A reverse merger example and its impact on ACE*

When reorganizing groups, the management is called to ponder both organizational and business reasons for restructuring without forgetting tax implications whose impact might radically change the operation profitability.

Our contribution analyzes reverse merger transactions with a specific focus on the effects arising out of the changes in the Italian Civil Code, the new notary trends and the issues that might emerge with respect to Aids for Economic Growth.

Particularly, we remind that when restructuring large industrial groups, the need to rightsize the management structure or to respond to the upcoming commercial demands can lead the management to opt for a business transaction.

Commercial reasons may entail customer expectations or bids requirements setting net equity thresholds for companies to enter agreements for a determined amount of Euro. 

In other cases, the focus could be that of taking on board a third-party shareholder in an initiative that, in the first instance, focused only on a part of the business.  For example, imagine that, for the reasons mentioned above, it was necessary to split a business into two units (Alfa Spa and Beta Spa), that Beta is 60% owned by Alfa, with the remaining 40% being owned by Gamma Spa.

Over the years, the circumstances that had led to the creation of two separated entities may cease to exist and the need to restructure the organization and cut costs may suggest the integration of the two entities.

The integration may be undertaken under different scenarios: a transfer of business unit, a forward merger, a demerger of the business unit to be integrated with the business unit of the target company or a reverse merger.

In particular, a reverse merger is an integration of operational structures whose benefit is that of winding up the intermediary company and transferring any assets and liabilities, including tax ones, to the merging company.  

The reasons for electing such a solution may be that the merged company has less customers and suppliers to which the integration must be communicated, has a lower exposure to banks or has less registered goods to transfer, such as, for example, buildings, vehicles, lease agreements, patents and trademarks.

This kind of transaction can be useful also with the aim of having the shareholders of Alfa taking stake in Beta.  This may be pursued to take on managerial skills or technical know-how and to foster further integrations. 

The article will focus on the analysis of the reverse merger from an accounting and tax perspective, disregarding the procedures set forth by the Italian Civil Code from art. 2501-ter (approval of the draft merger plan) to art. 2504 (registration of the merger deed with the competent Register of Companies).

 *Aids for Economic Growth