What is a Reverse Triangular Merger?
How do you legally define it?
What are the important elements you should know!
In this article, we will break down the definition of Reverse Triangular Merger so you know all there is to know about it!
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What is a Reverse Triangular Merger
A reverse triangular merger is when an acquiring company uses a subsidiary to merge with the target company.
Once the merger is completed, the target company remains the surviving entity while the acquiring company’s merger subsidiary is dissolved.
Here are the potential steps to accomplish this type of merger:
- Step 1: the acquiring company forms a new subsidiary
- Step 2: the merger subsidiary and target company enter into a transaction with one another
- Step 3: the merger subsidiary and target company merge where the target company assumes all the rights and liabilities of the merger subsidiary by operation of law
- Step 4: the merger company shares are converted to the target company shares and the target company shareholders receive the merger consideration in exchange for their shares
- Step 5: the merger subsidiary is dissolved and the target company remains the only surviving entity
The net result of the reverse triangular merger is that the target company continues to exist as a wholly-owned subsidiary of the acquiring company.
Publicly-traded organizations prefer a reverse triangular merger structure when acquiring a new company.
It is the most common type of merger structure for public entities.
Reverse Triangular Merger definition
How do you define a reverse triangular merger?
According to Investopedia, a reverse triangular merger is defined as follows:
A reverse triangular merger is the formation of a new company that occurs when an acquiring company creates a subsidiary, the subsidiary purchases the target company, and the subsidiary is then absorbed by the target company.
In other words, the subsidiary of the acquiring company merges into the target corporation where the subsidiary stock is converted into the target company’s stock.
What are the reverse triangular merger benefits?
With this type of merger, the acquiring company can more easily manage the merger logistics and formalities.
When forming a subsidiary, the acquiring company will typically be the only shareholder of the subsidiary.
As such, having one single shareholder to manage is much easier than having many to manage.
Another advantage in this type of reverse triangular merger is that the target company remains the surviving entity and becomes a subsidiary of the acquirer.
This is beneficial if the target company has valuable contracts or assets worth maintaining.
Speaking of maintaining the assets, having less administration in transferring over the target company’s assets to the acquirer can also be a good advantage.
In some cases, anti-assignment clauses or change of control provisions kick-in when a company intends to transfer contracts from one entity to another.
Keeping everything in the same company makes it that much easier to manage.
Forward triangular merger
What is the difference between a reverse triangular merger vs forward triangular merger?
In essence, a reverse triangular merger is when an acquiring company uses a subsidiary to merge with the target company and where the target company is the existing entity following the merger.
On the other hand, a forward triangular merger is when an acquiring company uses a subsidiary to merge with the target company but, in this case, the acquiring subsidiary will end up as the surviving entity following the merger.
Reverse triangular merger diagram
Here is the before and after diagram of the reverse subsidiary merger.
Before the merger, the acquiring company forms a subsidiary that will acquire the target company.
Following the merger between the merger subsidiary and the target company, the only surviving entity is the target company who ends up being fully owned by the acquiring company as a subsidiary.
For a reverse triangular merger to be considered as a tax-free reorganization, at least 80% of the seller’s stock must be acquired using voting stock of the buyer.
As a result, if you use more than 20% of non-stock consideration in the transaction, you may lose the necessary qualifications for tax purposes.
Under Section 368 of the Internal Revenue Code, depending on the requirements being met or not, the transaction may be taxable or non-taxable.
So what is the meaning of Reverse Triangular Merger?
Let’s look at a summary of our findings.
Reverse Triangular Merger:
If you enjoyed this article on Reverse Triangular Merger, we recommend you look into the following legal terms and concepts. Enjoy!
Forward triangular merger
Reverse Morris Trusts
SEC Form 15-15D