Additional product candidates may expand existing portfolio. Similarly, the attractiveness of reverse mergers for German biotechs may further be increased if the U.S. partner brings in additional product candidates that broaden the product portfolio. In the case of the Micromet/ CancerVax merger, CancerVax provided the combined company with an additional preclinical antibody program that strengthened Micromet's existing pipeline of drug candidates.
Exit opportunity is created for old investors. For shareholders in German biotech companies, particularly venture capital houses, the reverse merger is a new way to reach an exit. This aspect should not be underestimated, as other exit routes like IPOs and trade sales have become increasingly difficult in the German market.
It is not surprising that discussions about a possible reverse merger are often initiated by venture capital firms with shareholdings in German biotech companies. They are particularly attracted by the prospect of getting the valuation of their portfolio companies to a level that rewards them for their investments and opens the way to a profitable exit.
A trade sale of an entire business or merger under, for example, Delaware law is attractive as it allows for an approval by a simple majority vote of stockholders, while German law requires a 75% majority of the votes cast. The ability under Delaware law to easily squeeze out minority investors not desiring to sell is another significant selling point to any potential acquirer.
Furthermore, familiarity of the buyer with the legal issues, documentation, and due diligence of a U.S. target company will certainly enhance the likelihood of concluding a successful exit with a would-be U.S. purchaser.
A U.S. listing is particularly attractive to German biotech companies because it can offer several options for obtaining follow-on financings that would, in most cases, not be as readily available on the German market.
Avoiding pre-emption rights and shareholder approvals. The board of directors of a German company generally can issue new shares, either in a follow-on public offering or in a private placement, only after having first obtained shareholder approval and waivers of shareholder pre-emption rights. This is significantly more burdensome and time-consuming than in the U.S., where the management can complete a follow-on equity fundraising quickly to take advantage of favorable market opportunities.
Private investments in public equity (PIPEs). While U.S. PIPE offerings can often be executed quickly and privately (without advance publicity), and the purchase price payable by the investor is often significantly below the market price of the biotech company's shares, German law is less flexible.
It does not provide comparable special rules on the issuance of shares to institutional investors, and a share issuance at a discount of more than 3-5% below the market price is not possible, due to the requirement under German law that the issue price must not be substantially below the stock's fair market value.
Better-developed market for convertible bonds. Although convertible bonds are available both under U.S. and German law, Germany has a less well-developed market for them, while U.S. investors typically have a deep understanding of these instruments. In addition, complicated German legal procedures, such as creating contingent share capital, have restricted the market and therefore, the attractiveness of convertible bonds in Germany.