A "reverse merger" is one where at least 51% of the ownership interests of the private company is acquired by the shell company in a transaction where at least 51% and sometimes up to 90% or more of the shell companies stock ends up in the hands of the shareholders of the private company at the conclusion of the transaction. The "shell" company is the survivor because only its shares have the right to trade in the public market but the shareholders of the private company are now in control. They can then change the name of the company to the name of their company and elect their nominees to the board of directors.
Sometimes companies have cash remaining as an asset when the other assets or business has been sold and on occasion the issue less than 50% of their shares to acquire all of the stock of the private company. These are not "shell" transactions but mergers or acquisitions depending upon the structure.
Shells are occasionally used as vehicles to promote fraud. A "promoter" owns a large percentage of shares in the shell which are often the only shares initially permitted to trade in the public market. The company hires a public relations firm to bombard stock brokers and potential shareholders with exaggerated claims as to the potential of the new company. After the "promoter" has sold his inventory of shares, the price of the stock drops, and the investors are left holding the bag.
Almost the same scenario often happens in the IPO market. Only a small portion of the total outstanding shares are sold to the public at a price only justified by wildly optimistic projections. When the forecasts are not realized, and when management is free from "lock-ups" a large supply of stock comes on the market , the price drops dramatically and again investors are left holding the bag.
The stock market operates under the laws of supply and demand. If you are contemplating a shell transaction, make certain you know where the unrestricted stock is, when it will hit the market, and who is going to buy it and why they will do so. Companies that are losing money should not attempt a shell merger transaction unless they know for certain where the money is going to come from to pay for all the losses until they reach break-even!
I found this little tidbit about reverse mergers on a website...interesting.