Reverse Shell Merger – Deal Structure

Whether you are a Buyer or a Seller you will need representation by an experienced professional who understands the Shell marketplace and the “art of the deal”. Deal structure is one of many components needed to complete a successful transaction.  There are several ways to structure the purchase of a Shell.  Currently, there are two types of transactions that are most popular.

Straight Sale

This transaction is known as a “Cash and Carry” deal.  A straight sale occurs when the Seller is delivering a large majority of the outstanding common stock of the company to the Buyer.  These transactions are usually cash deals and are currently priced from $300K to $400K.  The higher the percentage delivered (usually 60% to 99%) the more the Shell costs.  This is the best deal for the Buyer and new investors because he has full control over the Shell. 

The free trading shares that remain in the float are what the Buyer has to be cautious about.  Those free trading shares represent the small investors from the previous company (the Seller). The shareholders will receive shares of the new company (the Buyer).  In most cases the new Buyer has reversed the shares, prior to trading, to the point that they do not pose any immediate threat to the Buyer if they are sold into the marketplace.  There are some caveats to this type of structure.  Sometimes the Seller has a large block of stock that he has retained through “friends and family” that can represent the major portion of the float.  Even after the Buyer has reversed the stock they still have a sizable block to sell.  If that happens, the Buyer must be aware that he may have to purchase the large block of stock when it hits the marketplace, thus adding additional cost to the purchase of the Shell.  That is why it is in the Buyers best interest to purchase a Shell that can not only deliver the largest number of shares but also the highest percentage of the total number of shares outstanding.

Equity Participation

Equity Participation refers to a Seller participating in the new Buyers deal after the reverse merger occurs.  The Seller will retain somewhere in the vicinity of five to twenty percent of the new company (his “equity participation”) in lieu of receiving cash for his shares.  This type of a transaction can be a mixed blessing.  Sellers who seek equity participation usually do so because they think they can identify a company that may become the next “Google”.  In most cases their greed overshadows the reality of the new company’s chances of becoming successful.  Many times the Buyer lacks the necessary funding to buy the Shell for cash so he seeks out an equity partner.  Investors should be very wary of these types of transactions because, unless there is a PIPE funding to back the deal, there is little chance of the stock going anywhere.

However, there are scenarios where Equity Participation makes a lot of sense.  The Buyer could be an Investment Banking Firm or Law Firm that is purchasing the Shell for a client company.  In this scenario the company backing into the Shell is substantial and in most cases the transaction will also include a PIPE funding.