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I am actually a little impressed with the price action and volume this morning. Over $10,000 exchanged hands today. Although, it's still illiquid, but that may change in the coming days ahead, barring some catalyst to brew things up a significantly. What is bizarre to me, the fact that peeps are selling in 90's and $1.00 range. Why?
On another note. Just for a second or two, level 2 showed ETRF with over 5000 shares for $20.00, that is bit strange to me.
That's also a good point. Thanks for the feedback.
I hope you are right. The next couple of days should shed some light on the whole debacle. It's nice to have someone like you specifically, who is neutral, not all pumping or bashing. You are just waiting like the rest of us.
Very true....I love that shirt. Seems your son a great boy, be proud of him. There is not a day I go without say how much I love my son and daughter.
Bean, thanks for the response. Yes, you are right about the speculative part and I didn't think otherwise. This has been about theories and theories right from the start. But, at the same time there is more fuel to the fire since the RS and since nothing has been established as far as the reason for the RS, it has become a bigger theory. The interesting part of this whole thing is that if this was the big board and the RS happened, I would be able to justify the reason, but because it's OTC and I always try to shy away from those plays, it's very hard for me to predict what is the real reason behind the RS. Since peeps like to come with their own opinions, I thought I'll throw my opinion (theories) just for amusement. I stand correct, this has become an amusement for the board and as well as Mann.
"There is much more to the story than meets the eye" It could be a reverse merger, it could be a scam, or it could be nothing. More importantly, peeps maybe just decided to tag along like herds, whats interesting is the cycle of pumpers keep changing here, that's a bit strange to me. Did they unload their free shares (if this is a scam), why all of the sudden new pumpers? Are they given shares to pump it? When are they going to unload or have they?
Mine is somewhat alive and well, until Mann proves himself. Now, this is the interesting moment, this is where if he really wanted the SP to be so that he can wash out the penny players and get some reasonable serious money peeps involved, then my hats to him. Theoretically, if peeps in the know are going to jump this, it will be right time to do it, that remains to be seen, provided that the RM if true still ways to go. Theories....theories, that's all this has become, maybe it's good in a way or maybe it's bad at the same time, but just like you, I gave it a 50/50 shot, but don't plan on waiting till next year because I don't plan on becoming a pumper who is holding the bag, I don't want to go through another cycle of adrenaline of whether a reverse merger is real or not.
There is no such thing of protecting shareholders, no such thing. Mann is not doing this for you, nor me, or anybody else who is genuinely long on this board. Like I said, Mann is no SAINT, he is in it for himself and no body else. If Mann did this to protect shareholders, the least he could have done was shed light on the whole RS, might I remind you, there was no advance notice, no 8k, no reason whatsoever about the RS, might I also remind you that ASUV has been dark for so many years, don't you think it's about the time to shed light on your endeavors and if you really, really care about the shareholders, then you would provide some, details about the RS. The theory about doing the RS to keep the SP price just above $1.00, what if SP closed right below 0.04 pre-split, may I also remind that we were just there when the quarterly report was out, even below that, we visited 0.035, what would have then if the RS happened if we were at 0.035-0.04, would he have still done it? If he would have still done it, it would have defeat the purpose of having the SP in the $1.00 range. It's a process that goes through FINRA, about a couple of weeks before, he has no control over the SP during that 2 weeks. Therefore, he didn't do this out of kindness for shareholders, whatever it is, it could be a reverse merger play, or depending on where the SP would be after 3 months, he might do a forward split (so to speak and amusement for him). Either way, something might be in the works, if its the reverse merger and believe me, it will take way longer time than we expected because as it looks right now, nothing is in the near horizon. Furthermore, if Klean is as big as some claim they are, RS was not necessary. RS is never a good idea when it comes to reverse mergers, I've done research and based on the findings advantages and disadvantages of Reverse Mergers and this falls under the disadvantages criteria. If there is nothing by Tuesday, then there won't anything for another 3 months. If he wants to think about the shareholders, if he wants to take this to Nasdaq as some claim, this is where he can start, establishing some trust, otherwise, the only thing ASUV is doing is going through some cycles, I've seen penny stocks peeps waiting for years for a RM to happen, peeps get tired and leave and a new cycle of shareholders come into the play, this is the same thing, but just a different ticker. No, Mann doesn't is not being thoughtful about the shareholders, Mann only thinks about his own fate and nobody else, remember that, that's almost like most CEO'S.
rward splits for stocks in the major exchanges are rare, but are still more common than reverse splits. Reverse splits are usually done for companies that are doing very poorly and are at risk for being delisted. One of the most common reasons companies are delisted is because they do not meet the minimum price requirements.
