what is a reverse triangular merger 
a reverse triangular merger is the formation of a new company that occurs when an acquiring company creates a subsidiary the subsidiary purchases the target company and the subsidiary is then absorbed by the target company a reverse triangular merger is more easily accomplished than a direct merger because the subsidiary has only one shareholder the acquiring company and the acquiring company may obtain control of the target s nontransferable assets and contracts understanding reverse triangular mergersin a reverse triangular merger the acquirer creates a subsidiary that merges into the selling entity and then liquidates leaving the selling entity as the surviving entity and a subsidiary of the acquirer the buyer s stock is then issued to the seller s shareholders the process is more or less as follows once this process is complete the acquired target company resumes its normal operations acting as a subsidiary of the purchasing company in a reverse triangular merger at least 50 of the payment is the stock of the acquirer and the acquirer gains all assets and liabilities of the seller 2advantages of a reverse triangular mergerreverse triangular mergers sound more complicated than regular mergers however they are often actually preferred for their simplicity here are some of the main reasons why companies go down this path a reverse triangular merger is attractive when the seller s continued existence is needed for reasons other than tax benefits such as rights relating to franchising leasing or contracts or specific licenses that may be held and owned solely by the seller reverse triangular merger requirementsbecause the acquirer must meet the bona fide needs rule a fiscal year appropriation may be obligated to be met only if a legitimate need arises in the fiscal year for which the appropriation was made since the acquirer must meet the continuity of business enterprise rule the entity must continue the target company s business or use a substantial portion of the target s business assets in a company the acquirer must also meet the continuity of interest rule meaning the merger may be made on a tax free basis if the shareholders of the acquired company hold an equity stake in the acquiring company in addition the acquirer must be approved by the boards of directors of both entities reverse triangular merger tax treatmenta reverse triangular merger like direct mergers and forward triangular mergers may be either taxable or nontaxable depending on how they are executed and other complex factors set forth in section 368 of the internal revenue code if nontaxable a reverse triangular merger is considered a reorganization for tax purposes a reverse triangular merger may qualify as a tax free reorganization when 80 of the seller s stock is acquired with the voting stock of the buyer the non stock consideration may not exceed 20 of the total 24