In structuring transactions, parties often explore various forms of business combinations tailored to specific goals, target business dynamics, asset transferability, and tax implications. Among these, a popular option frequently deliberated by clients and advisors is the reverse triangular merger.
Understanding Reverse Triangular Mergers
A reverse triangular merger involves three entities: the buyer, the target, and a newly formed shell entity wholly owned by the buyer, known as the "merger sub." In this setup, at the transaction's closing, the merger sub merges into the target, with the merger sub's equity converting into shares of the surviving company. Consequently, the target's shares are cancelled, and holders receive compensation, such as cash or equity, in exchange. Post-merger, the target survives as a wholly owned subsidiary of the buyer.
Advantages and Considerations
1. Business Continuity of the Target
- Allows the buyer to acquire the target while maintaining its business operations, brand, and goodwill.
- Preserves the target's identity, including its brand, trademarks, and intellectual property, enhancing continuity with customers and vendors.
2. Streamlined Third-Party Consent Process
- Asset ownership remains with the target, minimizing transfer restrictions in contracts, permits, and licenses.
- Avoids or reduces challenges related to assignment restrictions commonly present in contracts, permits, and licenses.
3. Streamlined Buyer Approval Process
- Buyer shareholder approval is typically not required, simplifying the approval process.
- Enables the buyer to approve the transaction with only board approval, eliminating potential delays associated with shareholder consent.
4. Limited Liability for Buyers
- Shields the buyer from the target's pre-closing liabilities, protecting the buyer's assets.
- The target's liabilities remain with the target entity post-merger, limiting the buyer's exposure to pre-closing debts and obligations.
- Despite administrative complexities, reverse triangular mergers offer a lower approval threshold compared to stock purchases, making them attractive in transactions involving numerous shareholders.
- Merger approval is subject to statutory thresholds, simplifying the process and mitigating potential shareholder holdouts.
In summary, while reverse triangular mergers may involve additional administrative steps, their streamlined approval process, continuity benefits, and limited liability make them a strategic choice in business combination transactions.