Forward splits are a way of providing more liquidity to a stock. Liquidity is a double-edged sword for traders. It can help the stock move more since there are more shares available to be transacted. Having too few shares can have the price move so fast that a few shares changing hands can kill any run. Too much liquidity can make a stock never move more than a few pennies at a time.
More liquidity is generally seen like a good thing. The same effect that can slow down an uptrend can slow down declines. Since most of the market goes long stocks, a stock that slowly uptrends will eventually be noticed. However, a stock that has little interest can see the share price slowly eaten away with occasional selling. The selling can be because of frustration, tax reasons, or fear. Over time these small taps downward can amount to a lot. The extra liquidity can help the company hold off that kind of slow bleeding when its slow on news.
So, my question is, which one does Mann really want? Lets see if he made the right move.
So if there is issuance of more authorized shares, wouldn't that dilute the common shareholders, us?
Yeah, if you want to look as far back as November last year, yes it did. But that's 7 months and I thought you knew something that I didn't, like a drop of 30% in one day alone and please don't compare apples and oranges. Penny stocks can drop like a 50% in one day vs big boards, unless a failed drug candidate could drop 30-50% in one day. And if Apple drops further, Apple is a value and long term hold, it's not a speculative play. Believe me, I know, Apple runs in our family, my parents owned since mid 2000's from 20's.
If you want to go that far, that's legitimate. But Apple will never drop 30% in one day alone. Apple is a cash hoard, pretty much everything I own is Apple, I have almost half a dozen Apple computers, watch, phones, plus the old Macintosh. One huge mistake Apple did was introduce the watch, but still they are innovators.
Here is my "analogy." The NFL games and players, the players are the (pumpers) the NFL team is (Harmonic Energy). So this is how it goes, pre-season when the NFL team (ASUV) was trading at sub-pennies, then slowly creeps up in the regular season, wins most of the conference games, which leads them to compete in the post season and they are way in the lead, so they take out the starting quarter back, which we all know who that was and they have a different quarter back, which lead them to a victory or completely flop.
How did Apple go down 30%? I own 500 shares of Apple, my 13 year old son owns 2000 shares he inherited from his grandparents.
Anything is possible at this particular juncture, I know something for sure Batman, he is definitely not here to clear his name, there is no such thing as him wanting to clear his name unless he is a SAINT and more importantly he wanted to clear his name, he would at least say something vague, not try to keep everything in the dark. He probably spend so much to go current just to pump it with the rest of pumpers on board. But, if this destined for a huge pump, I will certainly be on the look out to unload my position. If the merger was true, by mid June should come to light, by Tuesday next week we should know something. We might see $5.00 soon even without the merger, but only because some outlet there is pumping this, believe me, I've seen pump and dump tickers as high as $15.00, perfect example was BRKO or BKRO, I forget which one, this could end of like that too. After, doing research this couple of days, I am shying away from the merger happening, but not ruling it out. There is too many hypers here and the cycle changes and I know who they are precisely and prefer not naming names. Remember charity starts from home, be on the look out for yourself, Mann doesn't do this for you nor me, or anyone who could naively believe in the merger (although it could be true), he only does this for himself. Remember this, there was dirt on the ticker back in 2012, how do we know, he wasn't part of the plan, he never came out and deny any of the accusations, or did he?
Apple and Google, will never go down 30%, unless the whole market crashes like it did in 2006-2008.
Then you theory, if correct, should keep the ticker above the $1.00 mark at every closing session. If he wants to takes it for Nasdaq. Either way, it wasn't a smart move by him, now that we are sitting at 50% below $1.00 mark. For the very least, he should announce something at very latest Tuesday, otherwise I can almost guarantee you that this going back to where we started.
