Reverse Merger with US Public Companies

Reverse Merger with US Public Companies – Case Study

 

       Typically, a reverse merger is a merger between a private company and a publicly traded company. The public company issues stocks to the shareholders of the private company to acquire the ownership of the private company. The amount of the shares received by the shareholders of the private company enable them to become the majority shareholders of the merged company.  The shareholders of the private company take control of the merged company at the closing of the merger transaction.

 

     The following are two typical cases of reverse mergers in which  K & J Consulting, Ltd. was involved. These cases illustrate how a reverse merger is done.

 

Case 1:  

     

Private Company:	A Chinese software company
Shares Outstanding:	1 million, owned by 4 founders
Merger Objective:	Through a reverse merger, become a US public company and gain access to public funding.
Public Company:	A US public company that has ceased all its operations, has no business, no liabilities, that is, a clean public shell.
Shares Outstanding:	25 Million
Merger Objective:	Hoping that the stock price will go up after the merger, and therefore maximizing the shareholder value for the current shareholders.

 

     After signing a Letter of Intent (LOI), the public company effected a 5:1 reverse split, that is, each 5 shares became 1 share. As the result, the total number of shares outstanding was reduced to 5 million. At the closing, the public company issued 20 million shares to the 4 shareholders of the private company in exchange for 100% shares of the private company. The private company became a wholly owned subsidiary of the US public company. At the closing, the directors (except one director who stayed to help the company raise fund later) and officers of the public company resigned. The 4 shareholders (who became the 80% owner of the post-merger public company) of the private company became new directors.  The private company took over the $270,000 cash left on the public company’s account and was able to raise more funding through private placement later.

 

         The name and the stock symbol of the public company were changed to reflect the business of the private company.

 

 

Case 2:  

     

Private Company:	A Chinese Digital Signal Processing company
Ownership structure:	The company had one majority owner, the rest was owned by several officers and a group of private investors
Merger Objective:	Through a reverse merger, become a US public company and gain access to public funding.  The company also hoped that becoming a US public company will make it easier to market its products is US.
Public Company:	A US public company that has ceased all its operation, has no business, no liabilities, that is, a clean public shell.
Shares Outstanding:	138,096,833
Merger Objective:	Hoping that the stock price will go up after the merger, and therefore maximizing the shareholder value for the current shareholders.

 

 

     Before the merger, the public company effected a 200:1 reverse split, reducing the shares outstanding to 690,484. At the closing, the public company issued 12 million shares to the shareholders of the private company. The directors and officers of the public company resigned and the five directors of the private company became the new directors of the public company.

 

     In a separate transaction, a group of investors paid $250,000 to purchase stocks from the former majority owners of the public company after the closing.

 

     The name and the stock symbol of the public company were changed to reflect the business of the private company.