Reverse Mergers, Acquisitions and Due Diligence
Posted by Securities Attorney Laura Anthony | May 10, 2011 Tags: , , , , , ,

Due diligence refers to the legal, business and financial investigation of a business prior to entering into a reverse merger transaction. Although the due diligence process can vary depending on the nature of a transaction (a relatively small acquisition vs. a going public reverse merger)it is arguably the most important component of a transaction (or at least equal with documentation).

Reverse Mergers and Public Shells

In a reverse merger transaction involving a public shell acquiring a private operating business, the bulk of the due diligence will be by the acquiring shell on the target. Although some due diligence is also necessary on the public shell, as a Company subject to the reporting requirements of the Exchange Act of 1934, most, if not all, pertinent information is publicly available on the Securities and Exchange Commission’s (“SEC”) EDGAR database. In the case where the public shell is a non-reporting entity, both sides to the transaction will need to complete extensive, in-depth due diligence on each other.

Analyzing Private Companies Going Public

This article focuses on due diligence by the public acquirer on the private target. At the outset, in addition to requesting copies of corporate records and documents, all contracts, asset chain of title documents, financial statements and the like, the securities attorney for the public acquirer should make themselves familiar with the target’s business, including an understanding of how they make money, what assets are important in revenues, who are their commercial partners and suppliers, and common off balance sheet and other hidden arrangements in that business. It is important to have a basic understanding of the business in order to effectively review the documents and information once supplied, to know what to ask for and to isolate potential future problems.

Addressing Post Closing Issues

In addition to determining whether the transaction as a whole is worth pursuing, proper due diligence will help in structuring the reverse merger transaction and preparing the proper documentation to prevent post closing issues (such as making sure all assignments of contracts are complete, or where an assignment isn’t possible, new contracts are prepared).

Public Records Search

In addition to creating due diligence lists of documents and information to be supplied, counsel for the public acquirer should perform separate checks for publicly available information. In today’s internet world, this part of the process has become dramatically easier. SEC legal counsel should be careful not to miss the basics, such as UCC lien searches, judgment searches, recorded property title and regulatory issues with any of the principals or participants involved in the deal.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (“Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (“Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.