I am prepared to lose it all too, either way I don't care. On my previous post I have also mentioned the fact that he wants the tree shaken out from penny pinchers, the RS was probably the main reason he did this. We'll know how this is going to unfold next week, or next month, or even next year. If this falls below where it's now and if it falls to penny land (back to where we started) don't think it was a smart move by him. I've seen penny tickers when even less OS and float lower than this, that are incredibly illiquid, he wanted he ticker to be illiquid than he has accomplished that for sure.
Meant to say, definitely "not" clearing his name.
That's why my sentiment have changed. Based on my research the last couple of days, your rebuttal is very accurate and valid. I would have expected something other than keeping everyone in the dark. Mann is not in the business to clear his name, whether the merger happens or not, Mann is after his own stake, definitely clearing his name for sure.
That's also an awesome post, I have been thinking about this all along too. I personally requested information as a potential investor and yet to have received anything in that regard. This is months and months away before if even becomes a RM. Nothing has changed except the previous hypers (maybe paid pumpers, maybe not) this board is going through cycle of pumpers, every now and then you will see one or two of the pumpers making appearances just to the current ones favors, just to keep the momentum going. Momentum is gone now because of the RS, nothing will change that, unless something dramatically changes everything Monday or Tuesday, those pumpers that were here before have already sold their free shares that was issued to them by the company, that's why we have a new set of pumpers on board who also have free shares that are waiting to unload. The more and more I think about this, the more, I believe if no announcement by Monday or Tuesday, this is all a pump, that's all there is.
Exactly my point, keeping investors in the dark is not a good strategy. Like you said, he is not obligated to submit an 8k, but if he wants to clear his name like some say on this board, then he wouldn't not keep shareholders in the dark, even some from 2012. All he had to do was issue a press release as to what his intentions are, they could be vague or direct, at least give some indication. Although an 8k would have shed some light about the intention. There is no such thing as gag order, if the deal is done then gag order is irrelevant, unless of course, RS was only the beginning stages of a RM, so in essence we could be months and months away before we hear anything about a speculative RM. Maybe he will shed some light on this next week, I would expect something, at least something by Tuesday, either an 8k or some PR about the either a RM or something entirely different. I believe, Monday would probably be the last day to completely shake out the tree and if the merger is true, Tuesday the ticker should see some uptick, if his intentions were to get rid of the small peeps and get some decent action into the ticker, it should happen starting Tuesday. It was great strategical move by him and Klean if the merger comes through though.
Dina certainly makes valid points, but, whether they are valid or not, I know the risks involved and for that same reason I chose to gamble away my money. Now, whether it's a gamble or not it remains to be seen. However, Mann is not suppose to keep shareholders in the dark and caught most off guard with RS, whether OTC like some claim the OTC doesn't have the obligation to let everyone know what their intentions are that's full of B.S. There should have been an 8k, not necessarily a name change, but an 8k regarding the RS at least. Remember supposedly ASUV is going to merge with Klean (a reputable establishment). If they way things looks right now, it maybe awhile before the merger if it happens. More importantly, I also don't believe the theory that Mann wants to clear his name, there is no such thing as anyone wants to clear their name, unless you are real SAINT, everyman and woman is after their own stake, Mann is not interested in knowing your well being, Mann is only interested in his own well being. Everyone here makes a good argument except pee seeker and stockgringo and thankfully one of them is gone. Btw, pee seeker a couple of days ago you replied to one of my posts and said "nice price action today". "I got 2 email alerts". I asked you what they were, you never responded, so I ask you again, what is your 2 email alerts? There is nothing that you have, if you anything, you would show proof, like many have shown proof by DD. Dina sometimes comes with a good rebuttal and I respect that. Theories aside, but stick to the facts and the facts to point to anything yet, this all could be a scam or it could be a merger, or it could be much bigger or smaller than that. Remember this, Mann is not here to clear his name, Mann is here for his stake only, just like everyone else on this board or outside of this board. Presidents don't become presidents for you and me, they want to become presidents to make his story (history) or in this election her-story (clinton). Nothing has changed except for some of us the off-guard RS, the value still there, now whether Klean is worth 100 million, 300 million, 500 million , or 20 million it remains to be seen if the actual merger will come to fruitation and the market will price it accordingly if it's Nasdaq bound, if it's not nasdaq bound the price will hover around 1's and 2's because it will still be illiquid, more so than it was before the pre-split, this was and always would have been more liquid than where we are now, unless we go to Nasdaq, otherwise volume won't surpass 3,000 shares a day, I know this based on my experience. Now things might change in the coming days, peeps in the know, might jump start the ticker after more are shaken out, simply because psychological effect it has on penny players. Either way, you look at things, it could be a reverse merger, it could be dilution, it could be something else, we will find out soon or later. I knew from the 1st-2nd week of June, now I say this again, although nothing has changed as far as speculated valuation, this could take a few more months, I don't think they had all their paperwork in the system yet, this RS was step in stone (just the start).
