What Is a Reverse Triangular Merger?

A reverse triangular merger (RTM) is a type of merger in which an acquiring company forms a subsidiary that merges with the target company. Unlike a traditional triangular merger, in a reverse triangular merger, the acquiring company’s subsidiary merges into the target company, with the target company surviving and the subsidiary being absorbed. This structure allows the acquirer to maintain control while preserving the target company’s assets and its legal identity.

How a Reverse Triangular Merger Works

Structure of the Reverse Triangular Merger

In a reverse triangular merger, the acquiring company forms a subsidiary that is typically a newly created entity. This subsidiary then merges with the target company.

The target company survives the merger, and the acquiring company’s subsidiary is dissolved. The shareholders of the target company may receive cash, stock, or a combination of both in exchange for their shares.

The target company retains its assets, liabilities, and operations, which continue without interruption. The target company’s legal entity and structure remain intact after the merger.

Differences from a Traditional Triangular Merger

In a traditional triangular merger, the acquiring company forms a subsidiary that merges into the target company, with the subsidiary surviving and the target company being absorbed or dissolved.

In a reverse triangular merger, the target company survives, and the acquiring company’s subsidiary is dissolved. This is the key structural difference between the two types of mergers.

Tax and Legal Implications

Tax Benefits

One of the advantages of a reverse triangular merger is that the acquirer can generally step into the target company’s tax attributes, such as its net operating losses (NOLs). This can be beneficial for the acquirer, especially if the target company has accumulated tax losses that can be used to offset future profits.

Asset Protection

Since the target company survives in a reverse triangular merger, its assets and liabilities remain intact, and the acquirer does not need to assume the target’s liabilities directly unless they choose to do so. This is different from a traditional merger where the acquirer assumes the target company’s liabilities.

Continuity of Contracts and Operations

A reverse triangular merger allows the target company to retain its contracts, intellectual property, and other key assets. This is crucial for businesses that have valuable customer relationships or intellectual property rights, which would otherwise be lost if the target company were dissolved in a traditional merger.

Impact on Acquiring Company’s Ownership

Control and Management

The acquiring company gains control of the target company through its subsidiary, but the target company continues its operations as usual. The acquirer often becomes the majority shareholder or has control of the company’s board.

Preserving Brand and Identity

The reverse triangular merger allows the acquirer to gain control over the target while maintaining the target company’s identity, which can be important if the target has significant brand recognition or market value.

Advantages of a Reverse Triangular Merger

Flexibility in Integration

The acquirer can integrate the target company’s operations into its existing structure without disrupting the target’s brand or operational continuity.

Preserving Existing Relationships

The target company’s existing customers, contracts, and relationships remain intact after the merger, which is often a significant advantage in industries where goodwill and reputation are important.

Avoiding Direct Liability Assumption

The acquiring company avoids directly assuming the target’s liabilities, as those liabilities remain with the target company after the merger.

Example of a Reverse Triangular Merger

Company A, a large tech firm, wants to acquire Company B, a smaller software development company. Instead of directly acquiring Company B and absorbing it into its operations, Company A forms a subsidiary, Company C. Company C then merges into Company B, with Company B surviving the merger. As a result, Company B continues its operations, and the acquirer, Company A, gains control over it while preserving the brand, contracts, and operations of Company B. The shareholders of Company B receive a combination of cash and shares from Company A in exchange for their ownership.

Conclusion

A reverse triangular merger is a strategic acquisition structure where the acquiring company’s subsidiary merges into the target company, with the target company surviving. This allows the acquiring company to gain control over the target while preserving the target’s legal identity, assets, and operations. The structure offers several advantages, including tax benefits, continuity of business operations, and protection from assuming unwanted liabilities, making it an attractive option in certain M&A transactions.