REVERSE MERGER

BY:

UTKARSH SRIVASTAVA

INDEX
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Definition Example Types of Mergers Benefits

Definition
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A "reverse merger" is a method by which a private company goes public.

In a reverse merger, a private company merges with a public company with no assets or liabilities.

The private company merges into a public company and obtains the majority of its stock (usually 50% or more). The private company normally will change the name of the public corporation and will appoint and elect its management and board directors. Common Terminologys used to refer Reverse Merger: Reverse Listing, Reverse Acquisition,Backdoor Listing (commonly used in mostly European and Asian Countries)

Example
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Private Company

The private company shareholders sell 100% of their stock in the private company to the public shell company.

Public Shell Company

3 shareholders (original founders) Has assets, liabilities, revenues and ongoing operations Desires to be publicly traded

150 shareholders $0 assets, $0 liabilities and no ongoing operations Looking for suitable business with ongoing operations.

The public shell company then issues an amount of stock equal to 65% of the total ownership of the public shell company to the private company's original three shareholders (founders).

Types of Mergers
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1) Qualifying Transaction - The term "Qualifying Transaction" (QT) is commonly used

with respect to Capital Pool Companies that are primarily formed to be used as public shells for reverse mergers in Canada. The concept and the treatment of QT is the same as that of a Reverse Takeover in America

Types of Mergers - Continued

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2) Exceptional Reverse Mergers

Name Change Case I. Name does not change to the private company. II. Name changes to private company or to any other name. Examples:
A.

Lighten Up Enterprises International Inc. (Shell co.) was acquired by Bionovo, Inc. (Private) in a reverse merger transaction on June 4, 2005. We would be showing the two records (until Bionovo continues to trade and file as Lighten Up) as: Lighten Up Enterprises International Inc., Prior to Reverse Merger with Bionovo, Inc. Public/Acquired Lighten Up Enterprises International Inc - Public/Operating. (Alt/ Historical Name: Bionovo, Inc.)

Types of Reverse Mergers

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Reverse Merger
Exceptional Reverse Mergers
Name Change Case

Qualifying Transaction

More than one private company collectively acquires a public company

Where after the reverse merger, the subsidiary (private company that had acquired the public company) undergoes some sort of transaction and separates from the new public company such as spin off, management buyout, or selling of as a subsidiary

Exceptional Merger - Continued

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Case I Name Does Not Change To The Private Company

Name of the Public/Acquired record: Lighten Up Enterprises International Inc., Prior to Reverse Merger with Bionovo, Inc. Name of the Public/Operating record: Lighten Up Enterprises International Inc. (Alt/ Historical Name: Bionovo, Inc.)

Case II Name Changes

To Private Company

Name of the Public/Acquired record: Lighten Up Enterprises International Inc. (prior to. is removed) Name of the Public/Operating record: Bionovo, Inc. (Lighten Up Enterprises International Inc. will NOT be retained as an Alt/ Historical Name)

Exceptional Merger - Continued

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To Any another name different from that of private company, say Max, Inc.

Name of the Public/Acquired record: Lighten Up Enterprises International Inc. (prior to reverse merger. is removed) Name of the Public/Operating record: Max, Inc. (Alt/historical Name: Bionovo, Inc. AND Lighten Up Enterprises International Inc will NOT be retained as an Alt/historical name)

NOTE: We would make the relevant changes as mentioned in Case II irrespective of the time frame of the reverse merger) when the name changed to either that of the private company or to any other name. (Could be within 1 day, 1 week, 1 month, 1 year or 10 years from the date of completion)

Exceptional Merger - Continued

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B.

More than one private company collectively acquires a public company

Example A, B, C (all private companies) acquires XYZ in a reverse merger and continues by the name of XYZ for sometime and then the new XYZ change the name to D. B is later sold off. In the above case, A, B, C are going to be separate records and will have a current sub/merged entity relationship with D which will be created as a buyer of the company. XYZ will be the target. This is because Hyderabad finds separate financials for these private companies and they cannot be merged into one record. In case we know it is a fake entity we will not have separate private company records however if we find the companies have an operational status (has proper operations, people etc.) we would retain a separate records.

Exceptional Merger - Continued

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C. Where after the reverse merger, the subsidiary (private company that had acquired the

public company) undergoes some sort of transaction and separates from the new public company such as spin off, management buyout, or selling of as a subsidiary

Example Since selling of the subsidiary happens much after the RM transaction takes place, initially two records will be created. One representing the public company/acquired (target) and the other representing the New Public Company with Alt/ Historical Name (buyer) When a selling of a subsidiary is found, the new subsidiary record will then be created and a prior relationship with the new public company will be shown.