That's where you are wrong my friend because if that's your theory it will value Klean and the reverse merger "if" and "when" does happen at $25 million dollars only. Remember when you use to say on multiple occasions that nothing has changed? If Klean is a 100-300 million dollar company, whether they RS or didn't, will still be 1000's of percent increase the value still hasn't changed. Mann didn't do this RS for the RM, Mann did this to shake out tree and to some degree he was successful. There is something behind the scenes, I am not sure what it is.
Try it under symbol or name, then type in "ASUVD" then click on trade, if you haven't done that already.
Is it even tradable? I haven't even tried but having fun watching this.
C'mon I want to see who has the guts to slap the ask or even $1.02 for 50 shares. Lets see who has the guts? Or even better put in an order for 1.10, lets see if it will come across.
The ask is $1.88 now, looks good.
The question is which is going to hit 1st?
Then you contradicted your previous post. I am relieved now that you said this.
I sent an information last night, under the Emergency title highlighted. The 8k has to be done almost immediately with reverse splits, but with any other press releases, like quarterly reports or matters, it can be done yes up until 3 days.
Only one thing you say that makes sense, the "8K" the rest of the stuff is B.S. If no "8K" then this is a promo stock all the way to sub penny land again.
Batman, I think the same thing will happen here, if an 8k is not released.
I agree large institutional buyers will never touch this, until this get above 5 and trades the big boards.
Dina is right to a certain degree, there should be an 8k today at the very latest. I don't agree with the theory of no announcement will be made on Friday, that Friday is not a good day for PR, that's bunch of B.S. Like Dina said, in her last sentence, if you are a good company (in other words, not a scam) what different does it make what they you announce it. Mann needs to to do an 8k by at least after the market closes. However, after doing extensive DD last night, NO, Mann doesn't need a share holder approval if the merger is already in the works.
ASUV on the OTC everything is blank now, I would expect an 8K in the morning because it's customary.
Another valuable information: THE MERGER IS ON AND THOSE PEEPS WHO SOLD TODAY AND OTHER DAY WOULD WISH THEY NEVER DID. THANKS TO WHOEVER SOLD ME THE 0.07 TODAY FOR 30,000 MORE SHARES. MERGER...MERGER...MERGER
https://www.securitieslawyer101.com/2015/reverse-stock-split/
a) Increase of Number of Authorized Common Shares or Reverse Stock Split Pre-Closing
The easiest ways to enable Public Shells to issue enough common shares to the shareholders of the Private Company to accomplish the reverse shell merger are: (i) the increase in the number of its authorized common shares; or (ii) a reverse stock split before the merger is consummated. Pursuant to Section 242 of the Delaware General Corporation Law (“DGCL”),[3] each of these alternatives requires an amendment to the certificate of incorporation (CoI) of the Public Shell. Pursuant to the same provision, shareholder approval is necessary to amend the CoI. Whether such shareholder approval can be obtained by written consent of the majority shareholder(s) depends on the applicable corporate statute and the Public Shell’s by-laws. For instance, under DGCL 228, majority shareholder consent is possible unless the by-laws state otherwise; under Section 615 of the New York Business Corporation Law, generally unanimous shareholder consent is required, unless the CoI provides otherwise. Depending on the outcome of the analysis of the applicable corporate law, the CoI, and the by-laws, a shareholders’ meeting might be required prior to closing. However, both a shareholders’ meeting and a majority shareholder written consent will trigger time consuming procedures mandated by federal securities laws as set forth in Section III.1., which will delay a closing substantially.
