back door listings 2013

Brent Van StadenPartner, CBP Lawyers

Back-door listing?

What is a back-door listing?

Listing by alternative means

Invariably involves reverse takeover

Reverse vs. Conventional Takeover

Conventional takeover:

A takes over B and A obtains control of B

Reverse takeover:

A "takes over" B, but B obtains control of A as a result

Finding Shells

Where are they?

Law firms

Insolvency practitioners

Brokers

Corporate advisors

Issues to consider if proposing an RTO

Legal risks and alternative mechanisms

Risk vs. reward - how much to pay for vehicle

Premium for shell over net assets

Relative valuations

Commercial - why do it?

Financial - how will it be funded?

Future control and governance - what do vendors, legacy shareholders and new

investors get?

How to incentivise shell controllers - performance shares/rights and milestones

Liquidity of the stock after completion

Why do it?

Sentiment

Speed

Spread

Supportive institutional shareholders

Legal Issues - Broad Categories

Managing risk and selecting transaction mechanism:

Due Diligence on shell

Due Diligence on vendor entity

ASX Listing Rules

Corporations Act - Disclosure and Control

Due Diligence - Shell

What is legal status of shell?

Is the shell solvent?

Is the shell trading?

Consider its capital structure, including options/notes

Consider clean out of creditors and related party loans

Does shell have other existing liabilities?

What is the risk of contingent liability in the shell?

Due Diligence - Vendor Entity

More than 50 shareholders?

Director appointments valid and are they authorised to act?

Share issues valid?

Actual and contingent liabilities

Will change of control affect material contracts?

Tax liability (esp. duty)

Scrip for scrip rollover relief

Technical diligence on assets

Asset due diligence - Tenements - expenditure commitments, annual filings, native title,

land access/compensation, relinquishment, overlapping tenure

ASX Listing Rules

Important ASX Listing Rules for back-door listings:

11.1.1, 11.1.2 and 11.1.3 - changes of scale/activities/re-compliance

7.1 (and 7.1A) - share issues

9 and Appendix 9B - share escrow

12.1, 12.2 and 12.3 - appropriate operations, structure and spread

10.1, 10.2, 10.7, 10.8, 10.10 and 10.11 - "persons of influence', substantial shareholders

and related parties

14.11 - voting exclusions

1 and 2 - Admission and Quotation

Guidance Notes - 1 (Listing), 8 (Disclosure) , 11 (Escrow), 12 (Changes of Activities)

Key Listing Rule Issues

Listing Rule Shareholder approvals

– Change of scale and/or activities

– Issues of shares - shareholder approval

– Related parties AND substantial shareholders - independent experts' reports

o Classified assets

o Substantial assets

o Substantial shareholders

Re-compliance with Chapters 1 and 2

Announcements/trading halts/suspension

Vendor (and other) escrow - classified assets

Voting exclusions - ASX waiver for existing shareholders to vote on LR7.1

Shareholder approval for directors to participate in capital raising (LR 10.11)

Classified Assets

Listing Rule 1.1 Condition 10 -

– In 2 years before application for listing, any Classified Asset must have been

acquired for scrip (Restricted Securities)

– Scrip will be escrowed

– Cash not allowed, unless reimbursement for expenses

Listing Rule 11 - Changes of scale/activities

Change of Activities of main undertaking and change of Scale

Activities relatively simple?

Scale - ASX rules of thumb for notification

Change of Activities

ASX regards as change of activity:

– entity whose main business activity is exploring for minerals changing its main

business activity to exploring for oil and gas (or vice versa)

ASX does not regard as change of activities

– mining exploration entity successful becoming a mining producing entity;

– mining exploration entity whose main business activity is exploring for one type of

mineral on particular tenements, deciding to explore for a different type of mineral on

the same tenements (its main undertaking is, and remains, exploring for minerals on

those tenements);

– New tenements?

