A Reverse merger implies when the
public company acquires the private company, and the shareholders of the
private company get the controlling interest in the public company. The private
company shareholders also access the power of appointing the directors and
officers of the Public company.
As part of the transaction, the
shareholders of Private Company give up their shares in Private, in exchange
for shares of Public. For legal purposes, only the composition of shareholders
change and not the Public entity. However, for accounting purposes, Privco
(Private Company) is considered the acquiring company and the financial
statements of Privco become those of Pubco (Public Company).
Many companies opt for entering
into a reverse merger case for going public rather than selecting the
traditional Initial public offering.
Advantages
When a reverse merger is closed,
Private Company becomes a public entity, whereas an IPO involves long
registration and comment period before effectiveness. The reverse merger takes
less time and thus helps the company to focus on its business. Generally, the
shareholders of Private Company will receive between, 90% to 99% of the
outstanding shares of Public company upon completion of the reverse merger, with
the remaining 1% to 10% consisting of the shareholders of Pubco prior to the
merger.
Reverse Triangular Mergers
Reverse triangular merger is one
of the most common methods of reverse merger. Complying with this structure the
Public companies integrate a wholly-owned subsidiary in the jurisdiction of
private company. On closing, the holders of Privco exchange their Privco shares
for shares in Pubco and Subsidiary is merged with and into Privco.
In a reverse merger case, the
public company does not need to obtain shareholder’s approval for the reverse
merger, which saves cost and time. This turns out to be the biggest advantage
of this type of merger. The public company will have to undergo the expensive
and time consuming process of holding an annual general meeting and filing with
the Security and exchange commission in order to get the approval of
shareholder. In a reverse triangular merger, the sole shareholder of Sub
(Subsidiary) is Pubco, and thus the shareholder approval is achieved through a
board resolution of Pubco authorizing Sub to enter into the reverse merger.
Also, the public company is
required to give dissenters right to those shareholders who vote against the
merger under state corporate law. The measures for offering dissenters rights are
different from state to state, but in general, involves Public company
providing all the shareholders with sufficient information regarding the planned
acquisition or merger. It also conveys to the shareholders that they have the
right to have their share purchased for fair value if they do not agree to the
merger. What comprises the fair value is often subject to differences and can
lead to lengthy and costly litigation.
Share Exchange/Share Acquisition
Share Exchange or acquisition is
the other common type of reverse merger. In this, public company acquires the
private company as a wholly owned subsidiary through the issuance of a public
company shares, cash or combination of both. Unlike triangular merger, the
advantage of share exchange is that it does not need to do additional state
filing in connection with the establishment of public wholly owned subsidiary
and the filing of merger documents.
The share exchange type of
reverse merger is generally used when the private company is not a U.S. based
company, as cross border mergers are almost impossible and may not be allowed
under the laws of private company incorporation.
The disadvantage which share
exchange has, it requires all of the shareholders of Privco to enter into the
agreement, unlike a triangular merger, which only requires a majority vote of
the shareholders. Thus, it gives
important powers to minor shareholders to defy executing until the last moment,
hoping to gain further approvals or changes in terms of deals. Also, there can
sometimes be the logistical problems of simply assembling the executed
signature pages of each Private company shareholder, as often the transaction
documents are being changed right up until the closing.
Forward Triangular Mergers
There is a similarity between the
forward triangular merger and reverse triangular merger, except that on
closing, Private Company is amalgamated with and into Subsidiary, and Subsidiary
is the existing entity. The advantage of
forward triangular merger is similar to reverse triangular merger.
The disadvantage of this kind of
merger is the loss of Private Company as an operating entity. Also, the private
companies may have various contracts or licenses that cannot be assigned or
transferred which could disappear in connection with forward reverse merger.
These are the reasons why triangular mergers are seldom used.
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