Tip of the Week: What Happens When Non-US Companies are Involved in a Reverse Merger?

Some transactions are not structured as mergers but also achieve avoidance of shareholder approval.  For example, most reverse mergers involving foreign companies, which generally cannot engage in direct mergers with U.S. entities, involve a simple exchange of shares.  The shell and the private company’s shareholders agree that the private company’s shareholders will give up their shares of that company in exchange for shares of the shell.  The shell, if it has sufficient shares available, approves that issuance through its board.  Again, no shell shareholder approval is typically required.

Why doesn’t everyone use this simple technique even in domestic transactions?  Because, in a share exchange situation, every shareholder of the private company must agree to swap his or her shares, and sometimes this gives one or two small shareholders enough power to hold up the deal.  In a reverse triangular merger, a simple majority vote of the private company’s shareholders approves the transaction.

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