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Reverse Mergers

private stock offeringWe have served as private company counsel in connection with several successful shell mergers including Hyperdynamics Corp. (Amex: HYD) and Boots & Coots International Well Control (Amex: WEL). We have also served as public company counsel in connection with several successful shell mergers including Axion Power International, Inc. (OTC: AXPW). Our extensive experience with shell mergers has made us intimately familiar with both the benefits and risks of shell transactions.

There are several serious problems that can arise in connection with a shell merger:

• First, shells invariably have large blocks of stock in the hands of a few individuals who are eager to sell, often at any price. These distribution problems can seriously compromise investor relations and market development efforts for an extended period of time.

• Second, a private company that effects a shell merger will inherit the business and legal history of the shell. 

So a painstaking due diligence investigation of the shell is essential to ensure that there are no unreported liabilities or other legal problems.

• Finally, stockholders of a private company that engages in a shell merger almost always end up with newly issued restricted stock, which means the investors who have the most skin in the game have no meaningful opportunity to sell their shares for months or years from the closing date.

In general, both the financial community and the SEC view shell mergers with considerable skepticism until the combined companies have been active for a sufficient period of time to demonstrate credible operating performance. Until this performance is demonstrated, it can be very difficult to raise additional money for a company that went public through a reverse takeover transaction.

We have spent several years developing a unique and proprietary shell structure that allows a private company to finance its initial development through private placements and then combine with public shell in a fully registered transaction where all stockholders of the private company receive registered stock in the go forward public company.

We believe, a shell strategy is only appropriate in cases where the immediate financial needs of a private company can be met by a pre-merger private placement. If a private company believes that substantial additional capital will be required within the next 6 to 12 months, a shell merger is usually not the best alternative.