October 5, 2011

Forward Mergers & Triangular Mergers: The Differences

Hello, my name is Matt Farber, and I’ll periodically be contributing to the Blog as a guest blogger. My contributions will focus on topics relevant to transactional associates, ranging from book reviews and researching suggestions to legal developments and overviews of transactional law. I recently graduated magna cum laude from Loyola University Chicago School of Law, where I was the Editor-in-Chief of the Loyola Law Journal. Enjoy!

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What’s the difference between a forward merger, a forward triangular merger, and a reverse triangular merger? Let’s first address how forward mergers differ from triangular mergers. In a forward merger, the target merges with and into the buyer, eliminating the target’s existence. The buyer consequently assumes the target’s rights and liabilities by operation of law.

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By contrast, a forward triangular merger (also known as an indirect merger) is a transaction that requires a third entity, a merger subsidiary, or a shell company. This subsidiary company is capitalized with the consideration for purchasing the target company. Similar to a forward merger, the target merges with and into the merger subsidiary, with the subsidiary assuming all the target’s assets and liabilities.

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A reverse triangular merger has a similar structure to a forward triangular merger, but the buyer’s subsidiary is merged with and into the target company, leaving the target company as the buyer’s subsidiary. Thus, whether the merger takes the form of a reverse triangular merger or a triangular merger, the consequence is the same: the target is now a wholly owned subsidiary of the buyer.

Basic Advantages of Each Deal Structure

Different merger structures provide different advantages and disadvantages, providing deal lawyers with the flexibility to satisfy their clients’ needs:

– Buyer protection from target’s liabilities: Buyers are protected in both forward triangular and reverse triangular mergers, but generally not in a forward merger.

– Tax: Forward mergers and forward triangular mergers are usually taxed as an asset acquisition, rather than a stock acquisition, which is how most reverse triangular mergers are assessed. Forward mergers also are tricky from a tax point of view with often severe consequences for blowing the reorganization.

– Third-party issues: Most forward mergers and forward triangular mergers raise anti-assignment and third-party consent issues, but reverse triangular mergers generally do not.

Helpful Resources for Researching Merger Structures:

– “Corporate Acquisitions and Mergers” by Peter F.C. Begg (Aspen; 2011)
– “Corporate Acquisitions, Mergers, and Divestitures” by Aaron Rachelson (Thomson; 2010)
– “M&A Practice Guide” by Stephen Glover (Matthew Bender; 2008)