DEFINITION of 'Forward Triangular Merger'
The acquisition of a target company by a subsidiary of the purchasing company. The only difference between a forward triangular merger and a direct merger is that a subsidiary of the purchasing company, not the purchasing company itself, is the entity that acquires the target. Forward triangular mergers, like direct mergers and reverse triangular mergers, can be either taxable or nontaxable, depending on how they are executed and other complex factors.
BREAKING DOWN 'Forward Triangular Merger'
In a taxable forward triangular merger, the subsidiary buys 100% of the target's shares and the target's shareholders receive cash in exchange. In a nontaxable forward triangular merger, also known as a tax-free reorganization, the target's shareholders are compensated at least 50% in shares of the acquiring company. This gives the target's shareholders a continuing interest in the post-merger company and satisfies one of the key criteria for a tax-free reorganization.