A reverse takeover (RTO) is a transaction by which a publicly traded company acquires all the shares of a target company that has an operating business, but whose shares are privately held. By virtue of the RTO, shareholders of the target company exchange their shares for shares of the listed company, which in turn holds the shares of the target company owning the operating business. An RTO is generally seen as an alternative to the traditional IPO and is popular in some jurisdictions, including the USA and Canada. One of the most well-known RTO transactions involved Burger King, which was privately held prior to its RTO in 2012, resulting in its relisting on the New York Stock Exchange.
Over the years, British Virgin Islands companies have been used to assist in several RTO transactions, generally by way of a BVI statutory merger which allows the relevant exchange of shares and assets to take place by operation of law. Indeed, an RTO is a great option for certain businesses and with the flexibility of the statutory merger provisions under the BVI Business Companies Act, 2004 (as amended) (the Act) more businesses are looking to the BVI to pursue their listing ambitions.
In a recent BVI RTO transaction, Fredonia Management Limited (Fredonia Management), whose business involves gold and silver exploration, completed a three-cornered BVI statutory merger with Fredonia Mining Corp., a BVI incorporated subsidiary of Fredonia Mining Inc. (formerly, Richmond Road Capital Corp.) in a Qualifying Transaction in accordance with TSX Venture Exchange guidelines. The RTO resulted in the shareholders of Fredonia Management becoming shareholders of the listed entity, Fredonia Mining Inc., of which Fredonia Management is now a wholly-owned subsidiary. Below we will look at how the BVI statutory merger process works and then briefly examine how it can be used to facilitate an RTO.
BVI Statutory Merger
A BVI company may merge with one or more BVI companies pursuant to Sections 169 to 174 of the BVI Act. Although a BVI company may also with a foreign company, the focus of this discussion is on the merger of BVI companies. Under Section 169 of the Act, a merger is defined as the merging of two or more constituent companies into one of the constituent companies. The merger process must comply with the provisions of the Act in respect of mergers as summarised below.
Merger process
The directors of each constituent company that proposes to participate in a merger must approve a written Plan of Merger. The Plan of Merger must contain the following information:
- the name of each constituent company and the name of the surviving company;
- with respect to each constituent company:
(a) the designation and number of outstanding shares of each class of shares, specifying each such class entitled to vote on the merger; and
(b) a specification of each such class, if any, entitled to vote as a class;
- the terms and conditions of the proposed merger, including the manner and basis of cancelling, reclassifying, or converting shares in each constituent company into shares, debt obligations, or other securities in the surviving company, or money or other assets, or a combination thereof; and
- a statement of any amendment to the memorandum or articles of the surviving company to be brought about by the merger.
It must be noted that some or all shares of the same class of shares in each constituent company may be converted into a particular or mixed kind of assets and other shares of the class, or all shares of other classes of shares, may be converted into other assets.
After the Plan of Merger has been approved by the directors, it must be authorised by a resolution of members and the outstanding shares of every class of shares that are entitled to vote on the merger as a class if the memorandum or articles so provide, or if the Plan of Merger contains any provisions that, if contained in a proposed amendment to the memorandum or articles, would entitle the class to vote on the proposed amendment as a class.
If a meeting of members is held to approve the Plan of Merger, notice of the meeting, accompanied by a copy of the Plan of Merger, must be given to each member, whether or not entitled to vote on the merger. If it is proposed to obtain the written consent of members to approve the Plan of Merger, a copy of the Plan is to be given to each member, whether or not entitled to consent to the Plan of Merger.
Filings required
After approval of the Plan of Merger by the directors and members of each constituent company, Articles of Merger must be executed by each constituent company.
The Articles of Merger must contain:
- the Plan of Merger;
- the date on which the memorandum and articles of each constituent company were registered by the Registrar; and
- the manner in which the merger was authorised with respect to each constituent company.
The Articles of Merger and any resolution to amend the constitutional documents of the surviving company must then be filed with the Registrar. Upon being satisfied that the Act has been complied with, the Registrar will register the Articles of Merger.
Effect of merger
As soon as the merger becomes effective, the Act provides for several effects that flow from the merger. These include:
(a) the surviving company in so far as is consistent with its constitutional documents, as amended or established by the Articles of Merger, has all rights, privileges, immunities, powers, objects and purposes of each of the constituent companies;
(b) assets of every description, including choses in action and the business of each of the constituent companies, immediately vests in the surviving company; and
(c) the surviving company is liable for all claims, debts, liabilities and obligations of each of the constituent companies.
It should also be noted that where a merger occurs,
(a) no conviction, judgement, ruling, order, claim, debt, liability, or obligation due or to become due, and no cause existing against a constituent company or against any member, director, officer, or agent thereof, is released or impaired by the merger; and
(b) no proceedings, whether civil or criminal, pending at the time of a merger by or against a constituent company, or against any member, director, officer or agent thereof, are abated or discontinued by the merger, but
(i) the proceedings may be enforced, prosecuted, settled or compromised by or against the surviving company or against the member, director, officer or agent thereof; as the case may be, or
(ii) the surviving company may be substituted in the proceedings for a constituent company.
How the BVI Statutory Merger process facilitates an RTO
Where an RTO is contemplated, the operating business would be held through a BVI company. The listed company would also incorporate a BVI company as a wholly-owned subsidiary. Pursuant to the Act, the two BVI companies would merge as described above with the BVI company that owns the operating business being the surviving company of the merger—while its shareholders exchange their shares for shares in the listed company.
Also, by virtue of the merger, the listed company becomes the owner of the shares in the surviving company (which owns the operating business) as a result of its prior shareholding in the merged wholly-owned subsidiary. The exchange of shares would be fully set out in the Plan of Merger. Importantly, the BVI statutory merger process allows for the exchange of shares not only for shares in the surviving company, but also for other assets. This mechanism allows the shareholders of the target entity to acquire shares and become shareholders of the listed entity.
Undeniably, the statutory nature of the BVI merger process and the certainty it provides with respect to the exchange of shares and transfer of assets and liabilities are crucial elements of most RTOs. As such, it is expected that the BVI will continue to be a key jurisdiction when listing candidates consider an RTO transaction.
For additional information, please contact the author, Christopher Simpson, at csimpson@onealwebster.com.
