Non-Shell Reverse Mergers Next??

What with the SEC having made it a little tougher to be a former shell in the times after the Rule 144 amendments last year, more and more of my clients are turning to self-filings as a way to avoid the restrictions that apply to shells and former shells. But self-filings take time and must await SEC approval of a disclosure document.

I have several clients now looking at mergers with very small real public operating businesses, not set up as acquisition vehicles a la footnote 32, but which really operated for several years, maybe had a million or two in revenues and maybe now that’s gone down a bit. They are not a shell and therefore acquiring the entity will not trigger shell and former shell issues. The company gets stockholder approval to get rid of the current assets, or after a merger it might be that the assets are non-material enough not even to need shareholder approval, if you choose to wait until then.

The key, of course, is scrubbing the departing assets to ensure that no liabilities will linger. I generally teach that the longer ago a shell had a business the better. Here the business operates right until the merger, so you have to be extra vigilant to grill the auditors and management as to what could come out of the woodwork. And depending on the circumstances, you may want to have some stock or money held back from the public entity’s key shareholders until it looks like everything is fine.

Small public companies, want to bail? We might offer some help. And look at the Merck merger with Schering-Plough…also a reverse merger!

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