LR 5.6 Reverse takeovers

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.

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).

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

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

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.

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.

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

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.

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

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.

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.

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.

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).

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).

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.