For many companies, a reverse takeover (RTO) can be a fast route into the public markets. Reverse takeovers can be complex, so companies need to weigh both the benefits and the risks before pursuing one.
In this article, we look at reverse takeovers in the Canadian market, how they work, and the benefits and risks that matter to stakeholders. For topics not covered here, you can consult with a corporate finance and securities lawyer or law firm.
How does a reverse takeover work?
Patrick Fitzgerald, a partner of Cox & Palmer in Halifax, shared his insights on RTOs and how they work.
“A reverse takeover is a transaction in which a private operating company becomes publicly listed by acquiring control of an existing publicly listed company (often a company listed on the TSX Venture Exchange or CSE with little to no active business operations), rather than proceeding through a traditional initial public offering (IPO),” he says.
A reverse takeover is a specific type of merger and acquisition (M&A) transaction. RTOs are also called different names, including:
- backdoor listing
- reverse merger
- reverse IPO
In an RTO, the target public company is often a “shell company,” which has little or no active business or assets, but already has a listing and reporting status. What the private company wants from the public shell is its listing and reporting status, so that it can get more investors and capital more easily.
In Canada, a reverse takeover usually involves a merging with a public company already listed on the TSX or TSXV. The resulting company (usually through amalgamations) must still meet the original listing requirements of the TSX or TSXV and go through an approval process similar to IPOs.
Watch this video to learn more about RTOs. It also shows the steps and phases for a reverse takeover's completion:
Looking for lawyers to help with an RTO deal? Head over to our directory of the Lexpert-ranked best corporate finance and securities lawyers in Canada.
Steps in a reverse takeover
Below are the general, simplified steps in completing an RTO:
- Finding a public shell and private target: A private company with a growing business and assets that can support a public listing searches for a public shell company it can use to trade publicly
- Negotiations and deal terms: The two companies then negotiate. They discuss company valuations, control structures, the specific listing venue, and timing for announcing and completing the reverse takeover. Further down the line, they strike an initial deal
- Two‑way due diligence: During or after those negotiations, each company conducts due diligence on the other. Beyond risks and liabilities, they look at the overall deal rationale, including how it affects all stakeholders.
- The share exchange agreement: After due diligence is complete, the two companies return to the table to draft the share exchange agreement. This contains all the details of the reverse takeover, including the consideration for the deal and the shares to be issued to the private company
- TSX or TSXV review: Deals like reverse takeovers are subject to stock exchange review. The exchange reviews disclosure documents, including the proposed management and board composition of the resulting company
“Once the transaction is complete, the business of the private company becomes the main business of the resulting public company,” Fitzgerald says.
Key processes in a reverse takeover
Below are some of the key processes in a reverse takeover, which also define how this type of M&A transaction works:
Share exchange between the two companies
One feature that can make reverse takeovers simpler than IPOs is the way the companies exchange shares. The private company buys the public shell and then merges it with the private company.
Next, the public shell issues its majority shares to the private company’s shareholders. In return, those shareholders contribute their shares from the private company into the public shell company.
This change of control turns the formerly private business into a public company whose shares can be traded on an exchange.
Composition of the resulting private company
The former shareholders of the private company end up holding a large or controlling interest in the public company. As for the public company:
- it controls the business, operations, and assets of the previous private company
- most, if not all, of the management team in the public company is replaced by the private company’s team
The outcome is a public company in good standing with a stock exchange, with a new business to pursue and assets to develop.
What are the benefits of a reverse takeover?
“Often cited benefits are being able to access public markets and investment from the public more quickly than an IPO, lower costs for the transaction than an IPO, and more deal certainty," Fitzgerald says. "[This is] because it is an agreed to M&A transaction and less likely to be subject to the vagaries of the public markets than an IPO.”
Here's an overview of these benefits:
- faster and simpler path to the public markets: a reverse takeover is one of the fastest way a private company can go public, so the company can raise more capital for its growth
- M&A without the too many prerequisites: in a reverse takeover, private companies can go public without doing a full IPO, which can trigger more intensive regulatory review and large capital raises
- can be cancelled with less market risks: because reverse takeovers do not require a new public offering, they are less exposed to sudden market swings; the deal can be abandoned if market conditions turn sour, even after companies have spent many hours preparing it
In summary, the mix of speed, flexibility, and access to public capital makes a reverse takeover a practical route into the Canadian capital markets.
How long does a reverse takeover take to complete?
A reverse takeover can be completed in weeks rather than months because the listing structure is already in place and no new IPO underwriting is required. While an IPO can take several months or more than a year, an RTO can close faster in some cases. This saves time and lets company leaders focus on running the business, while the transaction moves forward.
Examples of reverse takeovers in Canada
Here are some actual cases of reverse takeovers in Canada that made their way into our Big Deals page, which features some of the biggest M&A deals:
- RTO of PsyBio Therapeutics, Inc.: this RTO was completed in December 2020 through a three-cornered amalgamation under British Columbia’s Business Corporations Act and a three-cornered merger under Delaware laws, with aggregate gross proceeds at $14.5 million, allowing PsyBio to enter the public market
- RTO of IberAmerican Lithium Inc.: an RTO involving a US$9.1 million financing through subscription receipts, completed in September 2023 through a three-cornered amalgamation under Ontario’s law, allowing IberAmerican to list its common shares publicly under the symbol “IBER”
- RTO of TSXV-listed Automodular Corp.: in March 2018, HLS Therapeutics Inc. completed an RTO of TSXV-listed Automodular Corp. through a court-approved plan of arrangement under Ontario’s Business Corporations Act, allowing HLS Therapeutics to go public
You can also check the links above to see the lawyers and law firms who are involved in some of these major RTO deals.
Here’s another video which shows a proposed (but failed) reverse takeover, which involved Dell and VMware in 2018:
Bookmark our Special Edition on M&As Law for more news about Canada’s securities marketplace and the biggest M&A deals of today.
How can lawyers help with a reverse takeover?
Fitzgerald says that “like any M&A transaction, lawyers assist their clients in preparing for the transaction by ensuring:
- due diligence materials are sufficient
- various contracts (for the M&A and any coincidental capital raise) are reasonable in the circumstance
- proper due diligence of the target is performed
- regulatory requirements are met
- the transaction proceeds as smoothly and efficiently as is possible
Reverse takeover: From back door listing to public listing strategy
Reverse takeover deals in Canada can give private companies a faster route to the public markets. A reverse takeover can cut months from a traditional IPO timeline and give private businesses a listed platform. In many sectors, it is now a standard option for capital growth rather than a niche path. With careful planning and legal advice from corporate finance and securities lawyers, a reverse takeover can help a private company become a listed issuer.
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