Triangle Strategy Works Both Ways

Written by James Sanders

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.