Change of Scale - Triggers for Notification - 25% threshold

an entity is proposing to:

– acquire a business - likely to result in an increase of 25% or more in; or

– dispose of or abandon an existing business, if the business in question accounts for

25% or more of,

any of the following measures:

– consolidated total assets;

– consolidated total equity interests;

– consolidated annual revenue or, in the case of a mining exploration entity or other

entity that is not earning material revenue from operations, consolidated annual

expenditure; or

– consolidated annual profit before tax and extraordinary items.

Shareholder approval needed for Change of Scale

When:

Acquiring a business that will result in a major change to the nature of main undertaking; or

Acquiring a business soon after admission and the transaction is not consistent with the

business objectives of the entity stated in the prospectus; or

Previously disposed of or abandoned its main undertaking and proposing to acquire a

business that will become its new main undertaking (classic shell).

Practical Approach to gauging ASX's view of transaction

Always consult

Consult or seek in principle advice before committing (preferred)

Commit, announce and then apply for ASX determination

Listing Rule 11 - Re-Compliance

Re-Compliance is the big bug-bear in the current climate!

Additional cost of listing application and prospectus

Difficulty of re-quoting at 20 cents

Additional time and cost

When ASX will require re-compliance

Re-Compliance will be required:

Transaction which, in ASX’s opinion, is a back door listing of another undertaking (whether

or not change of nature of activities)

Acquiring a business soon after its admission to the official list and the transaction is not

consistent with the business objectives of the entity stated in its prospectus

When ASX will require re-compliance - Cont.

Re-Compliance may not be required where the shell:

Is acquiring a business resulting in major change to the nature of main undertaking; or

Previously disposed of or abandoned its main undertaking and is proposing to acquire a

business that will become its new main undertaking -

AND

The entity unequivocally meets, and after the transaction will continue to meet, Listing

Rules:

– 12.1 - sufficient operations

– 12.2 - adequate financial resources

– 12.4 - sufficient spread and orderly and liquid market; AND

Security holders have received sufficient information about the proposed change - trading

occurring on reasonably informed basis.

ASX indicia of a back-door listing

Acquiring a business or merging or amalgamating with a non-ASX listed entity; and

Increase of 100% or more in any of the following measures for the listed entity:

– consolidated total assets;

– consolidated total equity interests;

– consolidated annual expenditure;

– total securities on issue

Not definitive

Not a Back-Door Listing?

Successful strategies to avoid re-compliance:

Series of acquisitions over more than 24 months

Series of acquisitions over a shorter time, each being conditional and uncertain to proceed

at the outset

Not a back-door listing, but a complimentary or bolt-on acquisition and intent to continue

existing business

Utilise ASX guidance concessions eg cashed up "shell"

Re-Compliance Steps (LR 11.1.3)

Shareholder approval under LR11.1.2 and for share issues

Possible share consolidation to get to 20 cents

Issuing a prospectus (unless a compliance listing) - full S710 disclosure

Meeting ASX’s minimum spread requirement

Meeting the profits test or assets test;

Escrow of some existing and new securities

Options must be exercisable for at least 20 cents in cash

Directors of good fame and character

Securities (except options) issued or sold for at least 20 cents in cash

Vendor escrow

Back Doors and Escrow

Where re-compliance not required by ASX -

- Related and unrelated vendors of classified assets will be escrowed

Where re-compliance is required by ASX -

- Does listing rule 9.1.3 apply to exclude escrow (generally, won't apply to exploration

entities)

- Apply 9B as if front door listing - catches "seed" investors

How to do it - Basic structures

Broad concepts

Dictated by Corporations Act and ASIC Guidance

Shareholder approval by shell to buy shares of vendor entity

Shell makes formal takeover bid for vendor entity

Scheme of Arrangement (Issue of shares to vendor shareholders).

