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A reverse triangular merger is a situation in which a targeted business is merged with a subsidiary of the corporation that is acquiring the target firm. Sometimes used as a means of complying with regulatory criteria put in place by a government agency, this approach effectively combines the stock of the target firm with the equity of the subsidiary. The end result is that the target firm becomes a wholly owned subsidiary of the acquiring company, allowing the shareholders in the target firm to receive shares of stock issued by the acquiring firm.
With a reverse triangular merger, the strategy usually requires that the subsidiary of the acquiring company be liquidated as part of the merging process with the newly acquired target company. The liquidation takes place once the merger has occurred. At that point, the acquirer reorganizes the liquidated company into a new entity that holds the assets of both the original subsidiary and the acquired target firm. This approach also involves settling all shares of stock issued by the two previous entities, and paves the way for the shareholders to receive stock issued by the parent company of the new entity.
One of the benefits of the reverse triangular merger is that the process can often help to minimize the tax burden that would otherwise be created by the merger process. In many places around the world, it is possible to limit the taxes owed by allowing the target firm to effectively purchase the assets of the subsidiary then allow the acquiring firm to purchase control of at least 80% of the assets of the target firm. While somewhat more complicated than simply merging the two principal companies into one new unit, adding the subsidiary to the process and engaging in the structured buying and selling of company assets does allow the business owners to legally take advantage of prevailing tax laws. Since tax regulations vary from one country to the next, the amount of savings generated by using this approach will also vary.
Another benefit of the reverse triangular merger is that the process can also help preserve any contracts with customers and vendors that would otherwise become null and void if a straight acquisition took place. Because the target firm does survive as a wholly owned subsidiary by using this strategy, any contracts that would have been canceled as the result of a buyout remain intact. The reverse triangular merger approach is especially helpful when those contracts include agreements that offer volume discounts from vendors, or lucrative and long-term commitments from longtime customers.
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