Using a merger to take a private company public is an increasingly common choice. For example, the annual number of SPACs, public companies created solely for this purpose, increased more than ten-fold from 2018 through 2021.
If you're considering taking a company public by this route, you should be aware of the logistical and legal processes involved. A company will want to address these 5 issues when you talk about the idea.
Generally, this kind of merger is an alternative to doing an IPO. With an IPO, the private company has to find a major investment banking partner to underwrite the offering. When doing a merger rather than an IPO, the public company already exists. It also relieves the private company of some of the aggravation.
When you merge a public company with a private one, the acquiring firm provides shares to the acquired one. Typically, this means the public company exchanges some of its shares for control of the private one. It is possible to do it backward through a reverse merger, though.
Regardless of which direction the merger goes, however, the result is a publicly-traded corporation with shareholders from both firms. You should have a securities law attorney review the arrangement to confirm it will comply with all regulations.
During the early discussions, the two companies will need to exchange information. A corporate lawyer will draft a confidentiality agreement. An agreement protects the information in case the merger doesn't go through. Similarly, the two sides will likely sign a non-binding letter of intent if they're prepared to start negotiations.
Likewise, it discourages discussions of the proposal with outside parties. You don't want to run afoul of securities laws, especially when the company's valuation may be up in the air during the pre-merger period.
The two sides must disclose all relevant information. For example, the private firm must state who its creditors are and what its debt load is. This schedule of information covers everything from contracts to equity stakes. Similarly, the two sides will make representations and warranties necessary to protect all the parties' interests.
Presuming the two sides can reach a deal, they will draft an agreement and announce the proposal. At this time, the sides will inform the SEC of the merger plan. Folks with voting powers in each company will have the opportunity to debate the idea and vote on it.
Upon approval, the merged company will trade on the exchange the public one was on. Ticker changes are common at this time, too.
For more information, contact a securities law attorney.
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