Advantages and disadvantages of alternative structures

Shareholder approval under S611 item 7 (outside takeover bid) is easiest, even if an IER

is needed

A takeover bid pursuant to Chapter 6 of the Corporations Act is simpler than a scheme

A scheme of arrangement is most complicated, but is useful if there are cross border

issues or significant corporate restructuring is needed (eg to clean out creditors)

Shareholder approval under S611 item 7 as a mechanism

Advantages Disadvantages

Certainty of outcomeDifficult where there are multiple vendor shareholders

Lower threshold - ordinary resolution required

Must have an IER

You can dictate timeframe -

Practically, lower disclosure threshold -

Takeover Bids as a mechanism


Simpler than a schemeUncertain if 90% threshold will be reached for some time

Flexible - consideration can easily be alteredHigher threshold than scheme - 90% plus 75% in number of all shares

Quicker than a scheme - Timing regulated in Corps Act

Harder to deal with options and other securities

No subjective conditions allowed - once you proceed, you are committed

Schemes of Arrangement as a mechanism


Quick/certainty of outcome Complicated, legally

Lower threshold than takeover bids - 75% of those attending scheme meeting

Less flexible than takeovers in cases of rival bids

You can dictate timeframeEasier to leverage a blocking stake (15% present at the meeting)

Easier to deal with options and other securities 12-16 weeks' timeframe

Recommendations on Alternative Mechanisms

Descending order of preference:

Member approval to acquire vendor entity shares - where vendor vehicle is a private

company or a public with fewer than 50 shareholders (and practically, not too many)

Takeover - where target is a public company with more than 50 members or where there

are too many members to efficiently execute sale agreements

Scheme - only where there are complications such as foreign issues or significant

restructuring of shell is needed/

Regulatory considerations for each

Corporations Act:

Shareholder approval S611 item 7 (ASIC RG 74) - IER, takeover control for vendors going

above 19.9% or related party vendors

Takeovers

– Prospectus level disclosure for scrip consideration

– Chapter 6 of the Corporations Act - strict regulatory framework (ASIC RG 9)

– IER needed if cross directorships or 30% or more cross shareholdings

ASX Listing Rules

– In all cases, ASX listing rules re change of activities

– Vendor escrow/related parties/promoters

– Voting exclusions

– Re-compliance

How to do it cont. - Example 1 - Lamboo Resources

Mechanism: Shareholder approval and re-compliance

"shell":

Fluorotechnics was a developer and manufacturer of fluorescent compounds and fluorescence based kits for the global biotechnology industry. Business was deemed unsustainable - wound down and new opportunities sought.

Target/Vendor: Private SPV's holding graphite, moly, gold and nickel projects

"Shell" position: At 31 December 2011, the company had a net asset deficit of $1.4M and total liabilities of $1.88M. $1.3M was in loans (convertible notes)

Target/Vendor position: Private companies holding projects.

Consideration: 17,500,000 shares at issue price of 20 cents ($3.5M)

Rationale: FLS had wound down its unsustainable business and elected to seek acquisition opportunities in the resources sector.

Related capital raisings:

Issues of shares under a full prospectus - 17,500,000-35,000,000 at 20 cents to raise $3.5M to $7M

re-compliance Yes

IERTechnically required, but directors' report was accepted after consultation with ASIC

How to do it cont. - Example 1 - Lamboo Resources Cont.

Steps: 16/3/11 Appointment of Richard Trevillion to FLS board

30/8/11 Issue of convertible notes of $615K converting at 35% discount to next public offer

10/2/12/13/2/12Trading halt; announcement of 6 month option to acquire project SPV's, subject to DD, finance, regulatory and shareholder approvals; $2.5M in equity, price to be determined; prospectus to follow

2/3/12/5/3/12 Trading halt and announcement of exercise of option to acquire SPV's

18/412:

Notice of General Meeting

•Consolidation of capital - 1:16•Change to nature and scale of activities (LR 11.1.2)•Issues of shares to vendors (S611 item 7 - !7.5M shares at 20 cents•Issue of shares under prospectus - 17.5M-35M ($3.5-$7M) at 20 cents (LR7.1)•Change of name to Lamboo Resources•"Approval for issue of 2011 convertible notes" - effectively converted loans into notes (LR 7.1)•Approval for provision of "benefits" and issues of shares to executive directors (LR 10 and Chapter 2E)


