Reverse Triangular Mergers
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.A reverse triangular merger is more easily accomplished 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.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 set forth in Section 368 of the Internal Revenue Code. If nontaxable, a reverse triangular merger is considered a reorganization for tax purposes.
Reverse Triangular Merger
Definition
A reverse triangular merger involves an acquiring company creating a subsidiary, the subsidiary purchasing the target company, and then the subsidiary being absorbed by the target company to form a new entity. Compared to a direct merger, a reverse triangular merger is easier to execute because the subsidiary has only one shareholder—the acquiring company. Additionally, the acquiring company may gain control over the target company's non-transferable assets and contracts.
Origin
The concept of a reverse triangular merger originated in the mid-20th century as corporate merger activities increased. Legal and financial advisors sought more efficient ways to merge companies. The structure of a reverse triangular merger allows the acquiring company to better control the target company's assets and contracts, thereby reducing legal and operational hurdles during the merger process.
Categories and Characteristics
Reverse triangular mergers can be categorized into taxable and non-taxable types:
- Taxable Reverse Triangular Merger: In this case, the merger is considered a taxable event, and both the acquiring and target companies may need to pay taxes on the merger.
- Non-Taxable Reverse Triangular Merger: If it meets the requirements of Section 368 of the Internal Revenue Code, the merger can be considered a reorganization, thus avoiding tax liabilities.
The main characteristics of reverse triangular mergers include:
- The acquiring company conducts the acquisition through a subsidiary, simplifying the shareholder voting process.
- The acquiring company can gain control over the target company's non-transferable assets and contracts.
- The merged new company inherits the legal identity and operations of the target company.
Specific Cases
Case 1: Company A wants to acquire Company B. Company A creates a wholly-owned subsidiary, Company C. Subsidiary C purchases all shares of Company B, and then Company B absorbs Subsidiary C. Ultimately, Company A controls all assets and contracts through Company B.
Case 2: Tech Company X plans to acquire Startup Y. Company X creates a subsidiary, Company Z. Subsidiary Z purchases the shares of Startup Y, and then Startup Y absorbs Subsidiary Z. This way, Tech Company X successfully acquires the patents and technology contracts of Startup Y.
Common Questions
Q: Is a reverse triangular merger always more advantageous than a direct merger?
A: Not necessarily. A reverse triangular merger can be more advantageous in certain situations, especially when the target company has non-transferable assets and contracts. However, the choice of merger type should be based on specific circumstances and legal advice.
Q: Is a reverse triangular merger always tax-free?
A: Not necessarily. A reverse triangular merger can be either taxable or non-taxable, depending on how the merger is executed and whether it meets the requirements of Section 368 of the Internal Revenue Code.
