13th September 2013

In recent years, focus on the international regime of climate change negotiations, notably represented by ongoing deliberations surrounding the United Nations Frame Convention on Climate Change (UNFCC) has increased dramatically due to increased understanding of the ramifications of global warming. The Montreal Protocol (MP)  on substances that deplete the Ozone layer was designed to reduce the production and consumption of ozone depleting substances in order to reduce their abundance in the atmosphere, and thereby protect earth’s fragile ozone layer. The original Montreal Protocol was agreed on 16^th September 1987 and entered into force on 1^st January 1999, the climate change protocol has seen several amendments since its introduction. Former U.N. Secretary Kofi Annan described “perhaps the most successful international agreement to date”.

The climate change policy has since been overshadowed by the myriad agendas promoted by different states, America in particular to benefit their industries and political agendas of their leaders. In the recently held G-20 summit in Russia, all the Group 20 nations agreed to work together on phasing down HFC’s under the Montreal Protocol, which means the developing economies such as Brazil, India, China which had refused to endorse the pact citing economic backlashes have agreed to phase down HFC’s. The U.S-China agreement has further added more pressure on these developing economies to sign the pact.

In one particular case, as reported by a national daily in India, the U.S. is pressurizing India to sign the Montreal Protocol which will replace the refrigerant gases which have ill effects on the climate with alternative but expensive, technologies monopolised by a few U.S. companies. If India does sign the pact, relenting under pressure from the U.S. it does open a huge market for the U.S. companies that hold patent rights on their replacement gases and their attendant technologies. U.S. Special Envoy on Climate Change Todd Stern is in talks with the Indian officials on starting discussions to phase out these refrigerant gases under the Montreal Protocol, before the Indian Prime Minister Manmohan Singh visits U.S. The Indian administration is under severe pressure as the Special Envoy has warned that if the decision is not taken in the administration level President Obama would raise it directly with the Indian Prime Minister.

Opposed to Indian interests

There is absolutely no bias on the objectives of the policy and the initiatives taken by U.S. in the recently held G-20 meet in Russia, the European Union has said that it will enact a law by which its member countries have to comply phase out the gases and replace it with alternatives. But, the Indian External Affairs Ministry and the Environmental Ministry have opposed the move strongly, warning of possible repercussions, the new technology and gases being pushed as the alternatives are patented by companies in the U.S. and other developed countries are 20 times more costly compared to present gases and largely untested posing danger to the users of these gases, the Indian Defence in particular. The Ministries have warned of the potential impact on India’s defence equipment –submarines and aircrafts, which use the refrigerant gases. Signing the pact would further bolster American monopoly on refrigerant businesses and allow “Uncle Sam” to claim the role of a global climate leader by punishing emerging economies such as India, Brazil and other countries which are experiencing current account deficits and currency devaluation. This will worsen their existing situation as the countries need to buy these expensive gases from America, depleting their already emptied forex reserves, this will fuel another economic crisis, this time finding its root in Asia.

Why not Kyoto Agreement?

In 2001, when George Bush was at the helm of affairs, U.S. unilaterally rejected the Kyoto Agreement on global warming on grounds of energy shortage and economic downturn in the U.S.  Mr. Bush did not ratify the agreement which would have reduced emissions of greenhouse gases as it would have hurt his political prospects (his father had lost Presidency to Clinton as he favoured foreign policies rather than the U.S. economy) and impending fears that the Senate would not ratify the treaty. To summarise, U.S. acted on its strategic interests rather than taking into account the interest of other nations in the world. Now, the tradition continues as Obama is using his position to influence the countries to adopt and sign the pact which will crown the U.S. as the kingmaker of climate change and bring in huge money to American companies.

Our View

International Finance Magazine clearly endorses the Montreal Protocol as it would phase out Ozone depleting chemicals and supports the initiative taken by President Obama on reaffirming the importance of Montreal Protocol in the recently held G-20 meet. China has signed the pact and there are strong signs that real progress will be made in the next round of Montreal treaty talks to be held in Bangkok next month. The Montreal Pact will protect the Ozone from depleting further and make the way for a greener world, however, there are several questions to be answered.

The MP has a clear mission of reducing the ozone depletion but climate change is outside of its charter, the G-20 addressed this confusion among several countries on whether the phase down should occur under the MP or under the UNFCCC, it said while phase down of the consumption and production of HFC’s will take place under Montreal Protocol and the emission reductions will fall under UNFCCC. This has raised the eyebrows of many as the G-20 is only an informal body with no permanent secretariat, it does not have any legal powers, thus it clearly emphasizes that certain vested interests propagated this policy for their own benefits.

America has found a golden goose in India, it is one of the fastest growing markets for refrigeration business and the alternatives for HFC’s are produced by DuPont, Honeywell and Daiichi Sankyo Company Limited, while the first two are American MNC’s the other one is a Japanese company. These companies would make billions if India does sign the pact and U.S. in turn would be benefitted from the taxes paid by these companies. We are of the opinion that like the UNFCCC agreement where the developed world have to fund the additional costs of the technological transition of reduction to other countries, the MP should amend its agreement and pay for the technological transition to emerging economies for using the alternative fuel. Secondly, the alternative gases which need to be procured from patented companies should be given at subsidized rates to countries like India, Brazil only after they are found reliable and safe to use it in the Defence and HVAC businesses.

