What Is a Forward Triangular Merger?
A forward triangular merger, or indirect merger, is when a company acquires a target company through a subsidiary, or shell company. The acquired company is merged into this shell company, which assumes all the target's assets and liabilities.
- A forward triangular merger is the acquisition of a company by a subsidiary of the purchasing company.
- The target company is then merged into the shell company completely.
- A reverse triangular merger is when the shell company is merged into the target company.
Understanding Forward Triangular Merger
Forward triangular mergers, like reverse triangular mergers, in which the buyer's subsidiary is merged into the target company, have the advantage of protecting the buyer from the target's liabilities. This is because whatever form a triangular merger takes, the target company ends up as a wholly-owned subsidiary of the buyer, unlike direct mergers.
In the United States, forward triangular mergers are taxed as if the target company sold its assets to the subsidiary and then liquidated, whereas a reverse triangular merger is taxed as if the target company's shareholders sold their stock in the target company to the buyer.
Reasons for a Forward Triangular Merger
Forward triangular mergers are most commonly used when financed by a combination of cash and stock because mergers in which the target's shareholders are compensated with at least 50% in shares of the acquiring company are nontaxable. They are rarely used in cash-only bids because it would make the merger taxable.
When it comes to non-tax issues, forward triangular mergers are usually less favorable than reverse triangular mergers. They can have a big impact on the target company's licenses and contracts because third parties can withhold consent to the assignment of contracts and licenses to the acquirer and seek a price for providing such consent.
For a forward triangular merger to be legal, continuity of interest and business purpose must be maintained within the acquiring company.