Tip of the Week: Reverse Merger Deal Structures

Occasionally I like to move higher in the atmosphere and review some reverse merger basics. In a reverse merger, a private company takes over a public shell company and instantly becomes public, and the public shell survives the transaction with the owners of the private company typically controlling what was the shell and which now owns the formerly private business. The term “reverse” applies since the private company acquires the shell yet the shell survives. This is done to maintain the trading status of the new combined enterprise to avoid certain complications of having the private company survive and act as a “successor” public company.

The most common structure is the reverse triangular merger. Here, the shell company creates a wholly owned subsidiary, and that subsidiary merges with and into the private company. As a result the private company becomes a subsidiary of the shell, and the private company’s owners swap their shares for shares of the public entity. There are several benefits to this. First, each party to a merger must obtain shareholder approval of the transaction. If the public shell were party to the merger, if it is an SEC reporting company, it would have to prepare a detailed proxy statement to go to shareholders prior to approval, and this must receive SEC review which can take months. Another advantage is that the operating business entity remains intact. Its tax ID, contracts, vendor numbers, bank accounts and the like do not change.

Some transactions, particularly with foreign private companies, are structured as an exchange of shares rather than a merger. Here, the private company owners agree to swap their shares for shares of the public company. The challenge here is that every shareholder must approve of the transaction, whereas the merger above is approved by majority vote of the private company shareholders. It gives a lot of power to each shareholder, no matter how small, to put a wrinkle in the deal if they are unhappy for some reason. Occasionally we do a sale of assets from the private company to the shell or a subsidiary, but that is fairly rare.

Comments

Leave a comment