Securities Law Update: OTCBB Reverse Mergers Flourish - Part 3

Published 16th October 2009

By Laura E. Anthony, Attorney at Law
Founding Partner, Legal & Compliance, LLC

West Palm Beach, FL - The private company then enters into a contractual agreement with public company and often the control persons of the public shell. Depending on the circumstances, the contractual agreement may be labeled a reverse merger agreement; reorganization agreement; merger agreement; share exchange agreement; or stock purchase agreement. Moreover, the final contractual agreement is often preceded by a non-binding or only partially-binding Letter of Intent (LOI), otherwise known as a Letter of Agreement (LOA).

Contractual Terms

The contractual agreement, must clearly and unambiguously set forth the agreement of the parties, the preconditions to closing; the due diligence process and timing; the closing methodology; representations and warranties; the consideration to be paid (cash, stock or a combination are most common); and post closing obligations; changes of control provisions for the officers and directors; termination and break-up fee provisions; and general contractual provisions such as venue, attorneys fees, authorizations and merger clauses, many of which are often overlooked but of significant importance.

It is typical for the merger consideration to be comprised of a combination of cash and securities. Often new classes of common or preferred stock are created to accommodate the merger terms. A properly completed reverse merger can greatly benefit the seller of the shell and the buyer (the private company seeking public status) alike.

The Merger

The parties typically schedule a closing date that normally occurs within one to two months of the execution of the contractual agreement. In order to close the reverse merger transaction, the private company must have two years of audited financial statements prepared in accordance with Generally Accepted Accounting Principles (“GAAP”), as well as current, reviewed quarterly statements. The audit and review must be completed by a PCAOB qualified accountant.

Financial Statements

These financial statements must be filed in a “Super 8-K” with the SEC within four days of the closing date of the transaction. The “Super 8-K” must include all Form 10 information on the private company and post closing merged entity. This information includes among other things, the terms of the transaction, a description of operations; management discussion and analysis; disclosures on stock structure and principal shareholders; discussion on management; industry overviews; financial statements and much more. Generally, he shareholders of the formerly private operating entity will now control the OTC Bulletin Board company which has its shares quoted on the OTC Bulletin Board.

The Securities Exchange Act of 1934 (the "34 Act"), specifically requires that any merger or acquisition candidate comply with all applicable reporting requirements, which include providing audited financial statements to be included within the numerous filings relevant to complying with the 1934 Act.

Time Horizon

In order to maximize the time benefit of the reverse merger process, GAAP audited financial statements of the private entity should be completed prior to, or concurrent with the merger. Assuming that due diligence, the terms of the merger, and all relevant filings are completed in a timely fashion, the reverse merger can be completed in two to three months.

Attorney Laura E. Anthony is the founding partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm. Ms. Anthony can be reached at LauraAnthonyPA@aol.com or through her websites www.LegalAndCompliance.com or www.Securities-Law-Blog.com.