Various methodologies exist for mergers and acquisitions, but forward and reverse triangle mergers are only found in one category. Guess which.

The rise of SPACs (special purpose acquisition groups)  in 2020  increased awareness of both forward and reverse triangular mergers because most use the reverse triangular to form a transaction. This blog will overview both triangle merger types, their advantages, disadvantages, and tax considerations.

Forward Triangular Merger Diagram

The diagram below provides  a helpful visual aid for increasing  our understanding of forward triangle mergers.

On the left is “Company A”, a subsidiary created by the acquiring company. In the middle,Company B represents the target company. 

In a forward triangle merger, Company A (the acquiring company’s subsidiary) purchases Company B (the target) and absorbs it. Company B ceases to exist in this scenario, and the two companies now operate as a single entity under Company A’s name and structure.

An Example of a Forward Triangular Merger

T-Mobile Completes a Forward Triangle Merger to Acquire Sprint 

A high-profile example of a forward triangle merger is T-Mobile’s acquisition of Sprint in 2020. In this acquisition, T-Mobile created and used a subsidiary to acquire Sprint. T-Mobile then absorbed Sprint and integrated its operations and customers into its business. 

The forward triangle merger approach protected T-Mobile by legally isolating its liabilities while enhancing its network and market share via acquisition.  

Reverse Triangular Merger Diagram

See the following diagram for a better understanding of reverse triangle mergers. On the left is Company A, thesubsidiary created by the acquiring company. In the middle,Company B represents the target company.

Company A (the shell company  ) purchases Company B (the target) in a reverse triangle merger. Once the acquisition is complete, Company B absorbs Company A.  In this scenario, Company A ceases to exist, and the two companies operate as a single entity under Company B’s name and structure and continue to act as a subsidiary of the acquiring company.  

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Example of a Reverse Triangular Merger

Amazon Completes a Reverse Triangle Merger to Acquire One Medical

One well-known reverse triangle merger occurred in 2023 when Amazon purchased One Medical, a technology-powered primary care organization, for $3.9 billion.  In this example, Amazon created a subsidiary shell company to perform the acquisition. Later, that subsidiary was absorbed by One Medical, enabling One Medical to operate as its subsidiary of Amazon.  The reverse triangle merger approach allowed One Medical to maintain operational continuity without disruption.

Forward vs. Reverse Triangular Mergers

While forward and reverse triangular mergers use subsidiaries to complete acquisitions, their outcomes vary. The main difference between them is the end state of the target company.  

In a forward triangular merger, the subsidiary absorbs the target company and ceases to exist. In a reverse triangle merge, the target company absorbs the shell subsidiary and continues as its buyer's subsidiary.

There is not necessarily a preference between these two types of mergers.  It all depends on the acquiring company’s strategy and ability to manage unique challenges.  For example, forward triangle mergers have significant tax benefits, but they often lack continuity of operations and culture in the target company, which causes major riffs. 

On the other hand, while reverse triangle mergers promise continuity for the target company, there will undoubtedly be increased legal complexity and cost to get the deal done. Let’s dive into the advantages and disadvantages of each approach in more detail.  

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Advantages and Disadvantages of Forward Triangular Mergers

Advantages of Forward Triangular Mergers

• Tax benefits are the underlying motive for most forward triangular mergers. By acquiring the target company with a combination of cash and stock, rather than cash only, the acquiring firm can offset tax against the voting stock it uses for the acquisition, saving considerably on taxation.
• There are reduced liabilities. Unlike direct mergers, forward triangular mergers involve the target company becoming a subsidiary. This means the acquirer is protected against the target’s liabilities, including pending legal liabilities. The parent company experiences far less risk than other merger and acquisition strategies.  
• Execution is a near certainty, as the acquiring firm is the only shareholder of the subsidiary. Permission for the transaction does not need to be sought from the acquirer’s shareholders, reducing a common source of friction for companies involved in direct mergers.
• The ease of sale benefits the target company. After the transaction has closed, the target company remains a subsidiary, so it will be easier to sell than a fully merged entity if and when the time arises. 

Disadvantages of Forward Triangular Mergers

• The lack of continuity caused by the target company's “disappearance” into the shell company after the transaction concludes may create issues. After the transition, contracts and licenses previously agreed by the target company will become legally void, meaning the new company must renew them. This is very different from a reverse triangular merger, where continuity is one of the main advantages. 
• A forward triangular merger often involves added costs, as the acquiring company must set up and maintain a subsidiary. This is frequently a complex and expensive process. However, this is not unique to forward triangular mergers; reverse triangular mergers often come with this type of additional cost as well. involve
• While liabilities can be an advantage of forward triangular mergers, they can also be a disadvantage due to potential existing legal or financial liabilities at the target company.  The acquiring company should complete a robust due diligence process to uncover as many liabilities as possible before closing the deal. 