Benefits
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Save Time Save Money Make Acquisitions

Raise Capital
Liquidity Increased Valuation

Employee Incentives
Debt Control Prestige

The Competitor
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Reality: Reverse Merger

Low Stock Price Low liquidity, stocks end up trading OTC or on the pink sheets Capital markets closed , no institutional following to raise stock price Unable to make acquisition, low valuation and illiquid stock precludes this option Stock incentive plans unattractive due to penny stock status Private placements difficult due to low public valuation

Reality: IPO Process

Early vetting process for companies unprepared for public markets Management forced to focus on increasing shareholder value pre and post IPO Reputable underwriter increases institutional following and confidence Underwriter can support stock in the secondary market post IPO Relatively few reverse merger success stories compared to IPO

Treatment in Deal Track

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A.

Identification of Entities involved in the transaction i. Identification of the Public Shell Company

Public shell record would be present in DT in most of the cases (especially for North American companies). They would either be fully profiled with the relevant FT CUSIP and Simply Stocks ID symbols or blank un-profiled records that have only the FT symbols attached to them. In blank record cases, please send the company for profiling in the relevant coverage. Other than the SS active/inactive records, you might also come across Mergent Owned records that can be unlocked and made CIQ property by changing the Type and saving. Once the record becomes CIQ owned, you can change the type back to whatever is the current status. Also, one needs to make sure that there is not a duplicate SS active record for the same in DT. If that is the case, then we would retain the SS record and send the Mergent record for deletion after consolidation. If the public co. record is not in DT, then create a new record and put it in the relevant EVT coverage as per the date of the transaction.

Treatment in Deal Track

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ii.

Identification of Private Company Either a fully profiled record would already exist in DT or blank records with Key Developments or Professionals attached to the same. In blank record cases, please send the company for profiling in the relevant coverage. If the private co. record is not in DT, then create a new record and put it in the relevant EVT coverage as per the date of the transaction.

Treatment in Deal Track

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B.

Treatment for Entering Normal Reverse Mergers

At Announcement Stage: For Public Company Record (Target) Transaction Features to be added: Reverse Merger-Backdoor IPO/ Reverse Merger-Other* and Stock Merger (by default) Any other relevant features such as cross border etc. Deal Conditions: Any relevant deal conditions as given in the source documents. Sellers: Apply the 3-year rule in case there are any investors attached to the target.

Transaction Consideration Details:

Consideration Description: Common Equity Consideration Flag: Stock Lumpsum Acquirer Security Subtype: Common Stock Target Security Subtype: Common Stock % of Target Shares Sought: blank Relationship Page: Pending Acquisition/investment: N/A Activity Log: Pending deal research note on the company main page.

Treatment in Deal Track

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For Private Company Record (Buyer): The type would remain as private and the status would be either operating or operating subsidiary (as the case may be). At Closing: For Public Company Record (Target): Deal Resolution: MicroSignal Corp. completed the acquisition of Pro Glass Technologies Inc. (OTCBB: PGTC) in a reverse merger transaction on September 10, 2002. Key Development at Closing: MicroSignal Corp. completed the acquisition of Pro Glass Technologies Inc. (OTCBB: PGTC) in a reverse merger transaction. Relationship: Merged Entity- 100% with the private company. All the current investment/subsidiary relationships to be made prior. All the higher relationships of the target to be updated accordingly. M&A Line in Business Description: As of September 10, 2002, Pro Glass Technologies Inc. was acquired by MicroSignal Corp., in a reverse merger transaction. Activity Log: Remove Pending Activity Log.

Treatment in Deal Track

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For Private Company Record (Buyer):

Company Type: Public company Company Status: Operating/operating subsidiary Company Relationships: If the private company was 100% subsidiary at the time of announcement, on closing, remove 100% from Percent Owned field and retain Private Company as Current Subsidiary of its Parent in the absence of information regarding exact stake retained by Parent after closing of reverse merger. Private Company is the surviving entity which goes Public pursuant to the merger of a Private company and public company in a reverse merger transaction wherein shareholders of Private Company retains majority stake in surviving entity. Activity Log - Research Notes (Permanent): As on September 10, 2002 MicroSignal Corp. went public through a reverse merger with Pro Glass Technologies Inc. (Please mention any name change of the surviving entity consequent to the closing).

Treatment in Deal Track

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C.

For reverse mergers that occurred more than one year ago Check for the pre-transaction and post transaction financials in the SS overwritten record from the CIQ platform. After analyzing the financials, create an inactive or active record. Add the new record in Entity Development Coverage for profiling. To get the Business Description, addresses in the overwritten record reprofiled: Add the overwritten record in EVT M&A Transactions - Research in the relevant tier. To get a Pro Id deleted, add the company from which the Pro relationship needs to be removed to Potential Duplicate Person Coverage with apt Tier. An activity log needs to be added in company stating the Person Name, Id and Pro Id that needs to be delinked followed by reason/ source of verification. After tracking the closed reverse merger, add the relevant information in the Symbology Sheet.

Treatment in Deal Track

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