Tip of the Week: So Many Issues in Buying a Shell
One topic we simply didn't have much room for in the book was the mechanics of "purchasing" a shell. Many shell players find shells and acquire a controlling interest prior to identifying a transaction to put in. This is true for both trading and non-trading virgin shells, as both types are flipped, typically for a cash payment in what is often called a "cash and carry" transaction.
Here are just a few issues to be careful about in buying a shell.
1. Are you starting a tender offer? If you are not careful your offer to acquire shares from shareholders to obtain control might constitute a tender offer under SEC rules, which could trigger the requirement to put together a time-consuming and costly SEC filing which obviously should be avoided. There is no bright line test of what constitutes a tender offer, only a number of factors to be considered on a case by case basis. Make sure you consult with counsel to analyze whether your offer might inadvertently cross the line.
2. Watch out for Worm/Wulff. If the people you are buying shares from acquired them at a time when the company was a shell company, they may be subject to the so-called "Worm/Wulff letters." Among other things, these letters between the SEC and the NASD make clear that an affiliate or promoter of a shell cannot transfer his shares to a third party in a private transaction. Period. Further, the SEC staff expands that and has the view that all shell shareholders are subject to this, not just affiliates and promoters. Make sure to look for ways to avoid purchasing shares from current shareholders if possible (for example purchasing shares directly from the company), and if not possible, conduct an analysis as to whether the shares are or are not subject to Worm/Wulff.
3. Don't forget due diligence! Do thorough due diligence on the shell the same as if you were a private company merging in. If that takes weeks of review, so be it. If there are undisclosed problems in the shell, your entire purchase could become worthless. In particular, try to trace all stock issuances since inception to ensure that they match the company's claimed capitalization.
4. Watch timing of deals. It is generally recommended that shells be purchased and put on the shelf for a period of time before entering into a deal. There are a number of reasons for this that should be discussed with your counsel.
5. Can you get indemnities? What if the person controlling the shell misrepresents something, for example about how many shares or warrants are outstanding? Can you go after him afterward? Usually not. Sometimes sellers are willing to put some shares in escrow for a period to be used to help compensate for any misrepresentations or breaches of the purchase agreement. It depends on the transaction and the leverage of the parties.
6. Watch out for footnote 32! I think I've said this enough times, and you can go back to prior posts and my book to see the telltale signs of a tainted shell pretending to be or have been a real company. Make sure counsel experienced in this issue looks at it on every shell.
7. Watch out for short swing profits. If the seller purchased any shares (or anyone whose shares he beneficially owns did so) less than six months prior to the intended sale, the profit the seller earns in the sale may have to be disgorged back to the company. This is only true if the seller is an officer, director or 10% shareholder.
8. Surprise - filings required!
(a) Schedule 14f-1. If the purchase of shares of more than 5% of a public reporting company includes a requirement that a majority of the Board change hands, a Schedule 14f-1 has to be prepared, filed with the SEC and mailed to all shareholders of the shell at least 10 days prior to the purchase.
(b) Super 8-K. Wait, don't we only have to file the "super 8-K" imposed by the SEC since 2005 when the company ceases to be a shell? That filing includes all the information that would be in a Form 10 for the company, essentially the equivalent of a public offering prospectus, including audited financials and so on. A little known part of the changes the SEC adopted to Form 8-K included a requirement to file a super 8-K upon any change in control of a shell company.
(c) Insider Filings. If the seller is an officer, director or 5% shareholder, he will have to file Schedule 13D and possibly Form 4. If the buyer is going to become an officer, director or 5% shareholder, he also may have to file Schedule 13D and possibly Form 3.
Enjoy Indian summer!
Here are just a few issues to be careful about in buying a shell.
1. Are you starting a tender offer? If you are not careful your offer to acquire shares from shareholders to obtain control might constitute a tender offer under SEC rules, which could trigger the requirement to put together a time-consuming and costly SEC filing which obviously should be avoided. There is no bright line test of what constitutes a tender offer, only a number of factors to be considered on a case by case basis. Make sure you consult with counsel to analyze whether your offer might inadvertently cross the line.
