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Instances in which companies are allowed to list their shares on the London Stock Exchange, or any stock exchange for that matter, without being fully vetted pose great risk to prospective and existing investors in the financial securities market. And such instances are often the direct products of reverse takeovers.
A reverse takeover generally refers to a case in which a private company buys an already listed company as a subsidiary. Ordinarily, companies have to first of all publish detailed financial information, and portray through their disclosed financial statements that they are properly run. Unfortunately, reverse takeovers,until now,have largely been exempt from this level of scrutiny. And thus,the acquiring companies in reverse takeovers often find they are able to sell their shares to the public without going through the exchange’s rigorous listing process. Many have argued that practices such as this could ultimately undermine the credibility of the London stock market.
Reverse takeovers prove to be particularly harmful when they are undertaken by firms in emerging markets, most especially when the shares involved are acquired automatically with funds that track key indexes.
One case that easily comes to mind with regard to the potential adverse effects of reverse takeovers is the Bumi incidence. Bumi (LSE:BUMI), an Indonesian mining company that was successfully listed on the London Stock Exchange via a reverse takeover, is now knee-deep in an investigation into alleged irregularities in subsidiaries amounting to a staggering $500 million in stock valuation. A great deal of havoc has undoubtedly been wrought on unsuspecting investors as the corporation’s share prices have fallen by as much as 84% in what can rightly be referred to as a bearish market trend. Had preventive measures already been in place beforehand, such an unfortunate situation would probably not have occurred.
In recognizance of the risks they pose to financial security investors and traders, the Financial Services Authority (FSA) has taken steps to clamp down on reverse takeovers. The new rules the organization is working on effecting will supposedly make it difficult for companies like Bumi to gain a listing on the London Stock Exchange.
The question that remains to be answered now is how effective these rules will ultimately prove to be. In this regard, David Lawton, the FSA’s director of markets, has been quoted as saying that the organization’s new proposals will “strengthen the investor protections afforded by the Listing Regime, particularly for companies with controlling shareholders”. Furthermore, the FSA has made known that it will insist on having a majority of independent directors on the board of any company with a dominant shareholder so as to further safeguard minority investors’ interests.
