Key Takeaways
- Buyer’s subsidiary merges into target; target survives.
- Target retains contracts, licenses, and legal identity.
- Target becomes wholly owned buyer’s subsidiary.
- Liabilities remain isolated within surviving target.
What is Reverse Triangular Mergers?
A reverse triangular merger is an acquisition technique where the buyer forms a subsidiary that merges into the target company, with the target surviving as the subsidiary of the buyer. This structure allows the target to retain its legal identity, preserving contracts and licenses often critical in complex industries.
This method contrasts with other merger types and is commonly used by Apple and Microsoft when acquiring companies while maintaining operational continuity and minimizing disruptions to existing agreements.
Key Characteristics
Reverse triangular mergers have distinct features that differentiate them from other acquisition structures:
- Surviving Entity: The target company remains intact and becomes a wholly owned subsidiary of the buyer, preserving its legal status.
- Consideration to Shareholders: Target shareholders typically receive cash, stock, or a combination as payment for their shares.
- Contract and License Preservation: Because the target survives, important contracts, permits, and licenses often remain in force without reassignment, reducing operational risk.
- Liability Isolation: The buyer’s assets are shielded, as the target assumes its pre-existing liabilities.
- Tax Implications: Tax-free mergers require meeting stringent requirements, including controlling interest and stock payments, which can limit cash use.
How It Works
In practice, you start by creating a new subsidiary under your C corporation. This subsidiary then merges directly into the target company, which survives the merger and becomes your wholly owned subsidiary.
The subsidiary dissolves after the merger, and you provide consideration—such as cash or your company's stock—to the target's shareholders. This approach maintains the target's existing contracts and licenses, avoiding complications tied to facility agreements or other operational arrangements.
Examples and Use Cases
Reverse triangular mergers are favored in industries that demand uninterrupted contract performance and regulatory compliance:
- Technology Acquisitions: Companies like Microsoft often use this structure to acquire startups while preserving valuable intellectual property agreements.
- Consumer Electronics: Apple utilizes reverse triangular mergers to maintain continuity in supply chain contracts and customer arrangements during acquisitions.
- Investment Vehicles: Exchange-traded funds such as SPY may be involved indirectly during corporate restructurings where preserving entity status is advantageous.
Important Considerations
When considering a reverse triangular merger, ensure you evaluate tax consequences carefully, especially the requirements for qualifying as a tax-free reorganization. The necessity of issuing stock to meet IRS criteria can limit flexibility in cash-heavy deals.
Additionally, although the target survives the merger, you should review potential anti-assignment clauses in contracts to avoid triggering terminations. Integrating with your existing paid-in capital accounts and understanding how the transaction affects your T-accounts is essential for accurate financial reporting and compliance.
Final Words
Reverse triangular mergers preserve the target’s legal identity, maintaining contracts and licenses while enabling a streamlined acquisition. Review your deal structure carefully to ensure it aligns with your tax and operational goals before proceeding.
Frequently Asked Questions
A reverse triangular merger is a type of acquisition where the buyer creates a subsidiary that merges into the target company, with the target surviving as a wholly owned subsidiary of the buyer. The subsidiary dissolves, and the target's shareholders receive cash, stock, or a combination in exchange for their shares.
First, the buyer forms a new subsidiary, which then merges into the target company. The target survives the merger as the buyer's subsidiary, while the subsidiary dissolves. The target's shareholders are compensated, and the target retains its contracts, licenses, and operations.
Reverse triangular mergers preserve the target's legal identity, avoiding the need to reassign contracts or licenses. They also isolate the target's liabilities from the buyer and allow the buyer full control without dissolving the target. This structure is especially useful for complex deals and SPAC transactions.
If structured as a cash deal, the reverse triangular merger is taxable and treated as a stock sale, with no step-up in asset basis. However, it can qualify as a tax-free reorganization under IRC §368(a)(2)(E) if the buyer controls the subsidiary before the merger, the target holds most assets afterward, and the target's shareholders receive voting stock representing control.
In a reverse triangular merger, the target survives as the buyer's subsidiary, preserving contracts and licenses, while in a forward triangular merger, the target merges into the buyer's subsidiary and ceases to exist. This means reverse mergers better maintain business continuity and isolate liabilities.
Companies often choose reverse triangular mergers to maintain the target's existing contracts, licenses, and permits without reassignment, which is critical for compliance and operational stability. This structure also keeps liabilities contained and provides the buyer with full ownership efficiently.
One key consideration is meeting tax-free reorganization requirements, which demand that the buyer controls the subsidiary before the merger and that the target's shareholders receive sufficient voting stock. Cash deals are less flexible for tax-free treatment, and careful planning is needed to ensure compliance.