2. Watch out for Worm/Wulff. If the people you are buying shares from acquired them at a time when the company was a shell company, they may be subject to the so-called "Worm/Wulff letters." Among other things, these letters between the SEC and the NASD make clear that an affiliate or promoter of a shell cannot transfer his shares to a third party in a private transaction. Period. Further, the SEC staff expands that and has the view that all shell shareholders are subject to this, not just affiliates and promoters. Make sure to look for ways to avoid purchasing shares from current shareholders if possible (for example purchasing shares directly from the company), and if not possible, conduct an analysis as to whether the shares are or are not subject to Worm/Wulff.
3. Don't forget due diligence! Do thorough due diligence on the shell the same as if you were a private company merging in. If that takes weeks of review, so be it. If there are undisclosed problems in the shell, your entire purchase could become worthless. In particular, try to trace all stock issuances since inception to ensure that they match the company's claimed capitalization.
4. Watch timing of deals. It is generally recommended that shells be purchased and put on the shelf for a period of time before entering into a deal. There are a number of reasons for this that should be discussed with your counsel.
5. Can you get indemnities? What if the person controlling the shell misrepresents something, for example about how many shares or warrants are outstanding? Can you go after him afterward? Usually not. Sometimes sellers are willing to put some shares in escrow for a period to be used to help compensate for any misrepresentations or breaches of the purchase agreement. It depends on the transaction and the leverage of the parties.
6. Watch out for footnote 32! I think I've said this enough times, and you can go back to prior posts and my book to see the telltale signs of a tainted shell pretending to be or have been a real company. Make sure counsel experienced in this issue looks at it on every shell.
7. Watch out for short swing profits. If the seller purchased any shares (or anyone whose shares he beneficially owns did so) less than six months prior to the intended sale, the profit the seller earns in the sale may have to be disgorged back to the company. This is only true if the seller is an officer, director or 10% shareholder.
8. Surprise - filings required!
(a) Schedule 14f-1. If the purchase of shares of more than 5% of a public reporting company includes a requirement that a majority of the Board change hands, a Schedule 14f-1 has to be prepared, filed with the SEC and mailed to all shareholders of the shell at least 10 days prior to the purchase.
(b) Super 8-K. Wait, don't we only have to file the "super 8-K" imposed by the SEC since 2005 when the company ceases to be a shell? That filing includes all the information that would be in a Form 10 for the company, essentially the equivalent of a public offering prospectus, including audited financials and so on. A little known part of the changes the SEC adopted to Form 8-K included a requirement to file a super 8-K upon any change in control of a shell company.
(c) Insider Filings. If the seller is an officer, director or 5% shareholder, he will have to file Schedule 13D and possibly Form 4. If the buyer is going to become an officer, director or 5% shareholder, he also may have to file Schedule 13D and possibly Form 3.
Enjoy Indian summer!
Labels: Tip of the Week
posted by David N. Feldman at
10/10/2007 09:24:00 PM
3 Comments:
My company has filled a 211 and we've received a very easy 3rd comment letter. Would it make sense to buy a 10-SB shell, reverse my company into it and then resubmit the 211? Also, how long would I have to get my companies finacials audited before we are not in compliance?
My company has filled a 211 and we've received a very easy 3rd comment letter. Would it make sense to buy a 10-SB shell, reverse my company into it and then resubmit the 211? Also, how long would I have to get my companies finacials audited before we are not in compliance?
Well, I don't have all the facts here, but a few thoughts. First, when you merge with a Form 10-SB shell, which is fully SEC reporting, you would have to file the so-called "super Form 8-K" within four business days of closing, and that filing would include audited financial statements. Thus you need to get the audit done basically before completing the merger. As to the 211, I don't know the circumstances under which you filed now, so not sure how to analyze whether the shell merger is or is not advisable. Feel free to call or email me directly with more details at dfeldman@feldmanweinstein.com.
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