A transaction in which an existing shell company (i.e., a publicly traded
company with few or no actual business operations) acquires a private company
with actual business operations. In this situation, the private operating
company takes over the public shell company. The value of reverse mergers is
that they provide an inexpensive and rapid method of being listed on a major
U.S. stock exchange—but without the need to go through an initial public
offering (IPO). Another advantage of this approach is that it obviates the need
to achieve compliance with U.S. securities registration requirements. The end
result of a reverse merger is that the private company takes over management of
the public company and the stockholders of the private company become majority
stockholders of the public shell company.
According to the Public Company Accounting Oversight Board (PCAOB), numerous
companies from the China region entered into reverse mergers in the United
States between 2007 and 2010, whereby the Chinese companies were
"acquired" by U.S. shell companies as a means of being listed on U.S.
stock exchanges. This produced a rash of litigation against these Chinese
companies, in which a number of accounting violations were alleged against both
the Chinese firms and their directors and officers. This litigation has been
termed "Chinese Reverse Merger Claims."