Reverse Takeover (RTO) - Explained
What is a Reverse Takeover?
Written by Jason Gordon
Updated at April 15th, 2022
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Table of Contents
What is a Reverse Takeover (RTO)?How Does a Reverse Merger or Backdoor Listing Work?Academic Research on Reverse Takeover (RTO) / Backdoor ListingWhat is a Reverse Takeover (RTO)?
The reverse takeover, also known as Backdoor Listing, is the acquisition of a public company by a privately held company so that the private company becomes publicly traded without an initial public offering.
In this process, the private company purchases enough shares of a public company so that they have the controlling power. Then the shareholders of the private company exchange their shares in the private company for the shares of the public company. This allows the private company to effectively become public and avoids the costly and time-consuming process of going public. This process is also known as a reverse merger or reverse IPO.
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How Does a Reverse Merger or Backdoor Listing Work?
The process of setting up an IPO is expensive and lengthy. So, the companies may take this route of going public to avoid the process. However, in this process, the company doesn't raise any additional funds and the company needs to have enough money to fund the whole process. The name of the publicly traded company is often changed in this process but that is not required by the law. After the acquisition the owner may merge the operations of the two companies, otherwise, they may create a shell corporation.
The process of setting up an IPO may take months or even years and involves a considerable amount of the cost. In this process, the privately held company gains automatic inclusion on a stock exchange within a few weeks. This strategy may also be used by foreign companies to get access to the U.S. market. The foreign company needs to purchase enough shares of a U.S based company so that they get the controlling power in the company. Then it can move to merge the foreign company with the U.S based company and gain entry to the market without following the traditional process. However, the final resulting company needs to file SEC Form 8-K to disclose the transaction. It also needs to fulfill all the legal requirement by the Security and Exchange Commission and other relevant regulations.
Studies have shown the performance level and survival rate of the companies that go public through backdoor listing is poorer than the companies that followed the traditional path of IPO. Acquisition of a larger company by a smaller company through a share-for-share exchange is also called reverse takeover.
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