Watchdog keeps sharp eye on backdoor moves

Greater scrutiny by corporate regulators of backdoor listings on the ASX is not slowing the flow of new transactions, with six Western Australian companies announcing transformational deals in the past fortnight.

Nationally, 30 backdoor listings were completed last year, a further nine are under way and 25 are in the pipeline, ASX state manager James Rowe told a Perth seminar this week.

About half of the completed transactions were in WA, according to BNiQ research.

This number is expected to grow, as there are dozens of listed exploration companies running low on cash and looking for a new lease of life by acquiring a technology venture.

The Australian Securities and Investments Commission has been tightening its scrutiny of the market, after finding poor quality disclosure in many cases.

In its corporate finance report for the half year to December 2014, ASIC said it reviewed offer documents lodged by 30 companies seeking a backdoor listing, and raised concerns with 22 of them.

Steinepreis Paganin partner Toby Hicks said the latest measure flagged by ASIC was the use of section 30 of the ASIC Act, to compel companies planning a backdoor listing to provide their due diligence files to the regulator.

This followed a major shift last year, when ASIC started to demand the preparation of audited accounts for companies that have been operating as a ‘going concern’.

This has delayed the completion of several transactions currently under way.

Mr Hicks said ASIC’s main concern was primarily around investor disclosure.

“They want retail investors to be able to get a good understanding of the transaction,” he told the seminar.

ASIC told Business News that, in a number of deals, disclosure of the company’s business model or business plans had not been up to scratch.

Poor quality disclosure about the incoming directors was another concern.

“There is also often a lack of disclosure on whether the company will need to raise additional money in the short term, how much might be raised and the effect on any existing shareholders,” an ASIC spokesman said.

The spokesman said shareholders needed to be given sufficient information to make an informed decision about the new venture.

“Generally that means getting an independent expert report on valuations,” he said.

Mr Hicks said the increased regulatory scrutiny marked a maturing of the market.

“It’s probably a good thing if it eliminates surprises,” he said.

Mr Hicks advised businesses planning a backdoor listing to engage early with their advisers and liaise closely with the ASX.

He highlighted the importance of the due diligence review, and said the possibility of handing over due diligence files to ASIC should not change the way companies approached this task.

Mr Rowe suggested market players engage early with the ASX to ensure they don’t have to restructure their planned transaction.

“If it doesn’t fit with our guidelines, you will need to unwind it,” Mr Rowe told the seminar.

Mr Rowe also urged people to be realistic when setting a timetable.

“People say they will seek shareholder approval and relist two weeks later; that’s not going to happen,” he said.

The number of listed companies that are candidates for a backdoor listing deal will drop sharply next year.

The ASX has written to about 70 companies that have been suspended continuously for three years to advise their shares will be removed from the ASX lists from the start of next year.

In limited circumstances, Mr Rowe said, the ASX might agree to a short extension if the company could demonstrate it was in the final stages of implementing a transaction that would lead to the resumption of trading in its shares within a reasonable period, such as via a backdoor listing.

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