b) Increase of Number of Authorized Common Shares Post-Closing
To avoid the timing problem set forth under (a), practitioners have developed a technique by which the transaction closes before the number of authorized common shares is increased or the reverse split is accomplished. This might appear puzzling because, after all, one closing condition is the payment of consideration in the form of the issuance of shares of common stock to the Private Company’s shareholders, which is in turn impossible without enough authorized common shares. The solution to the problem is referred to as the “Preferred Stock Solution”. A “good” Public Shell will generally have authorized but unissued preferred shares. In such a case, the Public Shell Board of Directors can file a Certificate of Designations with the Secretary of State (assuming that, as will generally be the case, the CoI vests corresponding powers in the board [4]) determining that each preferred share shall be convertible into a certain number of common shares so that after the conversion, the shareholders of the Private Company will hold the percentage of common shares in the Public Shell they are supposed to hold under the terms of the deal.
Example:
A Public Shell has 10,000,000 shares of common stock authorized, of which 5,000,000 are issued to its 200 shareholders. In the merger with a Private Company, the shareholders of the Private Company are supposed to receive 80% of the Public Shell’s stock, which is impossible without an increase in the authorized number of common shares or a reverse split of the outstanding common shares, both of which would require shareholder approval before closing. However, the Public Shell also has 1,000 preferred shares authorized. At the closing of the merger, it can issue 5,000,000 common shares and 1,000 preferred shares, with each preferred share convertible into 15,000 common shares upon authorization of a sufficient number of the underlying common shares and each preferred share having 15,000 voting and other rights incidental to common shares. After the closing, an increase in the number of authorized common shares by shareholder approval can take place and 15,000,000 additional common shares can be issued for the Private Company’s shareholders so that they end up with 20,000,000 common shares, which equals 80% of the then total outstanding number of common shares.
Advantage: The closing of the reverse shell merger can take place prior to a shareholders’ meeting or adoption of a shareholders’ consent (with all its time consuming security law implications described in Section III.1.), which is necessary for the authorization of additional shares of common stock. Naturally, the necessity for such a shareholders’ meeting or shareholder consent is only postponed, not avoided, through the Preferred Stock Solution.
Part III. Securities Law Aspects
1. Timeline and Scope of Proxy or Information Statement
As stated above in Section II.2, if the capital structure of a Public Shell is not adequate to accomplish the merger, the capital structure will have to be altered by effecting either an increase in the authorized number of shares or a reverse split of the outstanding shares, with both options generally requiring Public Shell shareholder approval. Depending on the applicable corporate statute and the bylaws, such shareholder approval can be obtained by either majority consent or by vote in a shareholders’ meeting. In the first case, a proxy statement complying with Schedule 14A under the 34 Act is required. In the second case, an information statement complying with Schedule 14C under the 34 Act is required. The filing, review and distribution procedure for a proxy or information statement can be delayed until after the closing by utilizing the Preferred Stock Solution, if possible. However, a proxy or information statement can only be avoided entirely if the Public Shell already has the necessary capital structure in place to accomplish the merger, which in our experience is rarely the case.
a) Timeline
A preliminary Schedule 14A proxy statement must be filed with the SEC at least ten calendar days before a final proxy statement is to be sent out to the Public Shell shareholders in preparation of the shareholders’ meeting.[5] The period between the mailing of the definitive proxy statement and the shareholders’ meeting is usually determined in the by-laws. It is usually at least 20 days. It would be erroneous, however, to assume that based on these two time periods, the necessary capital restructuring could be accomplished within 10 days plus the notice period specified in the by-laws. The SEC can, and for reasons stated below in (b) almost certainly will, give the preliminary proxy statement a full review, and this process can take weeks, if not months. Accordingly, if a capital restructuring is to be accomplished before the closing, the parties to the reverse shell merger are well advised to assume that the closing will not take place before at least three months after the merger agreement has been signed, if not later.
