The term “reverse merger” refers to a reorganisation whereby a subsidiary company absorbs the assets and liabilities of its parent holding company. With the approval of the merger, the parent company is being dissolved without being placed into liquidation and the subsidiary company continues to exist with direct shareholders, the persons who previously held the shares in the parent company.
Clients may wish to implement a reverse merger, where the corporate structure is desired to be simplified, and the subsidiary company is preferred to be kept alive. Such situations may include cases where there is no longer reason to maintain a two layer structure e.g. because the shareholder structure in the parent company has been simplified -for example, only one shareholder to have remained in the parent company, or the parent company to have no operations other than holding only one subsidiary, and at the same time, the subsidiary company to be party in agreements that must remain in place e.g. financing transactions, ongoing commercial arrangements or security agreements that cannot be amended. Other instances may be where the subsidiary has ongoing activities and employees, and moving those to another entity would cause disruption. Other reasons may also apply, for example due to requirements of foreign law, where the subsidiary holds assets in other jurisdictions, and registering those to another entity would be complex or impossible.
The Cyprus Companies Law, Cap. 113 neither expressly provides the framework for the implementation of such a reverse merger, nor does it prohibit it. The relevant sections of the Companies Law (sections 198 – 200), give to the Court broad powers to sanction “compromises or arrangements” proposed “between a company and its creditors or any class of them or between the company and its members or any class of them”.
Our experience has shown that, though uncommon, it is possible for Cyprus companies to implement a reverse merger and to apply to the Court to sanction it. In such a process, the rules and principles that apply are generally the same ones, as in the case of an ordinary merger for example, one between a parent and a subsidiary, whereby the parent company is the surviving entity.
In a nutshell, this means that a merger plan must be formed and approved, and an application must be made to the Court to have the merger sanctioned. The Court must be satisfied that the majority of the members and if any, the creditors, have approved the merger plan, and that the merger does not adversely affect rights of interested persons -who have the right to object.
In practice, to satisfy the Court to sanction the merger, companies must submit as evidence, approvals by the members and their up-to-date financial statements showing their financial position and who, if any, the company’s creditors are. Where creditors exist, consents are usually submitted to ease any concern that they may be negatively affected.
In a reverse merger, a differentiating step as compared to an ordinary merger, is that the subsidiary company, which will survive the merger, shall reduce its share capital to cancel the shares held by the mother company which will be dissolved, and necessarily issue new shares to the shareholders of the dissolving company, so to become shareholders in the surviving company.
It should be noted that the Court always maintains discretion to request additional information or steps in order to be satisfied to sanction the merger.