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   October 17, 2017
   Written by Chunshek Chan, Dealogic Research

In years past, some Chinese companies listed via reverse takeovers, but 2017 is on track to be the least active year since 2004.

Once popular, reverse takeovers fall out of vogue

Listing is a symbol of prestige for many companies, but getting one has not always been a walk in the park. In years past, some Chinese companies walked through the backdoor instead by listing via reverse takeovers—stock mergers where sellers of private target companies obtain majority shareholding in listed acquirors. Though once a practical way to get listed while skipping the IPO process, only 10 Chinese “backdoor listings” have completed globally so far in 2017, on track to become the least active year since 2004. In comparison, domestic Chinese markets saw 342 IPOs this YTD, only behind full-year 2010.

Chinese issuers had been lured overseas

The Chinese equity market has not always been welcoming for potential issuers. Due to an IPO curb, only 14 domestic IPOs were priced in 2005, the lowest activity since 1997; and overseas exchanges saw an opportunity to lure away Chinese companies with both IPOs and reverse takeovers. With less regulatory scrutiny than a full IPO process, merging with “shell companies” to obtain backdoor listings became commonplace for Chinese issuers in the following years. The number peaked in 2010, when 48 Chinese issuers were listed overseas via reverse takeovers, including 29 listings in the US on NYSE Amex and OTCBB.

However, investors caught on to the trend as a handful of US backdoor–listed Chinese companies showed accounting irregularities and became subject to class-action lawsuits in the early 2010s. Increased regulatory scrutiny meant reverse takeovers overseas became less viable. Since 2012, 10 or fewer overseas reverse takeovers were completed each year.

New rules scrutinize domestic backdoor listings

Instead of overseas, Chinese issuers turned to backdoor listings on domestic exchanges, peaking in 2011 and 2015 (36 deals each). When the China Securities Regulatory Commission (CSRC) stopped approving domestic IPOs for 15 months until December 2013, it created a 700-strong backlog of applications and the “backdoor” became a particularly important option. Focus Media, the Chinese advertising giant which delisted from NASDAQ in May 2013, jumped the queue with a backdoor listing in Shenzhen in December 2015.

That changed last September, when the CSRC issued new rules regulating stock mergers, essentially requiring companies seeking backdoor listings to fulfill the same regulatory requirements as an ordinary IPO. As approvals for domestic IPOs accelerate, and the impetus for reverse takeovers is all but removed, the backdoor seems to be closing for aspiring issuers.

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Data source: Dealogic, as of October 16