The timeline for a Schedule 14C information statement is similar. A preliminary information statement must be filed with the SEC at least 10 calendar days prior to the date the definitive information statement is to be distributed to the shareholders.[6] The definitive information statement, in turn, must be sent to the shareholders at least 20 days before the shareholder consent can be adopted. Again, because an SEC review of the preliminary information statement is likely, the parties should assume that shareholder action cannot be taken for at least three months after the filing of the preliminary information statement.
b) Scope
The subject of the required content of the Schedule 14A or 14C is a trap for the unwary. Since technically the restructuring of the Public Company’s capital only requires an amendment of the CoI, it would be tempting to include only the very limited information required under Item 19 of Schedule 14A (which is also applicable to Schedule 14C), which states:
If action is to be taken with respect to any amendment of the registrant’s charter, by-laws or other documents as to which information is not required above, state briefly the reasons for and general effect of such amendment.
First, the language “as to which information is not required above” necessitates providing any information required by any other applicable items. For example, item 11, which deals with the authorization or issuance of securities otherwise than for exchange, would certainly be applicable where the Public Shell needs to increase its number of authorized shares to accomplish the merger. Therefore, such a situation would require a detailed description of the Public Shell’s securities in question.
Second, and more importantly, Note A to Schedule 14A (also applicable to Schedule 14C) states:
Where any item calls for information with respect to any matter to be acted upon and such matter involves other matters with respect to which information is called for by other items of this schedule, the information called for by such other items shall also be given. For example, where a solicitation of security holders is for the purpose of approving the authorization of additional securities which are to be used to acquire another specified company, and the registrant’s security holders will not have a separate opportunity to vote upon the transaction, the solicitation to authorize the securities is also a solicitation with respect to the acquisition. Under those facts, information required by items 11, 13, and 14 shall be furnished.
This Note, although addressing directly only the situation in which an increase in the authorized number of shares is contemplated to accomplish a merger, is certainly also applicable to situations where the Public Shell intends to perform a reverse share split for the same purpose. The Note is applicable because, as stated above in Section II.1., no Public Shell shareholder approval is necessary for the merger. The implications - inclusion of the information required by items 11, 13, and 14 - are substantial. We have already explained the information required by Item 11. In addition, Item 13 requires financial information for both the Public Shell and the Private Company, as well as pro forma financial statements giving effect to the merger and related transactions, as required by Article 11 of Regulation S-X. Finally, in a reverse shell merger scenario, Item 14 requires all the information required under an S-4 registration statement, including, for instance, a description of the businesses of the Public Shell and the Private Company, risk factors and a Management’s Discussion and Analysis (“MD&A”).
Essentially, the proxy statement and information statement require the same effort as a registration statement on Form S-1, which is generally used for an initial public offering. Also, we believe this would apply even though the capital restructuring is supposed to occur pre- or post-closing. Therefore, one of the major advantages of a reverse shell merger, - to be a quick way to go public - disappears.
It should be mentioned here that in our experience the SEC staff does not favor the technique of reverse shell mergers because, as shall be explained in Section III.2.(c), this technique is often utilized to the detriment of the shareholders of the Public Shell. Accordingly, the SEC staff will seize any opportunity to scrutinize a reverse shell merger, and consequently shall in all likelihood give a full review to any preliminary proxy or information statement. Due to the described scope of the required proxy or information statement, the SEC review will generally be a time consuming and expensive process involving management, accountants, auditors and legal advisors.
