A triangular merger is a reorganization in which a subsidiary owned by the buyer merges with the seller, with the selling entity then liquidating. Being a merger rather than an acquisition, the transaction will eliminate all minority stockholders, since they are legally required to accept the buyer’s purchase price. Also, the approval of only the selling entity’s board of directors is needed, not the selling stockholders.
For a triangular transaction to be non-taxable, the buyer must have at least 80% control over its subsidiary, and must acquire at least 90% of the fair market value of the buyer’s net assets. Also, the transaction between the subsidiary and the selling entity must satisfy the requirements noted in the Tax Free Acquisitions article, which include the presence of a continuity of interest and a continuity of business enterprise.
A reverse triangular merger is a reorganization in which a subsidiary owned by the buyer merges into the seller, with the subsidiary then liquidating. The buying parent company’s voting stock is then transferred to the selling stockholders in exchange for their stock in the selling entity. Being a merger rather than an acquisition, the transaction will eliminate all minority shareholders, since they are legally required to accept the buyer’s purchase price. Also, the approval of only the selling entity’s board of directors is needed, not the selling stockholders.
For a reverse triangular merger to be non-taxable, the selling entity must acquire substantially all of the assets of the buyer’s subsidiary, and the buyer must obtain at least 80% control of the selling entity. Also, the buyer must acquire at least 90% of the FMV of the buyer’s net assets.
The reverse triangular merger is most commonly used when the selling entity has valuable contracts that would otherwise be cancelled if the selling entity were not to survive the acquisition transaction. It is also used when the selling entity’s stock is too widely held to make a direct stock purchase practicable, or where there may be a significant proportion of dissenting stockholders.
Sellers tend to be less enthralled with a reverse triangular merger, because this type of reorganization severely limits the amount of cash they can receive. Because the selling entity must give up at least 80% of its stock for the stock of the buyer’s subsidiary, this leaves no more than 20% of the total purchase price available for payment in cash. Nonetheless, this is one of the most common types of reorganization in use.
The Triangular Merger