PSE tightens rules in reverse takeovers

MANILA, Philippines — The Philippine Stock Exchange (PSE) is seeking to tighten regulations over reverse takeovers or transactions among companies that lead to the backdoor listing of unlisted businesses.

According to the PSE, there is a need to tighten rules as some companies do not go through the initial listing process and are not subjected to the same level of scrutiny applied to companies conducting an initial public offering.

The PSE plans to introduce new requirements that will ensure that minority stockholders and potential investors are fully and timely apprised of the backdoor listing, and that the public is given an opportunity to participate in the equity ownership of said companies.

Transactions considered backdoor listing are those that will result in change in control or de facto control of the listed company, or a change in the composition of the board of directors of the listed company, or those that would result in substantial change in the business of the listed company.

Under the current backdoor listing rules, it is considered backdoor if a listed company acquires, merges or combines with an unlisted company, or a listed company is acquired by, merged or combined with an unlisted company and that such acquisition, merger or combination results in a substantial change in the business, membership of the board of directors or voting structure of the listed company.

Under the proposed new rules, “the transaction may be deemed a backdoor listing if the acquisition of assets takes place within 24 months of such unlisted company, person or group of persons gaining control or acquiring a seat in the board of the listed company, which was then not regarded as backdoor listing.”

According to the PSE, a change in control takes place when the acquirer acquires more than 50 percent of the voting power of the listed company, while de facto control is acquired if the acquiring company becomes the single largest substantial shareholder of the listed company after the transaction leading to the backdoor listing.

Specific metrics would be used to assess control. These include revenue test wherein the revenues attributable to the new business or assets acquired from or infused by the acquirer are equivalent to more than 50 percent of the revenues of the listed company based on the audited consolidated financial statements of the listed company as of the end of the fiscal year preceding the backdoor listing.

Another is the assets test. There is control if the value of the new business or assets acquired is more than 50 percent of the total assets of the listed company, based on the audited consolidated financial statements of the listed company as of the end of the fiscal year preceding the backdoor listing or the latest available interim financial statements.

The proposed amendments were benchmarked against the rules of Bursa Malaysia, Stock Exchange of Thailand, Singapore Exchange and Stock Exchange of Hong Kong, the PSE said.

As part of the proposed amendments, a backdoor-listed company shall conduct a public offering of at least 10 percent of its issued and outstanding shares within one year from closing or completion of the transaction giving rise to backdoor listing.

However, a stock rights offering shall not be deemed a public offering for purposes of this rule.

“Prior to the conduct of the public offering, the listed company shall not conduct any private capital-raising activity unless the same is necessary to comply with the 20 percent minimum public ownership requirement,” the PSE said.