"Cash and Carry" of Form 10 Shells Becomes More Popular
In my office we are seeing an noticeable increase in private companies going public through a merger with a virgin shell where, rather than convincing the shell owner to merge with them and leave the shell's owners with a percentage of the equity, the private company takes over 100% of the shell's stock. This is done through cash being put into the entity upon a merger, whereupon the former shell repurchases the stock of the former shell owners. Many in the industry refer to this as a "cash and carry" transaction.
What are the advantages of this approach? One major one is that the negotiation process between the private company and the shell becomes non-existent. The merger agreement is a virtual non-event, as the owners of the shell know they are being cashed out and do not really focus on things like representations and warranties of the private company.
Second, there is no process of convincing the shell owner of the value of your business so they will provide the shell to you. Since you are paying cash, it is simply a matter of agreeing on a price for the shell (which happens quickly) and the discussion is over.
Third, the counsel for the shell (if there even is one for this) is not likely to spend any time at all doing due diligence on the company merging in. Again, that process is to protect shareholders, all of whom will be gone upon closing. Of course the private company will review the due diligence of the shell, but for Form 10 shells this is an extremely simple process.
Prices vary over time so I don't think it appropriate to discuss the market prices (as the old saying goes, hire me and I'll tell you!). Virtually all of my clients that have set up virgin shells did so with the intention of using them in reverse mergers where they are providing or arranging financing as well and retaining equity after the transaction. However, a number have told me that they would be willing to sell one or two (if they have five, say) for cash if a buyer is out there. This helps defray the costs of setting up the shells.
Why wouldn't someone set up their own Form 10 shell for less money rather than buy one for more? Several reasons. First, if you are the company hoping to merge, you cannot set up a Form 10 shell if you know the company you will merge in. If so, the SEC requires you to disclose substantial information about that company. Second, it takes about three to four months to germinate a new shell and get it public. Most of these cash and carry deals at a higher price (which in all cases is substantially lower than buying a controlling interest in a "legacy" shell with a history of operations) are with companies that do not wish to wait that long for a shell to be created, and need a transaction now.
What about the shareholder base? Buying out the current shareholders of a Form 10 shell usually involves a small handful, often less than five shareholders. Thus you don't lose too much on your shareholder count. It is important that upon closing, the company merging in has at least 35-40 unaffiliated shareholders to qualify for listing on the OTC Bulletin Board, and a small "friends and family" round of share sales can usually take care of that.
Several years ago a handful of Form 10 shells changed hands this way when new dealmaker clients agreed to set up groups of shells with us but realized they wanted one to use immediately. Other clients would step up and sell one. Since then, most clients preferred to wait until their shells were ready, rather than buy one. The price for these cash and carry deals has gone down rather significantly, but it still usually comfortably exceeds the cost of setting one up, thus rewarding the seller for doing so.
More recently, it is not the dealmakers but the companies themselves that are requesting the option to simply cash out the shell holders. A number of my clients seem more than happy to oblige. Anything that speeds and simplifies the process at manageable cost is a valuable additional arrow in the quiver of those of us structuring deals in RM land.
What are the advantages of this approach? One major one is that the negotiation process between the private company and the shell becomes non-existent. The merger agreement is a virtual non-event, as the owners of the shell know they are being cashed out and do not really focus on things like representations and warranties of the private company.
Second, there is no process of convincing the shell owner of the value of your business so they will provide the shell to you. Since you are paying cash, it is simply a matter of agreeing on a price for the shell (which happens quickly) and the discussion is over.
Third, the counsel for the shell (if there even is one for this) is not likely to spend any time at all doing due diligence on the company merging in. Again, that process is to protect shareholders, all of whom will be gone upon closing. Of course the private company will review the due diligence of the shell, but for Form 10 shells this is an extremely simple process.
Prices vary over time so I don't think it appropriate to discuss the market prices (as the old saying goes, hire me and I'll tell you!). Virtually all of my clients that have set up virgin shells did so with the intention of using them in reverse mergers where they are providing or arranging financing as well and retaining equity after the transaction. However, a number have told me that they would be willing to sell one or two (if they have five, say) for cash if a buyer is out there. This helps defray the costs of setting up the shells.
Why wouldn't someone set up their own Form 10 shell for less money rather than buy one for more? Several reasons. First, if you are the company hoping to merge, you cannot set up a Form 10 shell if you know the company you will merge in. If so, the SEC requires you to disclose substantial information about that company. Second, it takes about three to four months to germinate a new shell and get it public. Most of these cash and carry deals at a higher price (which in all cases is substantially lower than buying a controlling interest in a "legacy" shell with a history of operations) are with companies that do not wish to wait that long for a shell to be created, and need a transaction now.
What about the shareholder base? Buying out the current shareholders of a Form 10 shell usually involves a small handful, often less than five shareholders. Thus you don't lose too much on your shareholder count. It is important that upon closing, the company merging in has at least 35-40 unaffiliated shareholders to qualify for listing on the OTC Bulletin Board, and a small "friends and family" round of share sales can usually take care of that.
Several years ago a handful of Form 10 shells changed hands this way when new dealmaker clients agreed to set up groups of shells with us but realized they wanted one to use immediately. Other clients would step up and sell one. Since then, most clients preferred to wait until their shells were ready, rather than buy one. The price for these cash and carry deals has gone down rather significantly, but it still usually comfortably exceeds the cost of setting one up, thus rewarding the seller for doing so.
More recently, it is not the dealmakers but the companies themselves that are requesting the option to simply cash out the shell holders. A number of my clients seem more than happy to oblige. Anything that speeds and simplifies the process at manageable cost is a valuable additional arrow in the quiver of those of us structuring deals in RM land.
Labels: Shell Company
posted by David N. Feldman at
6/26/2008 08:15:00 AM
0 Comments:
Post a Comment
Links to this post:
Create a Link
<< Home