Advantages and Disadvantages of Reverse Triangular Mergers

Advantages of Reverse Triangular Mergers

• Continuity is maintained. Unlike forward triangular mergers, the target company remains a unique entity after the reverse triangular merger has concluded, meaning that none of the contractual arrangements previously agreed by the target company are lost in the transaction. This is a significant advantage of reverse and forward triangular mergers.
• Reduced liabilities exist, just as with forward triangular mergers. The acquirer takes complete control of the target company’s assets without taking on its liabilities because the target maintains its legal identity, meaning contracts, leases, and licenses do not have to be transferred. 
• There are substantial tax benefits. If managed correctly and more than 80% of the acquirer’s stock is used to fund the merger, the reorganization may qualify as a tax-free reorganization, resulting in zero tax liability for the acquiring company. 

Disadvantages of Reverse Triangular Mergers

• Given that the target company remains its entity, natural divides live between the acquiring company and the target. In a reverse triangular merger, truly unifying the two companies can be full of integration challenges, including employee push-back and cultural differences. With a forward triangular merger, the target company is absorbed, and integration is generally easier. ,
• The legal complexities and expenses associated with this merger type’s uniqueness can be significant. To ensure compliance with laws across locations, companies should have the appropriate internal or external legal counsel and the required resource budget if they intend to pursue a reverse triangular merger. 
• Target shareholder dissatisfaction in a reverse triangular merger is common. The target company may continue as a separate entity on paper, but, its original shareholders usually end up with reduced control. This sometimes leads to legal action for shareholders who feel the merger did not favor them.  

Requirements for Forward Triangular Mergers

There are critical requirements for parent companies to understand to complete a forward triangular merger. 

Create or Identify a Subsidiary

A subsidiary must be created to facilitate the forward triangular merger, but an acquiring company could also use an existing subsidiary.

Prepare & Transfer Funds

The acquiring company then transfers some sort of asset to the subsidiary.  This transfer could be stock, cash, or a mix of both. The assets will be used to purchase the target company. 

Gain Shareholder Approval 

This step depends on the relevant corporate laws for specific locations and scenarios. In many cases, shareholders from the acquiring and target companies must approve the merger. 

Ensure Board Approval & Legal Compliance

In many cases, three boards are involved in this step.  The boards of the target, acquiring, and subsidiary companies must review and approve the merger plan.  Beyond the board, the merger must follow all laws and regulations. 

Complete Due Diligence

The acquiring company must then complete a robust due diligence process on the target company to identify any legal, financial, cultural, etc, issues that would make the merger a risk. 

Create Integration Plan

As with any merger or acquisition, the acquiring company must create an integration plan to maximize the target company's value and minimize downtime and risks. 

Finalize Forward Triangular Merger 

The final step is to create a legal document that defines the terms of the merger and outlines all warranties, covenants, and procedures for completing the merger. 

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Requirements for Reverse Triangular Mergers

Reverse triangular mergers have many similar requirements to forward triangular mergers.  Both require creating or identifying a subsidiary, shareholder board approval, regulatory compliance, due diligence, and integration planning.   However, there are some notable differences:

Shareholder Approvals

In a forward triangular merger, all shareholders (acquiring and target company) must approve the purchase. The target company must specifically approve because it will receive parent company shares. However, this is only sometimes the case in a reverse triangle merger, and it depends on the size of the subsidiary relative to the target. In addition, the acquiring company’s shareholders in a reverse triangle merger usually do not need to approve the deal unless it is substantial. 

Regulatory Hurdles

Reverse triangular mergers generally involve fewer regulatory hurdles because the target company remains its entity, so there are fewer contract, license, and permit transfer considerations. 

Tax Considerations 

The tax considerations for a reverse triangular merger are usually more straightforward than those associated with a forward triangular merger because the target entity survives, making it easier to structure the deal as a tax-free reorganization.

Tax treatment for Forward Triangular Mergers

A forward triangular merger is taxed as if the target company sold its assets to the subsidiary and then liquidated.  The tax implications in forward triangular mergers are often more complex because of the required transfer of assets and liabilities from the target company to the parent company. 

Tax treatment for Reverse Triangular Mergers

A reverse triangular merger is taxed as if the target company’s stakeholders sold their stock in the target company to the buyer. As stated above, these mergers are often simpler than forward triangular mergers because the target company survives and there are fewer assets and liabilities.

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Anti-Assignment Clauses Related to Subsidiary Mergers 

Anti-assignment clauses are designed to protect parties in a contractual relationship. Specifically, they ensure that parties can only assign their obligations or benefits of the contract to someone else with prior consent from the original parties involved in the contract. 

One common contract type that includes anti-assignment clauses is subsidiary mergers, including forward and reverse triangular mergers.    

Conclusion

Both forward and triangular mergers serve a unique purpose in a holistic mergers and acquisitions strategy. The reverse triangular merger is more popular because it provides continuity—the target company, its contractual agreements, and its brand value are maintained after the transaction has closed. However, forward triangular mergers are beneficial when tax and liability concerns are paramount.