911 Emergency: Make sure you read everything, I believe this is the merger
and please read (ii) that will shine the light on everything plus
a) Increase of Number of Authorized Common Shares or Reverse Stock Split Pre-Closing
The easiest ways to enable Public Shells to issue enough common shares to the shareholders of the Private Company to accomplish the reverse shell merger are: (i) the increase in the number of its authorized common shares; or (ii) a reverse stock split before the merger is consummated. Pursuant to Section 242 of the Delaware General Corporation Law (“DGCL”),[3] each of these alternatives requires an amendment to the certificate of incorporation (CoI) of the Public Shell. Pursuant to the same provision, shareholder approval is necessary to amend the CoI. Whether such shareholder approval can be obtained by written consent of the majority shareholder(s) depends on the applicable corporate statute and the Public Shell’s by-laws. For instance, under DGCL 228, majority shareholder consent is possible unless the by-laws state otherwise; under Section 615 of the New York Business Corporation Law, generally unanimous shareholder consent is required, unless the CoI provides otherwise. Depending on the outcome of the analysis of the applicable corporate law, the CoI, and the by-laws, a shareholders’ meeting might be required prior to closing. However, both a shareholders’ meeting and a majority shareholder written consent will trigger time consuming procedures mandated by federal securities laws as set forth in Section III.1., which will delay a closing substantially.
b) Increase of Number of Authorized Common Shares Post-Closing
To avoid the timing problem set forth under (a), practitioners have developed a technique by which the transaction closes before the number of authorized common shares is increased or the reverse split is accomplished. This might appear puzzling because, after all, one closing condition is the payment of consideration in the form of the issuance of shares of common stock to the Private Company’s shareholders, which is in turn impossible without enough authorized common shares. The solution to the problem is referred to as the “Preferred Stock Solution”. A “good” Public Shell will generally have authorized but unissued preferred shares. In such a case, the Public Shell Board of Directors can file a Certificate of Designations with the Secretary of State (assuming that, as will generally be the case, the CoI vests corresponding powers in the board [4]) determining that each preferred share shall be convertible into a certain number of common shares so that after the conversion, the shareholders of the Private Company will hold the percentage of common shares in the Public Shell they are supposed to hold under the terms of the deal.
Example:
A Public Shell has 10,000,000 shares of common stock authorized, of which 5,000,000 are issued to its 200 shareholders. In the merger with a Private Company, the shareholders of the Private Company are supposed to receive 80% of the Public Shell’s stock, which is impossible without an increase in the authorized number of common shares or a reverse split of the outstanding common shares, both of which would require shareholder approval before closing. However, the Public Shell also has 1,000 preferred shares authorized. At the closing of the merger, it can issue 5,000,000 common shares and 1,000 preferred shares, with each preferred share convertible into 15,000 common shares upon authorization of a sufficient number of the underlying common shares and each preferred share having 15,000 voting and other rights incidental to common shares. After the closing, an increase in the number of authorized common shares by shareholder approval can take place and 15,000,000 additional common shares can be issued for the Private Company’s shareholders so that they end up with 20,000,000 common shares, which equals 80% of the then total outstanding number of common shares.
Advantage: The closing of the reverse shell merger can take place prior to a shareholders’ meeting or adoption of a shareholders’ consent (with all its time consuming security law implications described in Section III.1.), which is necessary for the authorization of additional shares of common stock. Naturally, the necessity for such a shareholders’ meeting or shareholder consent is only postponed, not avoided, through the Preferred Stock Solution.
Part III. Securities Law Aspects
1. Timeline and Scope of Proxy or Information Statement
As stated above in Section II.2, if the capital structure of a Public Shell is not adequate to accomplish the merger, the capital structure will have to be altered by effecting either an increase in the authorized number of shares or a reverse split of the outstanding shares, with both options generally requiring Public Shell shareholder approval. Depending on the applicable corporate statute and the bylaws, such shareholder approval can be obtained by either majority consent or by vote in a shareholders’ meeting. In the first case, a proxy statement complying with Schedule 14A under the 34 Act is required. In the second case, an information statement complying with Schedule 14C under the 34 Act is required. The filing, review and distribution procedure for a proxy or information statement can be delayed until after the closing by utilizing the Preferred Stock Solution, if possible. However, a proxy or information statement can only be avoided entirely if the Public Shell already has the necessary capital structure in place to accomplish the merger, which in our experience is rarely the case.
