Earlier this year, the U.K. Financial Services Authority issued a consultation paper proposing amendments to the UK Listing Authority's Listing Rules that would, among other things, amend the regulations respecting reverse takeovers. According to the FSA, the proposed changes would ensure that reverse takeovers could not be employed as a "back-door" route to listing for otherwise ineligible companies.

Definition of "reverse takeover"

Under the amendments, a reverse takeover would be defined as

a transaction, whether effected by way of direct acquisition by the issuer or a subsidiary, an acquisition by a new holding company of the issuer or otherwise, of a business, a company or assets:

(1) where any percentage ratio is 100% or more; or

(2) which in substance results in a fundamental change in the business or in a change in the board or voting control of the issuer.

When calculating the percentage ratio, the issuer should apply the class tests [these consist of a gross assets test, a profits test, a consideration test and a gross capital test].

In considering whether a fundamental change in the business occurred, the FSA would consider the extent to which the transaction would change the strategic direction or nature of the business, the impact the transaction would have on the industry sector classification of the enlarged group and the impact on the end users and suppliers. According to the consultation paper, the proposed definition would remove "any uncertainty as to which structures result in a reverse takeover".

Limited scope of exemption

Currently, an issuer completing a reverse takeover is generally required to cancel the listing of their shares and re-apply for listing by satisfying the relevant eligibility requirements. Exemptions, however, are available where a listed issuer acquires another listed issuer. The proposed amendments to the Listing Rules would narrow this exemption to acquisitions of listed issuers within the same listing category. The amendments would be consistent with the principles of the rules respecting transfer between listing categories and reflect the FSA's concern regarding reverse takeovers being used as a way of "avoiding the assessment of substantive eligibility conditions."

Suspension of shares

The Listing Rules currently allows the FSA to suspend the listing of shares where the "smooth operation of the market is, or may be, temporarily jeopardised" or where necessary to protect investors. Shares are typically suspended under this authority on the announcement or leak of a reverse takeover that has been agreed to or is in contemplation, unless the FSA is satisfied that there is sufficient publicly available information about the proposed transaction.

Under the amendments, an issuer would be required to contact the FSA as soon as possible once a takeover was agreed to or in contemplation to discuss whether a suspension was appropriate. Guidance is provided by the FSA regarding the circumstances under which a suspension would not be necessary.

Feedback on the proposals is being accepted until April 26, 2012.

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