Need a Reverse Split? Avoid a Merger Proxy

When a public shell is in the process of completing a reverse merger it often finds itself with too many issued and outstanding shares or not enough authorized shares. One solution is a reverse stock split. A reverse stock split is a pro rata reduction in the number of shares of capital stock of a company that are outstanding. It is often used to increase per-share price, or to make more authorized shares available in order to complete a reverse merger. At the time of the split, each shareholder still owns the same overall percentage interest in the company. Most states’ laws require a reverse stock split to be approved by shareholders, and this requires a proxy or information statement under SEC rules, if the shell is subject to the SEC’s reporting requirements. If the reverse split is a condition of the reverse merger, the SEC requires a much more complex merger proxy.

There are three lawful ways to avoid an involved merger proxy:

  • If sufficient shares are available for issuance in order to consummate the transaction, the reverse merger is closed with the number of shares already existing. After the merger is completed, the combined company could then seek a reverse split that is not a condition to the merger and only a reverse split proxy is necessary.
  • Even if insufficient shares are available, the shell might be able to issue pre-authorized shares of preferred stock that converts into common stock when a reverse split or increase in authorized shares is approved after the reverse merger. Other strategies are possible even if the shell does not have so-called “blank check” preferred stock.
  • The SEC requires a full merger proxy when the reverse spilt is a condition to the merger. To address this provide in the merger agreement that the parties request a reverse split, contemplate it, but do not make it a condition to the transaction. Again, in this case only the much simpler reverse split proxy is necessary.
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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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