What is a reverse merger of a listed company?

A reverse merger is a process by which a subsidiary company, as the acquiring company, acquires, together with the assets of the acquired company, shares or treasury shares representing a majority of its share capital. This form of merger is opposed to a typical merger by acquisition, in which a parent company acquires a subsidiary.

A reverse merger of a listed company is a process that can be legally carried out through the amendment of the Companies Act of 1 March 2020. This amendment introduced provisions allowing a reverse merger of a listed company and introduced the option to directly issue to the shareholders of the target company the own shares acquired by the acquiring company as a result of the merger.

Reverse merger of a listed company

To carry out a reverse merger of a listed company, several conditions must be met. First, the subsidiary must hold sufficient funds to take over the parent company. Next, the subsidiary must obtain approval for the reverse merger from its governing body and from the parent company. The parent company must also present its position on the merger.

Once the reverse merger has been approved, a merger agreement must be drawn up to set out the details of the process, including how the shares of the merged companies will be settled. A reverse merger is a process that requires careful preparation and must be carried out in accordance with applicable laws.

Succession of rights and obligations

A reverse takeover of a listed company involves a succession of rights and obligations. As a result of this process, the acquiring company assumes all the rights and obligations of the acquired company. This means that the acquiring company takes over not only the listed company’s assets and liabilities, but also its history, image and rights.

Succession of rights and obligations is one of the most important elements of a reverse merger, so care must be taken to ensure that the transaction is carried out in accordance with the applicable laws.

Advantages of a reverse merger of a listed company

A reverse takeover of a listed company can bring many benefits to the subsidiary. First and foremost, it allows the subsidiary to go public without the need for a traditional IPO. This allows the subsidiary to save time and money.
Another benefit is that an in-kind contribution can be used. This allows the merger to proceed without the subsidiary having to contribute additional cash.
The disadvantages of a reverse takeover of a listed company include, among other things, the risks associated with the valuation of the public company. The value of the public company may be overvalued or undervalued, which may affect the value of the subsidiary’s shares.

Summary

This form of company merger was questionable due to the lack of provisions that explicitly regulated its admissibility and procedure. However, thanks to the amendment to the Commercial Companies Code of 1 March 2020, it has become possible to carry out such a process. Carrying out a reverse merger of a listed company may involve certain risks, but it can also bring many benefits to both companies.

Authors:

Michał Skrzypczak, Legal Assistant

Jarosław Rudy, Attorney at Law