Benefits of Reverse Triangular Merger

Tax Professionals' Resource
February 12, 2013 — 6,835 views  
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A reverse triangular merger is a type of merger plan used when forming or absorbing a company. Instead of following direct merger or forward triangular merger plans, this kind of a merger consists of the acquiring or parent company creating a subsidiary, which then goes on to purchase another company. The resulting company is finally absorbed by its acquiring company.

This type of merger is quicker, simpler, and more effective than a forward triangular merger, since the subsidiary has only one primary shareholder, the acquiring parent company. There are other benefits of using this merger, which include the following:

Contract Continuity – In cases where the company to be acquired has been in business for many years and has a number of business contracts that the acquiring company doesn’t want to lose, the merger ensures that these contracts are absorbed by the acquiring company. This way, these contracts and proposals can be enforced by the acquiring company later on.

Faster Execution – During any type of merger, the acquirer needs to get votes of approval from the shareholders of the company to be acquired. By using this merger, the number of shareholders involved is reduced, and this translates to quicker merger execution.

Fewer Liabilities – When a company is not directly merged, the acquirer maintains a certain distance from the target company and any liabilities that may follow. Because the company acquired is simply considered a subsidiary firm of the parent company, the acquirer will not have exposure to the target company’s liabilities. This protects the assets of the parent company.

Selling – If at any time after the merger, the acquirer feels the acquisition was a mistake, selling a company that is merely a subsidiary is much easier than selling a portion of a fully integrated company.

Pitfalls of the Merger

This kind of a merger does have pitfalls. But some of these disadvantages can be avoided. For example, there may be cases of unforeseen legal liabilities within the target company, which the acquiring company will have to bear. These may come to light after the merger has taken place and can be a great inconvenience for the acquirer.

Another foreseeable disadvantage is the difficulty in reorganizing the acquiring company and its new subsidiary as tax-free under the IRS. This is because at least 80% of the company’s stock needs to be the voting stock of the acquiring company for the merger to be regarded as a tax-free reorganization.

Forward or Reverse?

The stark difference that exists between forward merger and reverse triangular merger is the fate of the target or acquired company. In this merger, the acquired company continues to function as a subsidiary of the acquirer and retains its identity. But after a forward triangular merger, the target company ceases to exist on its own.

Reverse triangular mergers are the most common merger structure among publicly traded businesses and corporations. Obviously, the advantages outweigh the disadvantages greatly, and with some background research, such a merger can be accomplished with almost no loss to any party involved.

Tax Professionals' Resource