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
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
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
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
What makes a reverse takeover a worthwhile alternative
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
Specific Questions relating to this article should be addressed directly to the author.
Consultation Paper 91-407 leaves a number of questions unanswered - it does not establish thresholds for registration as an LDP nor does it provide recommendations for minimum capital, margin or insurance requirements.
On December 6, 2012, the Canadian Securities Administrators OTC Derivatives Committee (the "CSA Committee") published CSA Staff Consultation Paper 91-301, Model Provincial Rules–Derivatives: Product Determination and Trade Repositories and Derivatives Data Reporting.