TLDR:
A reverse triangular merger is an M&A structure where the buyer creates a wholly-owned acquisition subsidiary (“Merger Sub”), which then merges into the target company, with the target surviving as a wholly-owned subsidiary of the buyer. Target shareholders receive merger consideration (cash, buyer stock, or both) in exchange for their target shares. The reverse triangular merger has become the dominant US M&A structure for stock acquisitions.
Why Reverse Triangular Mergers Are Used
Key advantages: contract preservation (target’s contracts with third parties generally remain with the surviving target entity—avoiding the need for individual contract assignments that direct asset purchases require), tax treatment (can qualify as tax-free reorganization under IRC Section 368(a)(2)(E) if conditions are met), shareholder approval mechanics (only target shareholders need to approve, not buyer shareholders unless stock issuance is significant), and risk isolation (Merger Sub absorbs the merger transaction risk before being merged out). The structure essentially “wraps” the target inside the buyer’s corporate structure without requiring asset-level transactions.
Forward Triangular Merger Alternative
The “forward triangular merger” reverses the direction: target merges into Merger Sub (rather than Merger Sub into target), with Merger Sub surviving. Forward triangular is less common because it triggers technical change-of-control in target contracts (target legal entity ceases to exist), losing the contract preservation benefit. Direct mergers (target directly into buyer) are also possible but trigger buyer shareholder approval and direct exposure of buyer assets to target liabilities.
Tax and Practical Considerations
For tax-free reorganization treatment, reverse triangular mergers must meet specific requirements: substantially all of the target’s assets must be held by the surviving corporation, target shareholders must receive at least 80% buyer voting stock as consideration (Type B-like requirements), continuity of business enterprise, and continuity of shareholder interest. Mixed cash-and-stock deals often fall short of tax-free treatment but accept taxation for deal-structure benefits. In Türkiye, the equivalent structure uses TTK provisions on mergers (Article 134 et seq.) and tax provisions on tax-neutral reorganizations (KVK Article 19). Cross-border deals require careful tax structuring to coordinate US and Turkish treatment.