When a corporation acquires another, it often uses a triangular merger structure to avoid shareholder votes, limit liability, or preserve licenses. In a triangular merger, the acquiring corporation forms a subsidiary, and the subsidiary merges with the target.
In a forward triangular merger (governed by § 368(a)(2)(D)), the target merges into the subsidiary. The target’s shareholders receive stock of the parent (or cash). The target ceases to exist, and the subsidiary survives. The parent is insulated from the target’s liabilities because only the subsidiary assumes them. The target’s shareholders may not have to vote on the merger (depending on state law).
In a reverse triangular merger (governed by § 368(a)(2)(E)), the subsidiary merges into the target. The target survives, but the parent ends up controlling the target. This is useful when the target has licenses or contracts that cannot be transferred. The target’s shareholders exchange their stock for parent stock (or cash). Under § 368(a)(2)(E), the transaction qualifies as a reorganization if (1) the surviving corporation holds substantially all of its properties and the merged subsidiary’s properties, and (2) the target’s shareholders exchange enough stock to give the parent control (generally, at least 80% by vote and value).
Rev. Rul. 67‑448, 1967‑2 C.B. 144, approved a “forced B reorganization” – a reverse triangular merger where the parent created a transitory subsidiary to merge into the target, forcing minority shareholders to accept parent stock. The IRS treated it as a B reorganization (stock for stock).
Triangular mergers are complex, but they offer significant flexibility. If you’re planning an acquisition, consider whether a triangular structure can meet your non‑tax objectives without losing tax‑free status.
This article is for general informational purposes only and is subject to change. Tax laws are complex and vary by situation. You should consult a qualified professional for advice specific to your circumstances. For questions, contact Alan Goldstein.
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