A reverse takeover (also known as a backdoor listing)—in which a listed company acquires a significant business from a non-listed entity, resulting in changes of control or change of core businesses—could raise regulatory concerns whether the post-transaction entity continues to meet listing requirements. To safeguard market integrity and maintain investor confidence, the Securities and Exchange Commission (SEC) and the Stock Exchange of Thailand (SET) require a listed company involved in reverse takeovers to submit a re-listing application. This process subjects a listed company to the same level of scrutiny as those undergoing a traditional initial public offering (IPO). The goal is to prevent lower-quality or unsuitable businesses from entering capital markets through backdoor listings and to safeguard existing shareholders from fraud or misleading financial statements often associated with reverse takeover transactions.
Regulatory and Disclosure for Backdoor Listings
The SEC and SET are obliged to maintaining the quality of companies seeking listing through backdoor routes by applying rigorous screening processes and requiring comprehensive due diligence from financial advisors, in line with IPO-level scrutiny. Both IPO and backdoor listings must meet consistent standards regarding financial eligibility, corporate governance, internal controls, and disclosure. However, the criteria for backdoor listings are more stringent in certain respects. In particular, the post-transaction entity must satisfy either the Profit Test or the Infrastructure Business Test, while IPO applicants may also qualify under the Market Capitalization Test. These requirements can result in extensive and costly legal and financial compliance obligations, similar to those of an IPO. Consequently, a listed company considering significant mergers or acquisitions involving any non-listed entity(ies) must thoroughly assess the re-listing requirements and potential challenges, as detailed below.
- Case-by-case assessment: An acquisition of significant business from a non-listed company may be considered a backdoor listing if: (1) the transaction size is equal to or exceeds 100% of the listed company’s size; (2) control of the listed company is transferred to the owner or controlling shareholders of the non-listed entity; or (3) existing shareholders are diluted to below 50% of the merged company’s paid-up capital. The SEC and SET may combine related transactions within a 12-month period as a single transaction. Even if these criteria are not met, they retain the discretion to determine whether a transaction—or a series of related transactions beyond 12 months—constitutes a backdoor listing requiring a re-listing application.
- Regulatory Approvals and Disclosure Requirements: A listed company must obtain approval from the SEC, SET, and its shareholders before acquiring significant business from a non-listed company. The notice to shareholders must be submitted to the SEC and SET for review and may be subject to additional disclosure requirements. If the shareholders’ meeting is scheduled before the SEC and SET has issued a decision on the company’s re-listing application, the notice must clearly state that the application is still under review. In such cases, the SET will post a “Notice Pending” (NP) sign once the board of the listed company resolves to acquire significant business in a manner that constitutes a backdoor listing. The NP sign will remain until the re-listing decision is publicly disclosed. Should the listed company proceed with the backdoor listing transaction despite a rejection of the re-listing application, the SET will post a “Suspension” (SP) sign. If the SP sign remains in place for more than two consecutive years, the listed company may be subject to delisting from the exchange.
- Financial Advisor: A listed company is required to appoint (1) a financial advisor (FA) to prepare the re-listing application and certify that the post-transaction entity meets all re-listing criteria, and (2) an independent financial advisor (IFA) to provide an opinion and voting recommendation to shareholders regarding the proposed acquisition of assets from a non-listed company. Both the FA and IFA must be selected from the SEC-approved list of financial advisors. To ensure objectivity and avoid conflicts of interest, the same entity cannot act as both FA and IFA in the same transaction.
- Reliable Financial Statements: The listed company must present the financial statements of the non-listed company, adjusted to comply with either Thai GAAP for Non-Publicly Accountable Entities (NPAEs) or IFRS if the original financial statements were prepared under a different accounting standard. Additionally, the listed company is required to submit the pro-forma financial statements as if the acquisition of the non-listed company occurred at the beginning of the past three years. These pro-forma financial statements must be audited or reviewed by an auditor approved by the SEC.
- Due Diligence on the Non-Listed Company to be Acquired: The listed company is required to conduct due diligence on the non-listed company and implement measures to address key concerns such as conflicts of interest, internal control, and governance structure. These efforts are essential to ensure that the post-transaction entity fully complies with all re-listing criteria. Furthermore, the listed company must ensure that all information concerning the non-listed company, as disclosed in the notice to shareholders and the re-listing application, is accurate, includes all material information that should be disclosed, and does not contain any statements that could mislead or result in a misunderstanding of material facts.
- Exemption: An exemption from re-listing requirements may be granted if all the following conditions are satisfied: (1) the acquired business is similar to or complements the listed company’s existing operations; (2) the listed company continues to operate its core business, which remains substantial; (3) the post-transaction entity meets all relevant re-listing requirements; and (4) there is no significant change in the company’s board and controlling shareholders.
Implications from Backdoor Listing Precedents
Even if a transaction does not meet the explicit criteria for a backdoor listing—such as not exceeding size thresholds or not involving a change of control—the SEC and the SET may still exercise regulatory discretion to classify the transaction as a backdoor listing. This discretionary authority can present unforeseen challenges for companies engaging in bona fide transactions, particularly when the listed company continues to operate its original substantial business after the transaction.
By reviewing precedents in backdoor listing cases, a listed company can better anticipate regulatory interpretations and structure their strategic expansion plans accordingly. This approach supports compliance with relevant regulations and helps mitigate the risk of appearing to circumvent listing requirements.
Key Precedents:
— Change of Control
A listed company acquired shares in a private company using proceeds from a capital increase, whereby new shares representing 25% of the listed company’s total issued shares were offered to the seller of the private company. This transaction resulted in a change of control and exceeded the 100% transaction size threshold—both of which are key triggers under SEC and SET regulations. Consequently, the transaction was subject to regulatory scrutiny as a potential backdoor listing.
— Change of Core Business
A listed company acquired new business from a private company in a manner that rendered its existing operations immaterial. The new business is neither similar to nor complementary with the listed company’s existing operations. This acquisition was classified as a backdoor listing, as it results in a change of the listed company’s core business.
— Dilution of Control by Existing Shareholders
A listed company acquired shares in a non-listed company by issuing newly issued shares of the listed company in exchange with the shares in the non-listed company (share swap) with the transaction value exceeding 100% threshold under the asset acquisition rules. As part of the transaction, the entire business of the non-listed company was transferred to the listed company, and a new group of major shareholders assumed control. Although the existing shareholders remained, their collective stake was diluted to below 50%. The transaction was classified as a backdoor listing not only due to its size and the resulting change in control, but also because the dilution caused the existing shareholders to lose effective control.
Conclusion: Balancing Investor Protection and Fostering Capital Market Growth
While backdoor listing has often been linked to scandals involving lower-quality companies seeking market access, regulatory oversight by the SEC and SET have sought to mitigate these concerns by implementing stricter review processes. However, these well-meaning measures can inadvertently create obstacles for companies involved in legitimate transactions. To better balance regulation and market access, regulators could issue clearer guidance on identifying and classifying past backdoor listings. This would provide companies with a better understanding of the rules, helping them navigate regulatory requirements and avoid unnecessary legal or financial complications.
It is important to recognize that many backdoor listings result from strategic mergers between two active operating companies, often motivated by synergies and growth potential. For smaller or fast-growing firms, reverse takeovers offer a faster, more accessible route to public capital compared to traditional IPOs. As such, a balanced regulatory framework—one that deters abuse but fosters innovation and access—is essential for a dynamic and inclusive capital market.