Reverse Merger Transaction: Everything You Need to Know

A reverse merger transaction is an option for a company that has an interest in going public.3 min read

A reverse merger transaction is an option for a company that has an interest in going public. Instead of making an initial public offering (IPO), the company will merge with another company that has already gone public.

How Does a Reverse Merger Work?

After your privately held company has reached a certain size, you may want to go public. However, the drawback of going public is that anyone will be able to purchase stock in your company, which can dilute your control. If you're worried about the drawbacks of going public by making an IPO, you could take your company public using the reverse merger process.

With a reverse merger, your private company would purchase a controlling stake in a public company and then merge with that company. The company with which you merge can either be a public operating company or a public shell company. A shell company has three characteristics according to the Securities and Exchange Commission (SEC):

  • It is publicly traded.
  • It has nominal operations or no operations at all.
  • It has nominal assets, no assets, or only cash assets.

During a reverse merger transaction, the shareholders of your private company will swap their shares for existing or new shares in the public company. Upon completion of the transaction, the former shareholders of your private company will possess a majority of shares in the public company. If the process is successful, your private company will be the public company's wholly owned subsidiary.

The shareholder who owned a controlling share of the public company before the merger will usually give their shares back so that they can be canceled. The shareholder may also transfer their shares to the private business. Once this has occurred, the public company takes over the private company's operations. The result of this process is that the private company has become a public company without having to make an IPO.

Triangular Mergers and Reporting Requirements

A reverse triangular merger is the most common form of reverse merger. With this structure, the public shell company creates a subsidiary company which then merges with the private company. Shareholders exchange their shares in the private company for those in the public company, and the private company is now a wholly owned subsidiary.

With a reverse triangular merger, it is usually easier to obtain consent from company shareholders because the new subsidiary company has only one shareholder: the public share company. Structuring a reverse merger in this way allows the public company to avoid the Securities Exchange Act's proxy requirements for mergers.