Reverse Merger: Meaning and Process


Meaning of Reverse Merger

A reverse merger refers to a process where a private entity is acquired by a publicly listed company. The major reason behind such a transaction is so the private entity can be listed publicly without the time constraints and the hassles of going through the process of an Initial Public Offering (IPO) on its own. A reverse merger eliminates the process of undergoing heavy scrutiny by the regulatory bodies and spares the substantial costs associated with an IPO.

Such a merger is conducted through the issuing of securities by the public entity to the private entity’s shareholders as a way of compensation for the acquisition. After the merger, the acquired entity, i.e., the private company holds a majority of the shares and thereby obtains control over the acquiring entity, i.e., the public company in the new resultant entity. In such a merger, a public shell company is usually used as a placeholder for the transaction as, in most cases, the public entity ceases to exist after the merger.

Ind AS-103- As per the Indian Accounting Standards, a reverse merger is treated under Ind AS-103. It must be noted that Ind AS-103 makes a clear distinction between the acquirer and acquiree for both legal and accounting purposes. Legally, the public entity is the acquirer and the private entity is considered to be the acquiree. However, for accounting purposes, the opposite is considered to be true. The public entity is treated as the acquiree and the private entity is deemed to be the acquirer.

While the public entity may be the one issuing the securities, under Ind AS-103 other factors are also evaluated in determining the status of the acquirer. These factors include determining which entity holds greater relative voting rights or greater minority voting interest in the resultant entity, the composition of the governing body, the relative size of the two entities, and the terms of the agreement.

Process of Reverse Merger

As per the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, and The Companies Act, 2013, the following procedures are to be followed for a reverse merger-

Preparation of the Scheme

The details of the merger are to be established during the general meetings held to consider the proposed scheme. Both parties must agree to the terms of the issuance of securities and the change in the organization structure after the merger. The financial statements must be thoroughly disclosed and both parties must satisfy themselves with the current financial position. The internal regulations of the entity must be complied with throughout the entire process of the merger. Any objections to be considered or modifications to be made must be acted upon during this step.

Filing of Application

Once the details of the merger have been finalized, an application is to be filed with the National Company Law Tribunal (NCLT), U/S 230 of The Companies Act, 2013. A copy of the draft scheme and relevant financial statements are to be filed with the application.

After careful consideration, the Tribunal shall make provisions for the legal proceedings, transfer date, fees involved, and the transfer of equities. These provisions shall only be made after the company auditor has filed a certificate assuring compliance with the accounting standards. A copy of the approved and certified statement of application is to be duly filed with the registrar of companies regularly as per the terms of the scheme.

Public Announcements and the Stock Exchanges

A public statement shall be made by a merchant banker appointed as the ‘manager to the open offer’ on behalf of the acquiring company.  The public statement shall also be filed with all relevant stock exchanges with which the entity is registered. The same shall also be published in any English national daily, any Hindi national daily, and any regional language daily in the location where the private entity is registered. The statement shall include details such as the name and identity of the parties involved, the nature of the proposed acquisition, and the mode of consideration.

Transfer of Securities

A letter of offer shall be posted to the shareholders whose names are listed in the register of the private entity after approval from SEBI. A period of tendering is set by the Board for the shareholders to accept the offer. The statutory requirements of such an exchange are to be accomplished by the public entity and the offer is to be completed for the shareholders who have accepted the offer.

Completion of the Merger

After the above procedures have been followed, the merger is considered successful subject to certain obligations for a limited period. The relevant documents of the newly merged entity are to be preserved until notified otherwise by the Central government.