含羞草社区

Reverse mergers are often an effective way to structure M&A transactions involving publicly listed companies. In a reverse merger, a publicly listed company, the merging listed entity, merges with an unlisted company, the merging unlisted entity, resulting in a combined merged publicly listed company.

A key advantage of a reverse merger is that post-completion of the transaction, the shares of the merging unlisted entity are listed on a stock exchange without the requirement to follow the traditional initial public offering process. This provides liquidity to existing shareholders of the merging unlisted entity and, in some cases, an exit opportunity for financial investors who may be shareholders of the merging unlisted entity. That said, such liquidity may not be instantly available. Securities regulations in India governing mergers of listed entities impose certain lock-ins on the pre-scheme share capital of the merging unlisted company. Under these regulations, up to 20% of the post-merger paid-up share capital held by promoters of the merging unlisted entity have to be locked-in for a period of three years from the date of listing, and all the remaining shares of the merging unlisted entity that are listed are to be locked-in for a period one year from the date of the listing.

Another key advantage of a reverse merger is that the acquisition of a publicly listed company by an unlisted company by way of reverse merger, that is one required under the Companies Act, 2013, to be approved by the , is exempt from the obligation to make an open offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. This can therefore be a way to implement a cashless acquisition of a publicly listed Indian company.

Disadvantages can be that reverse mergers can be time-consuming to complete and require approval and clearances from stock exchanges and the approval of the . Reverse mergers may not be the ideal structure if a quick closing is the main objective.

The requirement to obtain the shareholders’ approval of the merging listed entity only adds to the timelines and creates deal uncertainty. Reverse mergers, in some cases, require the approval of not only three-quarters of members or class of members of the entities involved, as required under the Companies Act, 2013, but also the approval of the majority of the public shareholders of the merging listed entity.

Because a reverse merger affects public shareholders, the Securities and Exchange Board of India (SEBI) has prescribed additional safeguards to ensure that the interests of the public shareholders of the merging listed entity are protected. For example, as part of the reverse merger process the merging listed entity is required to receive no objections from the stock exchanges on which its shares are listed. The application for such clearances has to be accompanied by documents and information such as a valuation report prepared in accordance with prescribed requirements, a fairness opinion prepared by a SEBI-registered merchant banker and a report from the audit committee of the merging listed entity recommending the transaction. There must also be a report from a committee of independent directors of the merging listed entity recommending the transaction that has considered whether the transaction would be detrimental to the shareholders of the listed company.

In summary, while reverse mergers do provide a path for unlisted companies to list their shares without the requirement to follow the initial public offer process and can be used as an effective way of completing the acquisition of a publicly listed company, there are a number of steps and approvals that have to be completed before they can be implemented. Although a reverse merger does bypass the usual initial public offering process, because the shares of the combined merged listed entity will ultimately be listed, it is better for corporate governance norms that apply to listed companies to be put in place by the entity whose shares are proposed to be listed before the merger is completed. These include the requirement to have a certain number of independent directors, the requirement to have certain key managerial personnel and the requirement to have policies appropriate to listed companies.

Karun Prakash is a partner at Shardul Amarchand Mangaldas & Co.