A reverse triangular merger is very similar to a triangular merger. In a triangular merger, the acquiring company creates a new subsidiary and then merges the target company in it. This is done so that the acquiring company can acquire the target company without facing interference from shareholders. The shareholders will not have a say in the decision of having a merger, as these companies are not constituent corporations. By forming a triangular merger, the acquiring company will be able to control and manage the target company without being its constituent.
In case of a reverse triangular merger, the acquiring company creates a subsidiary company and merges it with the target company. What happens here is that the identity of the target company remains, but the acquiring company gets the control of the target company in the form of a new firm. Once the merger has taken place, the acquiring company liquidates the subsidiary company creating a new entity and it then takes charge of the both of them. The shares of both, the acquiring company and the subsidiary company is settled by the parent company (acquiring company). Though, the assets of the target company will belong to the target company itself. The selling entity or the target company has to sell a minimum of 80% of its stock to the buyer.
Why Would a Company Opt for a Reverse Triangular Merger?
1. Protection Against Unknown Liabilities: When the target company is merged in the form of a reverse triangular merger, the acquiring company's assets are protected against the unknown liabilities that the target company may have. This is because the target company will now be operating as a subsidiary and not as a single firm, unlike a two-party merger.
2. Does Not Require Shareholders' Voting: This form of a merger is easier to attain than the other types of mergers as, the shareholders will not really have a say in the decision-making of the merger. This also allows the target or the acquired company to continue its operations with the existing licenses, debts and other obligations and rights.
1. Tax Benefits: As the acquiring company in a reverse triangular merger only acquires the stock from the target company, it gains a lot of tax benefits. This is in the form of a minimized tax burden on the acquiring company.
2. Prevents the Flight of the Target Company's Vendors and Clients: When a company directly overtakes a company, there is a big possibility that the vendors and customers associated with the target company will drift away. However, in case of a reverse triangular merger, the customers and the vendors associated with the target company are retained, as the target company has not really merged with the parent company. If the target company was acquired, it would have brought a lot of changes in the structure and the operations of the target company.
3. Less Vulnerable to Market Changes: Another advantage is that the acquired company becomes less vulnerable to the market conditions. This is because if an IPO for a new company was issued, the company is relying on the market conditions entirely for raising funds. However, in case of a reverse triangular merger, the acquiring company is not really issuing new stocks and the decision-making remains unhampered because of no shareholder intervention in the decision-making.
1. Transfer of Legal Liabilities: Often, there are unforeseen legal liabilities of the target company, which the acquiring company has to bear, after the reverse triangular merger takes place.
2. Difficulty in Reorganizing the Companies as Tax-free: Under a reverse triangular merger, it is difficult to make the deal a tax-free reorganization. This is because, for a reverse triangular merger to qualify as a tax-free organization, at least 80% of the overtaken stock must be the voting stock of the acquiring company.
Any sort of merger or acquisition requires the board of directors' approval followed by the shareholders' approval by the means of voting. This is something that is avoided in a reverse triangular merger. It is important from an investor's point of view, as well as a student's, in order to understand how the loopholes associated with a reverse triangular merger and other types of mergers, can lead to losses for the acquiring company. Nonetheless, there are many advantages associated with it, which makes this form of a merger an attractive option for the acquiring as well as the target company.