Tip of the Week: Don’t Forget Schedule 14F!

If you anticipate a change in the shell’s board upon the completion of a reverse merger, this filing is almost always required. It is sometimes forgotten or ignored, but Schedule 14F must be prepared, filed with the SEC and mailed to the shell’s shareholders ten days before closing the deal. The most painstaking part of this process is the weeks it takes to complete the preparation, filing, printing, mailing and closing. Schedule 14F looks similar to a proxy statement for the annual meeting of shareholders in which directors are being elected.

If you were looking to avoid this filing, you would have to remove the board change as a condition to the merger and have no other agreement, arrangement or understanding with regard to changing the board. This is the only legitimate way to avoid the filing. Many argue that Schedule 14F shouldn’t be required because the shareholders do not benefit from receiving this information and have no ability to vote. However, rules are rules. The 14F includes information that would not otherwise be available prior to closing concerning the background of those who will run the newly merged company, including the disclosure of “bad boy” history. Therefore, going through with the filing or removing the board change requirement are my two recommended ways.

Another way to avoid the delay in closing associated with the filing is to file at closing, or less than 10 days before. In this situation, the majority of the board would not be able to change until 10 days pass after filing and mailing, but you could close the merger in the interim. Thus if, for example, the shell has one board member, at closing you might be able to appoint another director on the side of the private company merging in and wait 10 days from filing before the shell director resigns post-closing.

Here one could argue that the majority of the board has not changed. At least this prevents the shell director from passing anything without the private company director, but it also prevents the latter from passing anything. Since this is a short time period, it is for the parties to decide. Some shell clients refuse to do this as they do not wish to be board members, with associated fiduciary duties and liability exposure, post-closing.

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