Michigan residents may often hear about business acquisitions that ultimately allow a company to consolidate its market share or expand its range of product offerings. A less common though equally interesting event that takes place in the business world is a reverse merger.
A reverse merger is a move undertaken by a private business that wishes to become a publicly traded company while minimizing the waiting time and administrative steps involved. The process involves the sale of a business that is already publicly traded. This latter business is often referred to as a shell corporation, and it is frequently a dormant business, according to authorities. While a reverse merger may allow a private business to become publicly traded in a matter of weeks as opposed to months or years, it is not normally an advisable course of action unless that private business is well established and follows accepted accounting practices.
This kind of transaction is disclosed to the public when a form 8-K is filed with the Securities and Exchange Commission. This filing is usually accompanied by additional filings that detail the new company’s structure and financial resources. While a reverse merger offers several benefits for a well-established private company that wishes to become publicly traded, the process is not without potential pitfalls. Authorities says that it is essential to perform due diligence prior to a reverse merger so as to expose any possible liabilities or other unresolved issues.
The reverse merger is an example of how creative minds can overcome some of the common challenges faced by a growing business. However, it is also a reminder that perceived shortcuts often raise their own thorny issues. A business law attorney with experience in mergers and acquisitions may be aware of these potential pitfalls and provide counsel with regard to the appropriate steps to take. This blog, on the other hand, is intended solely for general discussion.
Source: Entrepreneur, “A First Take on Reverse Mergers“, October 23, 2014