UK Listing Authority’s approach to reverse takeovers

Following the UK Listing Authority’s (“UKLA”) publication of revised guidelines on reverse takeovers under the Listing Rules (“LR”) on 30 July 2010, reverse takeovers should become quicker and easier to execute.

Under LR 5.1.1(R)(1), the Financial Services Authority (the “FSA”) may suspend the listing of any securities if the smooth operation of the market is, or may be, temporarily jeopardised or it is necessary to protect investors. In the case of a reverse takeover, the FSA will generally require a suspension of the issuer's shares unless it is satisfied that there is enough available information in relation to the transaction and the target's business. In reaching its decision, the FSA would consider the quality of information available on the target.

Previously, where the target business was not listed, the issuer effecting a reverse takeover was allowed to fill the information gap and avoid a suspension by providing detailed disclosure on the target including fully audited information covering a period of three years.

The UKLA has now relaxed its requirement that the financial information needs to be audited in response to concerns that this imposed an unnecessarily high standard for disclosure and could result in long periods of suspension while the necessary information was compiled.

Minimum level of disclosure

The key minimum level of information now required is as follows:

• Financial information on the whole business to be acquired, covering a period of three years to include:
  a) profit and loss information to at least operating profit level;
  b) balance sheet information highlighting at least net assets; and
  c) cash flow information.
• A statement within the announcement stating that “the Directors of the issuer consider that the announcement contains sufficient information about the business to be acquired to provide a properly informed basis for assessing its financial position”;
• A private comfort letter from the sponsor confirming that in its opinion the announcement contains sufficient information on the target to provide a properly informed basis for assessing its financial position;
• The key differences between the issuer’s current accounting policies and the target’s; and
• Commentary on current trading since the most recent financial information.

Ban on imposition of a holding company to avoid disclosure

The UKLA will also no longer allow issuers to circumvent the rules by creating a new holding company which acquires both companies, or “topco” structure as the Prudential did in its failed bid for AIA.

Forward Thinking

The revised guidelines will benefit reverse takeovers and should facilitate their earlier announcement as there will be less work involved in preparing audited financial information on the target business. In addition, shareholders should welcome the changes as they obviate the need to suspend an issuer’s shares pending publication of the relevant information.

Lawyers Fade Solanke-Mitterer