a) Timeline
A preliminary Schedule 14A proxy statement must be filed with the SEC at least ten calendar days before a final proxy statement is to be sent out to the Public Shell shareholders in preparation of the shareholders’ meeting.[5] The period between the mailing of the definitive proxy statement and the shareholders’ meeting is usually determined in the by-laws. It is usually at least 20 days. It would be erroneous, however, to assume that based on these two time periods, the necessary capital restructuring could be accomplished within 10 days plus the notice period specified in the by-laws. The SEC can, and for reasons stated below in (b) almost certainly will, give the preliminary proxy statement a full review, and this process can take weeks, if not months. Accordingly, if a capital restructuring is to be accomplished before the closing, the parties to the reverse shell merger are well advised to assume that the closing will not take place before at least three months after the merger agreement has been signed, if not later.
The timeline for a Schedule 14C information statement is similar. A preliminary information statement must be filed with the SEC at least 10 calendar days prior to the date the definitive information statement is to be distributed to the shareholders.[6] The definitive information statement, in turn, must be sent to the shareholders at least 20 days before the shareholder consent can be adopted. Again, because an SEC review of the preliminary information statement is likely, the parties should assume that shareholder action cannot be taken for at least three months after the filing of the preliminary information statement.
b) Scope
The subject of the required content of the Schedule 14A or 14C is a trap for the unwary. Since technically the restructuring of the Public Company’s capital only requires an amendment of the CoI, it would be tempting to include only the very limited information required under Item 19 of Schedule 14A (which is also applicable to Schedule 14C), which states:
If action is to be taken with respect to any amendment of the registrant’s charter, by-laws or other documents as to which information is not required above, state briefly the reasons for and general effect of such amendment.
First, the language “as to which information is not required above” necessitates providing any information required by any other applicable items. For example, item 11, which deals with the authorization or issuance of securities otherwise than for exchange, would certainly be applicable where the Public Shell needs to increase its number of authorized shares to accomplish the merger. Therefore, such a situation would require a detailed description of the Public Shell’s securities in question.
Second, and more importantly, Note A to Schedule 14A (also applicable to Schedule 14C) states:
Where any item calls for information with respect to any matter to be acted upon and such matter involves other matters with respect to which information is called for by other items of this schedule, the information called for by such other items shall also be given. For example, where a solicitation of security holders is for the purpose of approving the authorization of additional securities which are to be used to acquire another specified company, and the registrant’s security holders will not have a separate opportunity to vote upon the transaction, the solicitation to authorize the securities is also a solicitation with respect to the acquisition. Under those facts, information required by items 11, 13, and 14 shall be furnished.
This Note, although addressing directly only the situation in which an increase in the authorized number of shares is contemplated to accomplish a merger, is certainly also applicable to situations where the Public Shell intends to perform a reverse share split for the same purpose. The Note is applicable because, as stated above in Section II.1., no Public Shell shareholder approval is necessary for the merger. The implications - inclusion of the information required by items 11, 13, and 14 - are substantial. We have already explained the information required by Item 11. In addition, Item 13 requires financial information for both the Public Shell and the Private Company, as well as pro forma financial statements giving effect to the merger and related transactions, as required by Article 11 of Regulation S-X. Finally, in a reverse shell merger scenario, Item 14 requires all the information required under an S-4 registration statement, including, for instance, a description of the businesses of the Public Shell and the Private Company, risk factors and a Management’s Discussion and Analysis (“MD&A”).
Essentially, the proxy statement and information statement require the same effort as a registration statement on Form S-1, which is generally used for an initial public offering. Also, we believe this would apply even though the capital restructuring is supposed to occur pre- or post-closing. Therefore, one of the major advantages of a reverse shell merger, - to be a quick way to go public - disappears.
It should be mentioned here that in our experience the SEC staff does not favor the technique of reverse shell mergers because, as shall be explained in Section III.2.(c), this technique is often utilized to the detriment of the shareholders of the Public Shell. Accordingly, the SEC staff will seize any opportunity to scrutinize a reverse shell merger, and consequently shall in all likelihood give a full review to any preliminary proxy or information statement. Due to the described scope of the required proxy or information statement, the SEC review will generally be a time consuming and expensive process involving management, accountants, auditors and legal advisors.
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