When evaluating possible exit options, an alternative to the typical IPO or sale transaction is a reverse takeover transaction (often referred to as an “RTO”). An RTO is a type of sale transaction where the shareholders of a company, often an unlisted entity, sell the company to a publicly listed issuer (“Pubco”) in exchange for shares of Pubco, which results in an effective change of control of Pubco. An RTO allows shareholders of an unlisted company to effect the sale of 100% of the business while maintaining a continuing indirect interest in the business and achieving liquidity in their investment.
How does a reverse takeover work in practice?
Various transaction structures can be used to accomplish an RTO, such as a plan of arrangement, an asset sale, or a merger or amalgamation. RTOs can be completed pursuant to the policies of both the Toronto Stock Exchange (the “TSX”) and the TSX Venture Exchange (the “TSXV”). The TSX will generally treat a transaction as an RTO if the transaction results in the existing shareholders of Pubco owning less than 50% of the outstanding shares or voting power of Pubco after completion of the transaction.
An RTO will be treated by the TSX or TSXV as a new listing of the acquired business, which will require a new listing application. The TSX and TSXV will also require that Pubco obtain shareholder approval. An important consideration for the shareholders of the acquired business, especially if liquidity is their primary objective, is that the TSX and the TSXV may impose certain escrow restrictions on the shares of Pubco held by certain shareholders, such as officers, directors and insiders, which will impact the liquidity of their holdings of Pubco shares for an initial period.
While any listed issuer can complete an RTO transaction, the TSX also has a special listing category for “Special Purpose Acquisition Corporations” (often referred to as “SPACs”), which allows the founders of listed shell companies to raise proceeds for the purpose of completing an acquisition of an operating business within 36 months of listing. SPACs that undertake an RTO will be subject to additional SPAC-specific requirements.
What makes a reverse takeover a worthwhile alternative exit strategy?
RTOs are a worthwhile exit alternative for business owners to consider, especially during a difficult time for IPOs in the capital markets. Although RTOs are often thought to provide business owners with a cheaper and quicker alternative to an IPO, this isn’t necessarily the case. While no prospectus is required for an RTO, the information required to be included in the meeting circular for Pubco is very similar. One key advantage of an RTO is the absence of securities commission review, a process that is often intense and time consuming in an IPO.