Reverse Mergers – What is a Reverse Merger?

Reverse Mergers – What is a Reverse Merger?


I am attorney Laura Anthony founding partner
of Legal & Compliance, a full service corporate, securities, and business transactions law
firm. Today is the first segment in a multipart
securities LawCast series discussing reverse merger transactions. What is a Reverse Merger? A reverse merger is the most common alternative
to an initial or direct public offering for a company to go public. A reverse merger allows a private company
to go public by acquiring a controlling interest in a public operating or shell company. The SEC defines a shell company as a publically
traded company with no or nominal operations and, either no or nominal assets or assets
consisting solely of cash and cash equivalents. In a reverse merger process, the private operating
company shareholders exchange their shares of the private company for new shares of the
public company so that at the end of the transaction, the shareholders of the private company own
a majority of the public company and the private company has become a wholly owned subsidiary
of the public company. At the closing, the private company has gone
public by acquiring a controlling interest in a public company. For tax reasons, a reverse merger is sometimes
structured as a reverse triangular merger, where the public company forms a new subsidiary
to complete the transaction with the private company. The end result is the same. The private company shareholders own a majority
interest in a public company and the formerly private company is now public. The public company must file a Form 8-K with
the SEC reporting the reverse merger transaction. Where the public company was a shell company,
that Form 8-K contains Form 10 registration statement information on the private company
and is commonly referred to as a super 8-K. Like any transaction involving the sale of
securities, the issuance of securities to the private company shareholders must either
be registered or exempted from registration. Generally, the issuance relies on Section
4(a)(2) or and or Rule 506 for such exemption. Now, moving onto the transaction. A reverse merger is a merger transaction with
the difference being that the target company ultimately ends up owning a majority of the
acquiring company. Generally, the first step in a reverse merger
transaction is to execute a confidentiality agreement and letter of intent. The initial confidentiality agreement generally:
contractually binds the parties to keep all information confidential so that due diligence
can be exchanged; may contain provisions prohibiting solicitation of customers, suppliers or otherwise
prohibiting the use of proprietary information learned in the due diligence and negotiation
process; and may contain standstill and exclusivity provisions so that the parties don’t concurrently
negotiate with other parties for the same or similar transaction. The Letter of Intent, or LOI, is generally
non-binding and spells out the broad parameters of the transaction. The LOI helps identify and resolve key issues
in the negotiation process and, hopefully, narrows down outstanding issues prior to spending
the time and money conducting due diligence and drafting the transaction contracts and
supporting documents. Along with an LOI, the attorneys prepare a
transaction checklist which includes a to do list along with a who do identification. Following the LOI, the parties will prepare
a definitive agreement. The next Securities LawCast in this series
will pick up discussing the definitive agreements used in a reverse merger transaction. I am securities attorney Laura Anthony, founding
partner of Legal & Compliance, and producer of LawCast. Should you have any questions about today’s
topic, please visit SecuritiesLawBlog.com and LawCast.com, or contact me directly. Inquiries of a technical nature are always
encouraged.

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