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What is “Backdoor Listing” in the PSE?

“Backdoor listing” is one of several ways a company can offer its shares to the public, together with Initial Public Offering (IPO) and Listing by Way of Introduction.

What is Backdoor Listing?

In the Philippine Stock Exchange (PSE), backdoor listing occurs “when a listed company acquires or merges or combines with an unlisted company, or when a listed company is acquired by, merged or combined with an unlisted company, and which acquisition, merger or combination results in a substantial change in the business, membership or the board of directors, or voting structure of the listed company.”

This simply means backdoor listing can happen when a publicly traded company (listed in the PSE) enters into a merger or acquisition or combination transaction with an unlisted company that results in a significant overhaul of the listed company’s business, membership or board of directors or voting structure.

In the Philippines, typical backdoor listing transactions occur when an unlisted company acquires or merges with a listed company that is relatively dormant or with shares that are not actively traded, with the unlisted company as the surviving entity enabling it to ultimately list its shares on the PSE.

Examples of Backdoor Listings in the PSE

This is what happened in the following cases in previous years:

  • Dennis Uy’s Udenna Corp. which listed through Philippine H20 Ventures Corp. in 2018;
  • Melco Crown Philippines Resorts Corp. (MCP) which listed via Manchester International Holdings Corp. in 2013
  • Lucio Tan’s new holding firm LT Group Inc. (LTG) which listed through Tanduay Holdings, Inc. in 2012; and
  • Lucio Co’s Cosco Capital Inc. (COSCO) which listed through Alcorn Gold Resources Corp. in 2010.

Backdoor Listing not illegal

Interestingly, the PSE itself discourages backdoor listing. It is seen as a loophole that provides easier and faster alternative to offer shares to the public without the stringent requirements of an IPO.

Technically, however, backdoor listing is not illegal but the PSE is not encouraging backdoor listings because it supposedly shows the “acquiring entity does not possess the track record and suitability requirements to qualify for listing under existing rules,” as per a PSE memorandum about backdoor listing in 2013.

The previous rules only prescribe full disclosure of the transaction details and impose disclosure obligations on the listed company. The rules currently lack restrictions or requirements in the subsequent modes of fund-raising activities for a listed company that undertook backdoor listing. Both LTG and COSCO conducted private placements exclusive to foreign investors immediately after their backdoor listing.

In 2013, the PSE added another definition of backdoor listing, that is “any reorganization or transactions involving a group of companies where a listed company is a member of the group or when the transactions result in the listed company becoming the controlling shareholder of the members of the group of companies.”

This may occur when an unlisted company in a group of companies transfers its shares to a listed company that ultimately becomes the controlling entity or “parent company” of the group. The new parent company then grows its market capitalization and can now offer new shares to the public (using shares of the unlisted company) — bypassing the stringent requirements of additional shares issuance imposed by the PSE.

Lock-up Provisions

The PSE also now included lock-up provisions that prevent related parties and new owners from “selling, assigning, or in any manner disposing of their shares.”

If the listed company belongs to the Main Board of the PSE, the new shares issued to related parties or to new owners who own at least 10% of the outstanding capital stock will be subject to the lock-up provisions. The lock-up period is 180 days after the backdoor listing, that is if the firm meets the track record requirement of the PSE, or 365 days if the listed company was exempt from the track record and operating history requirements of the listing rules of the exchange.

If the listed company, meanwhile, belongs to the Small, Medium and Emerging (SME) Board of the exchange, all existing shareholders are barred from selling, assigning or disposing their shares for one year from the backdoor listing.

Stock Price Increases 

Stocks of companies being considered as a vehicle for backdoor listing have historically benefited from a short-term price surge. The speculation, on whether the company will indeed be acquired by the company intending a backdoor listing, fuels the buying frenzy.

The stock of Tanduay Holdings, for example, surged 224% from P4.50 to a peak of P14.60 when LTG announced it is taking over Tanduay Holdings as a vehicle for LTG’s backdoor listing.

H2O Ventures also experienced a price rally when rumors of Udenna Corp.’s potential backdoor listing emerged in 2017. H2O’s stock went up from P3.51 per share to as high as P10.80 — a 208% stock price increase.

Should You Invest in Backdoor Listings?

Should you buy stocks of companies involved in backdoor listings?

If you’re a short-term trader and you’re comfortable with the possibility of losing money in speculation, you can join the frenzy and hopefully benefit from any short-term stock price increases.

But if you’re a long-term or value investor, you might lose money if you’re unable to sell once the speculation has ended and stock prices have stabilized. Better to assess a company’s worth based on its fundamentals and future earnings cashflow before investing in its stock.

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