As Obama rejoices over the success of MP in Europe and other parts of the world where U.S. can wield considerable influence, sanctions (if required) and other punitive measures, the world is closely watching the events that would unfold if India  does sign the protocol.

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11th September 2013

Earlier in July, Ultra Sun Corporation successfully completed a reverse merger transaction with Wild Earth Naturals Inc., in which Wild Earth became a wholly owned subsidiary of Ultra Sun. Wild Earth is a herbal skin care products formulation and marketing company that plans to target the growing natural health care products market in the United States and other countries. Wild Earth plans to develop and manufacture high quality, herbal based skin care products; Ultra Sun is an American based tanning importer which distributes Tanning equipment to U.S., Canada and Mexico.

A reverse merger refers to an arrangement where a private company acquires a public company, usually a shell company, in order to acquire the status of a public company. It is an alternative to Initial Public Offering as it allows private companies to avoid complex regulations and formalities associated with an IPO,  Reverse merger also gives additional liquidity to the company as the resources of the two companies are combined together, this process is also known as reverse takeover. In this process the private company acquires the public company which is a “shell” company but unknown in the market. Through, the merger the private company becomes publicly traded.

Public shell companies are those which are publicly owned but have no business operations.

Investopedia defines Reverse Takeover as “a type of merger used by private companies to become publicly traded without resorting to an initial public offering (IPO). Initially, the private company buys enough shares to control a publicly traded company. The private company’s shareholder then uses their shares in the private company in exchange for shares in the public company. At this point, the private company has effectively become a public company.

Reverse Merger Vs IPO

A common method for raising capital for a publicly traded company is by going for public subscription (IPO), this process involves the hiring of an underwriter, security lawyers and auditors. A registration statement is prepared and filed with the federal and state regulators following which there will be a review procedure which will take more than six to eight months, once the review process is completed the underwriter seeks subscriptions to purchase the company’s shares, once the subscriptions are sufficient the IPO is closed. The costs and time associated with an IPO is substantial and include the payment of legal fees, auditor’s fees, printing costs, underwriting sales commissions which include 7 percent to 10 percent of the proceeds and other expenditures.

Bankers say that raising funds through IPO is a cumbersome procedure as it requires due diligence from merchant bankers, have lengthy processes, valuation mismatches due to delays in regulatory approvals.

On the other hand, a reverse merger enables a private company to go public within weeks compared to the months or years involved with an IPO. This financing technique is best suited to those companies that have a strategic reason to become a public company, this involves raising of capital for an upcoming project, use combined resources of both the companies to ensure higher productivity and avoid unnecessary operational costs.

A reverse mergers also has certain risks, the first risk is a combined business and legal risk. Generally, there are two types of public shell companies that are used in the process of a reverse merger: a public company that once had operations but no longer active or a newly formed “clean” company with no operating history, solely formed for the purpose of entering into a reverse merger transaction. There will be a substantial risk to the private company to enter into the reverse merger transaction with a public shell that was formerly an operating company as the company would have run an unsuccessful business, have a history of outstanding liabilities, litigation and potential litigation. The new stock holders of the public company post closing may inherit all of the pre-closing liabilities.

Avoiding the Pitfalls

The easiest way to avoid the problems of a public shell company with an operating history is to use a newly formed public company with no operating history. Such a company can be formed through the filing of a “Form 10” with the SEC.  A company that has filed form 10 with the SEC is a publicly reporting company but does not have any trading stock until operations are incorporated into the shell through the reverse merger and the company’s stock is registered. Diligence for these companies will be relatively simple since there is no operating history and mainly involves ensuring that the company was properly formed and that the company is complying with the SEC norms.

Increase in Regulation

In the case of a reverse merger transaction the company in essence will become a private company with public reporting obligations. Prior to the reverse merger, the public shell had reporting obligations under the Securities Exchange Act of 1934, however, as a company without operations the filings were simple , but after the reverse merger the company must file a comprehensive Form 8-K that describes the new company. Thereafter, the company must comply with the reporting requirements of the Exchange and with the requirements of the exchange where it is traded. Furthermore, the company must follow rigorous financial procedures and controls as per the Sarbanes Oxley act of 2002. Most private companies do not have well defined processes or practices in place, let alone the personnel who run to run those systems, the expense of those systems along with legal and accounting costs incurred in complying with the Exchange act and market regulations will be too high for a private company. These additional costs outweigh the profitability of the newly formed companies, experts also suggest that the amount of capital raised by reverse merger is less compared to an IPO and is certainly not enough for the company to the next step of self-supporting profitability.

Fraudulent and Scandal Ravaged

Earlier in June this year, the Securities and Exchange Commission (SEC) charged defunct company ChinaMedia Express and its CEO with misleading investors. The watchdog alleged that the company falsely reported increase in its business operations, profits and overall financial condition soon after it became a publicly traded company in October 2009 through a reverse merger. The SEC deregistered its securities in March 2012 and NASDAQ delisted the company’s stock in May 2011. Many backdoor merger companies with accounting troubles have been delisted from U.S. exchanges and faced punitive action by the regulators.

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