What is a Reverse Triangular Merger?

Though the most direct method of acquiring a company is through a straightforward reverse merger, proceeding with a merger has several downsides, including the need to transfer the target’s assets to the acquiring company and the problem of anti-assignment clauses in contracts, leases and licenses that may impact the target’s ability to continue doing business. Mergers eliminate the acquired company and passes its liabilities on to its purchaser.

By using the reverse triangular merger, the acquiring company gets full ownership of the target and its assets, along with all of the benefits of allowing the target company to continue operating on its own, with its own separate liabilities. No assets need to be transferred, and the courts have determined that non-assignment clauses in licensing and other contracts are not applicable. The process can even qualify as a tax-free reorganization if the acquiring company uses its voting stock to acquire at least 80% of the target company’s stock, and if the reversible mortgage is taxable, the tax only impacts the shareholder, and results in no corporate tax liability.

The process begins with the getting approval from the board of directors of the acquiring company, its subsidiary, and the target company. The target company’s shareholders must also approve, with dissenting shareholders being provided with a buy out of their shares. After an Agreement and Plan of Merger is crafted and approved, the reversible triangular merger begins with the acquiring company’s subsidiary merging with the target company. Following this, the acquisition subsidiary immediately dissolves. Only the target company remains, with a new status of subsidiary. For the target company’s shareholders, the procedure results in the issuance of the acquiring company’s stock.

Reverse triangular mergers have several requirements. A minimum of half of the acquisition’s payment must consist of the acquiring company’s stock, and all of the target company’s assets and liabilities must be acquired as a result of the merger. The process can be either taxable or non-taxable, but in order for the acquisition to qualify as a tax-free reorganization the acquiring company must meet the continuity of business enterprise rule, allowing the target company’s historic business to continue conducting business. Another requirement of the tax-free basis is that the target company’s shareholders hold an equity stake in the acquiring company. This satisfies the continuity of interest rule.