Tip of the Week: Paperwork When Flipping a Shell
By David Feldman at 1 March, 2008, 8:59 pm
A number of our clients have given up control of their shells to third parties. Sometimes it happens when the creator of a Form 10 “virgin” shell is approached to simply transfer ownership for a price. Other times it happens in connection with a relationship with a third party with whom the shell controller wants to eventually partner with on a deal.
A number of our clients also are purchasers of shells. While I could have spent a lot of time in my book talking about many issues related to acquiring a controlling interest in a shell, I am aware that the SEC is not too fond of there being a “market in shells.” Thus, I did not go into depth in the book. That said, many people, including my clients, are active in these markets and the actions are totally lawful, so here’s a few tips on putting together the paperwork to change control of a shell.
One thing that is very often overlooked in changing control of a shell (including by several players who create shells for the purpose of flipping them for cash and charge very little) is the requirement that a full “super” Form 8-K is required upon any change in control of a shell. When the SEC passed new rules in 2005 implementing this new 8-K requirement when a shell ceases to be a shell, the rule also included requiring this filing upon any change in control of a shell.
In addition, if the shell owner is resigning from the board and a majority of its members are changing as part of the change in control, a Schedule 14F-1 (this looks much like a proxy statement for an annual meeting of a public company) is required to be prepared, mailed to the shell shareholders and filed with the SEC.
Of course you also need board minutes to approve the deal, any blue sky or state securities review that’s necessary, the purchase agreement itself, and “insider” filings by both the buyer coming in and the seller going out. Last, you need to structure the deal to comply with the Worm/Wulff letters. Yes, the SEC’s position is that the new Rule 144 changes did not completely eliminate every aspect of these letters. In particular, a direct transfer of shares from a shareholder of a shell in a private sale is viewed as not permitted by the SEC. So the structure (I can’t give away all secrets!) must take this into account.
Most important, if you are buying a shell make sure you complete a very thorough due diligence review of the shell’s history. If it is a virgin shell, that review should be very brief indeed. If the shell is trading and was once an operating business, that review should be complete and go back in certain instances to the very beginning of the life of the company.
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