23 G must be published by means of an RIS.

LR 5.6.25RRP

An eligibility letter prepared for the purposes of LR 5.6.23 G must be provided to the FCA not less than 20 business days prior to the announcement of the transaction referred to in LR 5.6.24 R.

LR 5.6.26RRP

Where an issuer has a premium listing, the eligibility letter provided for the purposes of LR 5.6.23 G must be provided by a sponsor.

Acquisitions of targets from different listing categories: issuer changing listing category

LR 5.6.27GRP

The FCA will generally be satisfied that a cancellation is not required on completion of a reverse takeover if the target is listed with a different listing category from that of the issuer and the issuer wishes to transfer its listing to a different listing category in conjunction with the acquisition and the issuer as enlarged by the relevant acquisition complies with the relevant requirements of LR 5.4A to transfer to a different listing category.

LR 5.6.28GRP

An issuer wishing to transfer a listing of its equity shares from a premium listing (closed-ended investment fund)9 to a standard listing (shares) should note LR 5.4A.2 G which sets out limitations resulting from the application of LR 14.1.1R(1)9(application of the listing rules to a company with or applying for a standard listing of shares).

LR 5.6.28AG

9An issuer wishing to transfer a listing of its equity shares from a standard listing (open-ended investment company) to a standard listing (shares) should note LR 5.4A.2AG which sets out limitations resulting from the application of LR 14.1.1R(1A) (application of the listing rules to a company with or applying for a standard listing of shares).

LR 5.6.29GRP

Where an issuer is applying LR 5.4A in order to avoid a cancellation as contemplated by LR 5.6.27 G, the FCA will normally waive the requirement for shareholder approval under LR 5.4A.4R (2)(c) where the issuer is obtaining separate shareholder approval for the acquisition.