Reverse Triangular Merger Steps

Reverse Triangular Merger

Mergers and acquisitions are a tremendous amount of work, time, effort, and expense. It’s a multi-layered, complex transaction that can take a long time, has serious risks, and can fail if the wrong strategies are used. Mergers and acquisitions can take many different forms, and of course, the principle of how they work is also different. In this article, we will talk about reverse triangular merger steps.

What is a reverse triangular merger?

A reverse triangular merger is a process in which an acquiring company creates a new entity to become its subsidiary. Once the subsidiary has been formed, it buys the target company and takes it over. In this case, this organization has only one shareholder, which is the acquiring company. The buyer has the right to control all the assets and contracts of the subsidiary.

So in what case would a reverse triangular merger be appropriate? What is the reason for it? The fact is that the buyer is required to follow the continuous business rule. This rule is a taxing rule that intensifies during corporate mergers and acquisitions. Under this rule, the acquiring company must not interrupt its business activities or must use its business assets in conducting business.

How to make acquiring company process conducted in a reverse triangular merger?

A reverse triangular merger is somewhat more complicated than any other type of this transaction because it has an additional step. The scheme is a bit confusing to grasp, because the newly formed company, which is a subsidiary of the acquiring company, is also the legal purchaser of the target company. 

Depending on the structure of this acquisition, this type of transaction may not be taxable. For example, if more than 80% of the shares of the selling company are acquired, there is no tax involved.  During a reverse triangular merger, half of the payment must be shares of the acquiring company, and it also owns and controls all of the assets of the target company. 

The main advantages and disadvantages of a reverse triangular merger

The key positives of this type of transaction include:

  • Faster transaction process. And all because in this case, the due diligence stage can be skipped, because the new company that was used to take over the acquirer company, without the need to convince shareholders of its good faith
  • The acquiring company can take responsibility for fulfilling contractual obligations that the target company must fulfill, thus ensuring business continuity
  • Creating a “firewall” that shields the acquiring company from any obligations that the target company may have, both present and future

The disadvantages of this type of merger include various legal or financial obligations that may go unnoticed in the target company’s operations. Therefore, when they are disclosed, the company will have to face some problems.  Also, the tax rules that apply to reverse triangular mergers become too complicated, so companies need to do more due diligence to make sure they comply with all laws.

How can VDRs help during this type of M&A?

We are fortunate to live in a world of modern technology, and now all those things that used to take too much time can be done in a few minutes. Virtual data rooms can make any type of merger and acquisition easier and more efficient. They allow you to have access to the confidential information you need without leaving the place you are in, whether it’s your office, home, store, or airport.

All data is securely protected by a strong level of security, and room administrators can monitor all activities and control access to documents.