24/4/12 Announcement clarifying vendor scrip issue price27/4/12 Issue of Prospectus and end of suspension

11/5/12 Replacement Prospectus

18/5/12 Issues of shares on conversion of 2010 notes

21/5/12 Trading halt, general meeting, announcement of results of meeting and suspension of shares

21/5/12 Appointment of vendor directors to the board

28/5/12 Share consolidation becomes effective

31/5/12 Close of Prospectus offer

8/6/12 Reinstatement to Official quotation


Metrics:

Shell had no cash and was a classic shell "seeking opportunities"

One-hit transaction - no initial stake acquired

Time period: August 2011 to June 2012 (10 months)

Legacy shareholders diluted by 94%

1:16 consolidation - shares from 54,147,874 to 3,384,242

Issued 17,500,000 shares to vendors (vendors ended up with circa 30%)

Issue of 35,000,000 shares to raise $7M

How to do it cont. - Example 2 - Elementos/Rockwell

Mechanism: Off-market takeover bid announced on 2 April 2013 by Elementos; executed Merger Implementation Deed

"shell": Elementos was an ASX listed South American copper and gold explorer

Target/Vendor: Rockwell was an unlisted public company holding an option to acquire a tin project in Tasmania and related exploration ground

"Shell" position: Elementos had total equity of $5.7 million and cash of $696K per the takeover pro formas when the takeover bid was made.

Target/Vendor position: Rockwell had $365 cash and total equity of $3.17 million on the takeover pro formas

Consideration: Elementos had 188,638,746 shares on issue and offered 277,480,021 or 59.5% of shares on issue. Implied acquisition price of Rockwell shares was 1.5 cents per share.

Rationale: Elementos could acquire an advanced tin asset with near term development potential - reducing exposure to greenfield exploration

Related capital raisings:SPP to fund transaction announced 27/5/13; Elementos completed a $250K private placement around the same time; another private placement of $1.3M was completed in November 2013.

Steps:

Merger Implementation Deed announced 6 June 2013 Elementos board changes at close of merger Bidders Statement and Target Statement lodged on 7 August 2013, subject to ELT

shareholder approval Elementos EGM held on 8 October 2013 for election of new directors, authority to

issued shares under a private placement and amendments of existing option terms

re-compliance No

IER No

How to do it cont. - Example 3 - Avocet and Lion One

Mechanism: Merger by scheme of arrangement

"shell": Avocet was an ASX listed explorer for uranium, precious metals and iron ore in Australia and Argentina.

Target/Vendor: Lion One was a Canadian explorer registered on TSX with Fijian exploration and development projects.

"Shell" position: As at 31 December 2012, Avocet has cash of $3.9M and exploration assets of $3.7M and total equity of $7.67M.

Target/Vendor position: As at 31 December 2012, Lion One had cash of $13.7M, exploration assets of $26M and total equity of $41M

Consideration: 1 Lion One share for every 9.5 Avocet shares

Rationale: Creation of diversified minerals explorer; Lion One had an advanced exploration and development profile.

Related capital raisings: n/a

Steps (3-4 months):

Complete IER Scheme documents filed with ASIC Court to approve convening of scheme (shareholders) meeting Mail scheme documents to "shell" shareholders Hold scheme meeting Second court hearing Implementation

re-compliance No

IER Yes

How to do it cont. - Example 4 - Segue Resources/Fraser Range Resources and others

Mechanism: Acquisition by shell of assets with shareholder approval

"shell": ASX listed explorer, Segue Resources, acquired 3 companies holding exploration licences in WA with gold, nickel and copper projects. Segue held The company held interests in two nickel and copper tenements in WA

Target/Vendor: Unlisted private companies.

