Merger Structure Rundown: Reverse Triangle Strategy

One of the beauties of the triangle offense is that it works in both directions.  In a similar way, the reverse triangular merger strategy has the same benefit.  The Purchasing Entity (the “Purchaser”) creates a subsidiary, which then acquires the Selling entity (the “Seller”).  The key difference is that the Seller, through the Purchaser’s subsidiary, retains its identity.

Benefits

1. Contracts – Because the Seller retains its identity, any third-party contracts that were previously in place do not have to be assigned or modified (e.g., think about the issues of becoming a new vendor to the government or a large corporation)
2. Less complexity – Because a true merger or asset acquisition is not taking place, the acquisition of the Seller by the Purchaser is typically faster.  On the flipside, if the acquisition does not work out, the Seller can be resold.

Drawbacks

1. Liabilities – The Seller may have legacy liabilities (e.g., lawsuits, taxes, etc.) which will have to be dealt with by the Purchaser.
2. IRS Requirement to be tax free – 80% of the Seller’s stock must be acquired with voting stock of the Purchaser (i.e., this is not heavy cash up front deal for the Seller).  This may make these transaction structures less attractive for a Seller looking to truly exit.

 Below are some good overviews of the different transaction structures (repeat from last week):

• M&A 101 – The difference between mergers and acquisitions
• Making Mergers, Acquisitions and Other Business Combinations Work
• Acquisition Structure – General Framework

Here are some other items of interest:

• The Latest from NYBB Group (thanks to Anthony Citrolo for sharing)
  • What Are Your Flaws? (thenybbgroup.com)
  • BizBuySell Insight Report for 2022 (thenybbgroup.com)
• SALT: The Waterfall Effect of Hiring & Having Remote Employees (stambaughness.com) – 3/28 @ 2pm EST
• March 2023 Commentary: Continued Uncertainty and Opportunity | Stonebridge Financial Group (stonebridgefg.com)
• AMAA NEWSLETTER Winter 2023 (amaaonline.com)
• Smart Business Dealmakers Conference – April 26, 2023 (thanks to Murphy McCormack Capital Advisors for sharing)

Additional Merger Structure Rundowns

This article is part of a series on different types of merger structures. You can find the other structure rundowns at the links below:

• Merger Structure Rundown: Forward (Direct) Merger
• Merger Structure Rundown: Forward Triangular Merger
• Merger Structure Rundown: 338 Elections

As always, please don’t hesitate to email myself (jsanders@mpl-law.com), Andy Miller (amiller@mpl-law.com), Christian Miller (cmiller@mpl-law.com), Erik Spurlin (espurlin@mpl-law.com), Brad Leber (bleber@mpl-law.com) or anyone in our office with questions or comments.  

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