Meaning Of Reverse Takeover (RTO)

Meaning Of Reverse Takeover (RTO)

What is Reverse Take-Over (RTO)?
This is a situation where a larger unlisted company takes over a smaller listed company through a share-for-share exchange. This implies then that a larger number of shares in the smaller listed company will have to be issued to the shareholders of the larger unlisted company. The effect of this takeover is that the shareholders of the unlisted company will have the majority shares of the smaller listed company, making them to have control of the listed company.
Synonymous to saying that a young 21 year old man wants to get married to a 40 year old beautiful woman but has no bride price. He decided to enslave all of his family members as bride price. The woman then in effect controls the family members and even the gentleman. Sounds funny, yeah? I trust this better explains RTO.

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Anyway, IFRS 10 provides a clear definition of what control is and provides that an investor controls an investee when:
  1. The investor has power over the investee, and
  2. The investor is exposed, or has rights, to variable returns from its involvement with the investee, and
  3. The investor has the ability to affect those returns through its power over the investee.
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In simple terms, control is normally assumed when one entity owns more than half of the equity shares of another entity.

A RTO often times involves listed companies that are actively involved in trading on the stock exchange or shell companies that are not involved in active trading. RTO is another form a company could get listed as the investee company automatically satisfies listing requirements.

The transition on completion of RTO is that the smaller listed company is to be managed by the top executives of the larger unlisted company and it can be agreed to take on the name of the larger unlisted company. After all, once control is gotten, it comes with all accompanying features.

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Of course, there are drawbacks of RTO but let us look at some benefits first:
  1.  Speed: For example “the process of listing a company on Nigerian Stock Exchange (NSE) market involves a number of strategic steps; the exact steps taken will vary from company to company by the method of flotation and the market the company join” Whereas, RTO will be completed very fast that this.
  2. Greater opportunity to carry out further acquisitions.
  3. Easy access to capital markets.
  4. Less regulation documentations.
However, a few potential drawbacks would be:
  1. Adverse change in governance from the synergy of the two companies
  2. High risk of unlisted company not scrutinizing the smaller listed company.
Inasmuch as RTO is a cheaper and easier way to get large but unlisted company quoted on the stock exchange without stringent regulatory procedures and requirements, it is fair to emphasize that there is no easy way to success, invariably there is no explicit easy route to achieve listing on the stock exchange. Exactly the same way, there are social and ethical considerations around the unison between a 21 year old man and a 40 year old woman, it isn’t easy as it seems! LOL!

Adeniyi Asade ACCA, ACA
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