What Is a Reverse Triangular Merger?

A reverse triangular merger is a mergers and acquisitions (M&A) strategy that occurs when an acquiring company creates a 澳洲幸运5官方开奖结果体彩网:subsidiary and that subsidiary purchases and merges with a target company. A𝔉 reverse triangular merger is easier to accomplish than a direct merger because the subsidiary has only one shareholder—the acquiring company—and the acquiring company may obtain control of the target's nontransferable assets and contracts.

Understanding Reverse Triangular Mergers

In a reverse triangular merger, the acquirer creates a subsidiary that merges into the selling entity. That subsidiary is then 澳洲幸运5官方开奖结果体彩网:liquidated, leaving the selling entity as the surviving entity and a sܫubsidiary of the acquirer. The buyer’s stock is then issued to the seller’s ♍shareholders.

The process is more or less as follows:

1. The acquiring company forms a subsidiary
2. The subsidiary acquires the 澳洲幸运5官方开奖结果体彩网:target company
3. The created subsidiary merges with the target company and is then dissolved
4. The acquired company becomes the new subsidiary

Once this process is complete, the acquired target⛄ company resumes its normal operations, acting as a subsidiary ofღ the purchasing company.

In a reverse triangular merger, at least 50% of the payment is the st꧒ock of the acquirer🤪, and the acquirer gains all assets and liabilities of the seller.

Advantages and Disadvantages of 𝓀a Reverse Triangular Merger

Reverse triangular mergers sound more complicated than regular mergers. However, they are often preferred for their simplicity. Here are some of the main reasons why companie🤪s go down this path:

• Continuity: A reverse triangular merger can make it easier for a company to acquire another company’s business contracts and ensure they continue to run without disruption following the completion of the merger.
• Easier to push through: For a merger to go through, shareholders need to give their approval. With reverse triangular mergers, there are fewer shareholders involved in the decision. That's because the only shareholder of the subsidiary is the acquiring firm. In other words, the acquirer doesn't necessarily need to get permission from its shareholders to push through the deal.
• Keep business separate: Having the acquired company come in automatically as a subsidiary can help create some distance between the target and 澳洲幸运5官方开奖结果体彩网:parent company’s assets and potentially make it easier to sell later on.
• Tax advantages: The transaction is treated as a stock purchase rather than an asset purchase. This means the acquirer can capitalize on the target company’s tax attributes, such as net operating losses or 澳洲幸运5官方开奖结果体彩网:tax credits.
  

Disadvantages

• Transaction costs: Reverse triangular mergers have higher 澳洲幸运5官方开奖结果体彩网:transaction costs. That's because they are complex—notably because the acquirer has to bear the cost of creating a subsidiary. There may also be additional accounting or advisory costs that the firm may need to pay to execute the deal.
• Integration challenges: Integrating two companies can often be challenging because they need to combine two different corporate cultures, technologies, and processes. There may be communication breakdowns, operational inefficiencies, and employee conflict. It can also be time-consuming and costly to streamline systems and processes.
• Regulatory hurdles: The acquiring company must do its due diligence to ensure there are no potential 澳洲幸运5官方开奖结果体彩网:liabilities in the transaction and it must comply with the regulations set forth by federal regulators.

Reverse Triangular Merger Requirements

Because the acquirer must meet the 澳洲幸运5官方开奖结果体彩网:bona fide needs rule, a fiscal year appropriation may be obligated to be met only if a legitimate ne🏅ed arises in the fiscal year for which t🐷he appropriation was made.

Since the acquirer must meet the 澳洲幸运𓆏5官方开奖结果体彩网:continuity of business enterprise rule, the ent✤ity m꧟ust continue the target company’s business or use a substantial portion of the target’s business assets in a company.

The acquirer must also meet the continuity of interest rule, meaning the merger may be made on a tax-free basis if the shareholders of the acq♏uired company hold an equity stake in the acquiring company. In addition, the acquirer must be approved by the boards of directors of both entities.

Reverse Triangular Merger Tax Treatment

A reverse triangular merger, like direct mergers and forward triangular mergers, may be either taxable or nontaxable, depending on how they are executed and other complex factors in Section 368 of the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Code (IRC). ♍If nontaxable, a reverse triangular merger is considered a reorganization for tax purposes.

A reverse triangular merger may qualify as a tax-free reorgꦬanization when 80% of♓ the seller’s stock is acquired with the voting stock of the buyer; the non-stock consideration may not exceed 20% of the total.

The Bottom Line

A reverse triangular merger involves a company forming a subsidiary or 澳洲幸运5官方开奖结果体彩网:shell company to purchase another company. Once the transaction is complete, the subsidiary merges with the acquired company and is then dissolved, leaving just the newly acquired company as the subsidiary. Other than potential tax benefits, reverse triangular mergers are also easier to get past shareholders and can offer greater continuity.