What Is a Reverse Triangular Merger?
A reverse triangular merger is an acquisition structure in which the buyer forms a temporary shell subsidiary, commonly called a merger sub, and merges that subsidiary into the target company. The merger sub ceases to exist while the target survives as a wholly owned subsidiary of the buyer. Target shareholders exchange their stock for the agreed consideration, whether cash or acquirer shares.
The word 'reverse' distinguishes it from a forward triangular merger, in which the target merges into the merger sub and the target's legal existence ends. Because the target survives in the reverse version, it keeps its legal identity, which matters enormously when the company holds contracts, permits, or licenses that would otherwise need to be reassigned or renegotiated.
How the Structure Works
Mechanically, the buyer capitalizes the merger sub, the merger sub merges up into the target under a state merger statute, and the target's outstanding shares are cancelled and converted into the right to receive the merger consideration. The buyer ends up holding 100% of the surviving target's stock. Deal lawyers favor this route because it requires approval from the target's shareholders as a group rather than a signature from every individual holder.
The structure also has tax implications. A reverse triangular merger can qualify as a tax-free reorganization under Section 368(a)(2)(E) of the Internal Revenue Code if, among other requirements, the buyer uses its voting stock to acquire control and target shareholders receive at least 80% of their consideration in that stock. Cash-heavy deals fail this test, so all-cash reverse triangular mergers are simply taxable acquisitions in economic substance.
Why It Matters in M&A Practice
This is the default structure for negotiated US public company acquisitions. It isolates the target's liabilities inside a separate subsidiary rather than folding them into the parent, and it preserves non-assignable contracts such as intellectual property licenses and government permits. It also solves the practical impossibility of buying shares from thousands of dispersed holders, since a majority vote binds everyone.
For interviews, the key contrast is with a direct stock purchase, which requires dealing with each shareholder individually, and with a forward merger, which can trigger anti-assignment clauses in the target's contracts. The reverse triangular structure sidesteps both problems, which is why nearly every US public deal announcement describes a newly formed merger sub merging with and into the target.
