What’s in a Shell? Analysing the Gain to Shareholders from Reverse Takeovers

We examine the wealth effect of reverse takeover transactions to shareholders of shell companies. Using three return proxies, including buy-and-hold return, expert-based return and implied premium ratio, we find evidence strongly consistent with a significant gain to shareholders of shell companies participating in such transactions. We also argue that the source of the gain (shell premium) arises from the listing status embedded in the corporate shell of the public firms, which can be utilised by private firms as a vehicle for going public via the backdoor. Multivariate analysis also suggests that, after controlling for other potential factors, the magnitude of the shell premium is positively related to the number of shareholders on the shell company's share register. In addition, we find that the invocation of the takeovers provisions of the Corporations Act has a positive effect on the gain to public firm shareholders by enhancing their bargaining power when negotiating the deal with the private firm