Reverse Merger

Abstract: A reverse merger can prove to be immensely beneficial for a private company. After the reverse merger, many changes occur in the structure of the private company as well as of the public corporation. The new company gets a new name, there are changes in the ownership of the stocks. Not only this, the entire management team as well as the top level executives also undergo reshuffling.

A private company can become a public company by means of a reverse merger. Merging of a private company with that of a public company without any liabilities and assets takes place in reverse merger. The public company is referred as “shell” corporation. The name implies that after a merger, the identity of the public corporation is only the outer shell structure. The public corporation retains the corporate structure whereas all other factors have the characteristics of a private company.

Share of stocks in a reverse merger: The private company obtains approximately 90% of the stocks of the public company after the reverse merger. In addition to this, the public company does not retain its original name and in majority of the cases adopts the name of the private company. The private company takes the decision of the management team and the members on the Board of Directors. In order to qualify for entry into NASDAQ Small Cap Market, the public corporation has the basic minimum of 300 shareholder base.
Prerequisites for a reverse merger: The private company intending to become public is required to get consent of majority of the shareholders of the company.
Advantages enjoyed by the private company as a result of the reverse merger: The private company, after the merger enjoys the following public trading benefits pertaining to the various securities it owns:
The private company is capable of acquiring other companies by making use of the stocks of the company.
Ownership shares enjoy increased liquidity.
This can be seen as “retirement strategy” pertaining to business owners.
The private company can also retain efficient employees by various plans pertaining to stock incentives.
Due to the share prices being high , the valuation of the company also becomes higher.

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Reverse Merger

 

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Last Updated on : 29th July 2013