The triangular merger

The Triangular Merger

In a triangular merger, the acquirer creates a wholly-owned subsidiary, which in turn merges with the selling entity. The selling entity then liquidates. The acquirer is the sole remaining shareholder of the subsidiary. Depending on the structure of the deal, a triangular merger can reduce the effort required to obtain shareholder approval of an acquisition.

The characteristics of the transaction are the same as those for a Type “A” acquisition, which are:

  • At least 50% of the payment must be in the stock of the acquirer
  • The selling entity is liquidated
  • The acquirer acquires all assets and liabilities of the seller
  • It must meet the bona fide purpose rule
  • It must meet the continuity of business enterprise rule
  • It must meet the continuity of interest rule
  • It must be approved by the boards of directors of both entities

The Reverse Triangular Merger

A reverse triangular merger is the same as a triangular merger, except that the subsidiary created by the acquirer merges into the selling entity and then liquidates, leaving the selling entity as the surviving entity, and a subsidiary of the acquirer. Its characteristics are:

  • At least 50% of the payment must be in the stock of the acquirer
  • The subsidiary created by the acquirer is liquidated
  • The acquirer acquires all assets and liabilities of the seller
  • It must meet the bona fide purpose rule
  • It must meet the continuity of business enterprise rule
  • It must meet the continuity of interest rule
  • It must be approved by the boards of directors of both entities

The reverse triangular merger is used much more frequently than the triangular merger, because the reverse version retains the seller entity, along with any business contracts it may have. It is also useful when there are a large number of shareholders and it is too difficult to acquire their shares through a Type “A” acquisition. In addition, the subsidiary created by the acquirer is easy to control, since it only has one shareholder.

The Need for Triangular Mergers

There may be some dissenting shareholders who disagree with a proposed acquisition, and refuse to participate in it. If so, they may elect to continue as minority shareholders, or demand appraisal rights, or vote against the deal in the stockholder vote that is required for most types of acquisitions. In addition, it can be hard to contact the many shareholders of a public company to obtain their votes.

It is possible to get around the problems posed by dissenting shareholders, as well as the sheer volume of shareholders in a public company, through the use of a merger transaction, rather than an acquisition transaction. In a merger, all shareholders are required to accept the price offered by the acquirer, if the seller’s board of directors approves the deal. In this article, we present two types of mergers – the triangular merger and the reverse triangular merger.