Reverse Mergers Transaction – Documenting the Transaction




Posted by on November 02, 2016

Reverse Mergers Transaction – Documenting the Transaction- In the first segment I explained what a reverse merger transaction is and broadly described the confidentiality agreement and letter of intent. Today I am talking about the definitive agreement used in the transaction.

The reverse merger contract is usually called either a “Share Exchange Agreement” or a “Merger Agreement.” For today, I’ll call it a Merger Agreement. In a nutshell, the Merger Agreement sets out the financial terms and legal rights and obligations of the parties with respect to the transaction. The Merger Agreement sets forth closing procedures, preconditions to closing and post-closing obligations, and sets out representations and warranties by all parties and the rights and remedies if these representations and warranties are inaccurate.

The main components of the Merger Agreement are:

1. Representations and Warranties – of all the different parties. Reps and warranties include a wide array of facts, such as regarding the company’s capital structure and corporate existence, legal capacity and authority to enter a binding contract that the company has title to its assets, there are no undisclosed liabilities, there is no pending or potential litigation, taxes are paid and there are no issues with employees. .

2. Covenants – Covenants govern the parties’ actions for a period prior to and following closing. An example of a covenant is that the parties must continue to operate their business in the ordinary course and maintain assets pending closing, or that there be a stock split or name change pre or post-closing. All covenants require good faith in completion.

3. Conditions – Conditions generally refer to pre-closing conditions such as shareholder and board of director approvals, or necessary third party consents are obtained and proper documents are signed. If all conditions precedent are not met, the parties can usually cancel the transaction.

4. Indemnification/remedies – Indemnification and remedies provide the rights and remedies of the parties in the event of a breach of the agreement, including a material inaccuracy in the representations and warranties or in the event of an unforeseen third-party claim.

5. Schedules – Schedules provide the details of the broader disclosures in the Agreement, such as a complete list of assets, liabilities and equity holders.

In the event that the parties have not previously entered into a letter of intent or confidentiality agreement providing for due diligence review, the Merger Agreement may contain due diligence provisions. Likewise, the agreement may contain no-shop provisions, breakup fees, and/or non-compete and confidentiality provisions if not previously agreed to separately.