"Shell" position:

The shell, per its latest 3B before the notice of meeting, had 547,662,798 shares on issue. At close, assets were $1,097,751 cash and $1.8M exploration and plant. Total equity changed from $1.67M to $2.77M. It issued 550,000,000 shares to increase shares on issue from 536,912,798 to 1,086,912,798.

Target/Vendor position: No disclosure, except regarding in independent technical assessment of the relevant assets.

Consideration: 550 million Segue shares - circa 50% to vendorsRationale: Not clearly stated - simply an acquisition of assets

Related capital raisings: n/a

Steps (3-4 months):

Procure an IER Called general meeting for 29 November 2013 -

o Approval of change of nature and scale activities under Listing Rule 11.1.2

o Takeover approvals - S611 item 7 - issues of shares to certain specific vendors caught under Takeover Control

o Listing Rule 7.1 - approval of issues of shares to vendors not caught by the takeovers rules

re-compliance No

IER Yes

How to do it cont. - Example 5 Black Mountain Resources

Mechanism: Acquisition by shell of assets with shareholder approval

"shell": Listed on 15 February 2011, Black Mountain Resources was an ASX listed company exploring for gold, nickel and uranium in the Yilgarn craton.

Target/Vendor: Unlisted private companies.

"Shell" position: It listed on ASX on 15 February 2011, having raised circa $3.7M. it was a uranium gold and base metals explorer in WA.

Target/Vendor position: US entities

Consideration: Issue of 25 million shares, 25 million performance shares and committing to expenditure of $4.50 million and $500K initial study of the projects.

RationaleAcquisition of US assets with near term production opportunities

Related capital raisings:

As part of re-compliance - prospectus dated 20 December 2011 to raise $2 million

How to do it cont. - Example 5 Black Mountain Resources Cont.

Steps:

Announcement of acquisition - 23 August 2011 Despatch of notice of meeting - 28 November 2011 Lodgement of prospectus - 19 December 2011 General meeting - 6 January 2012:

o Change to nature and scale of activities -LR 11.1.2o Listing rule 7.1 - issue of consideration shareso Listing rule 7.1 - issue of performance shareso Listing rule 7.1 - approvals for issue of shares under

prospectuso Appointment of directorso Approval for directors to participate in capital raising

(as they are related parties) LR 10.11 Application of listing rule 11.1.3 - suspension of securities

from morning of general meeting until re-compliance Issue of securities under prospectus capital raising Satisfaction of chapters 1 and 2 - 24 January 2012

re-compliance YesIER No, but technical reports under the prospectus

Advantages and Disadvantages of Back-Door Listings

Back Door IPO

Faster way to be listed Yes No

Access to shareholder base Yes No

Full control of destiny No Yes

Easier to price Yes No

Skeletons in the closet Yes No

Ready reference point for brokers to price capital raising

Yes No

Opportunity for uplift Yes Yes

Selling pressure from legacy shareholders Yes No

A Picture Speaks a thousand words

Brent Van [email protected]+61 7 3002 8767

Brent Van Staden is a partner in the corporate team.

Brent has considerable experience in all aspects of corporate, mining and

commercial law, both in professional practice in Australia, the United

Kingdom and in South Africa and as in-house counsel for one of South

Africa's largest companies. He has recently advised clients on initial public

offerings, takeovers, mergers and acquisitions, secondary debt and equity

capital raisings and cross-border issues.

Brent is commercially focused and skilled in providing strategic legal advice.

He takes an incisive approach to legal issues and excels at distilling

complex legal matters into plain English.

Brent holds a Masters of Law in Taxation and Commercial Law and a

Diploma of Legal Practice. He is admitted to practice in Queensland and

New South Wales as well as England, Wales and Johannesburg.

Area of expertise•Commercial contracts and advice•Corporate advisory•Energy and mining law•Intellectual property•Capital markets•Private equity•Mergers and acquisitions•Joint ventures•Mining services•Procurement•Due diligence•Energy and resources

back door listings 2013

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