Overview (1) What is a forward/reverse triangular merger? (2) Legal steps to follow (3) Anti-assignment clauses (4) Benefits of triangular mergers (5) Forward vs. reverse

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Negotiating Reverse and Forward
Triangular Mergers

2. OVERVIEW
(1) What is a forward/reverse triangular merger?
(2) Legal steps to follow
(3) Anti-assignment clauses
(4) Benefits of triangular mergers
(5) Forward vs. reverse

3. FORWARD TRIANGULAR MERGER
• Target Company Shareholders receive merger consideration consisting of at least 50% Acquiring
Company stock
• Target Company merges into Acquisition Subsidiary with Acquisition Subsidiary being the surviving
corporation
Acquiring Company
Shareholders
Acquiring
Company
Acquisition
Subsidiary
Target Company
Shareholders
Target
Company
Acquisition
Subsidiary (post-
merger)Merger
Merger Consideration
Acquiring Company
Shareholders
Acquiring
Company
Before After

4. REVERSE TRIANGULAR MERGER
• Target Company Shareholders receive merger consideration consisting of at least 80% voting stock
of Acquiring Company
• Acquisition Subsidiary merges into Target Company with Target Company being the surviving
corporation
Acquiring Company
Shareholders
Acquiring
Company
Acquisition
Subsidiary
Target Company
Shareholders
Target
Company
Target Company
(post-merger)
Merger
Merger Consideration
Acquiring Company
Shareholders
Acquiring
Company
Before After

5. LEGAL STEPS
• Form Acquisition Subsidiary
– Capitalize Acquisition Subsidiary with merger
consideration
• Agreement and plan of merger
• Board of Directors approvals
– Acquisition Subsidiary
– Acquiring Company
– Target Company
• Target Company shareholder vote

6. ANTI-ASSIGNMENT CLAUSES
• Beware “anti-assignment” provisions in Target Company’s
contracts
– Look for anti-assignment or anti-transfer provisions
– Are there any IP license grants to Target Company that will
require consent for transfer?
• Consider the state law merger statute
– Generally, forward triangular mergers trigger anti-assignment
provisions, but reverse triangular mergers do not
– Exception: Under California law, reverse triangular mergers may
trigger anti-assignment clauses
• Review any “change of control” provisions in Target
Company’s contracts

7. WHY ADOPT A TRIANGULAR
MERGER?
• Acquiring Company remains separate from Target
Company liabilities
– However, Acquisition Subsidiary needs to assume
“substantially all” of Target Company’s business and
therefore it cannot leave behind the liabilities
• No approval from Acquiring Company
shareholders
– There is a shareholder vote of Acquisition Subsidiary,
however Acquiring Company is usually the sole
shareholder of Acquisition Subsidiary

8. FORWARD VS. REVERSE
• Forward triangular mergers
– More likely to trigger anti-assignment provisions in Target
Company’s contracts
– Will need a new Taxpayer Identification Number (TIN) and
therefore new payroll
– However, only 50% of the merger consideration needs to
be stock of the Acquiring Company
• Stock does not need to be voting stock
• Reverse triangular mergers
– Less likely to trigger anti-assignment provisions in Target
Company’s contracts
– Retain TIN and continue existing payroll
– 80% of the merger consideration needs to be voting stock
of the Acquiring Company

9. FORWARD VS. REVERSE
• Failure to satisfy the respective stock consideration
requirements results in a “busted” merger
– Reverse triangular mergers are riskier due to the 80%
voting stock requirement
• Busted forward triangular merger = reclassification as
an asset sale followed by a liquidation
– Two levels of tax
• Busted reverse triangular merger = reclassification as a
stock sale
– One level of tax
• Therefore the forward triangular merger is the safest
option, but with the highest penalty (two levels of tax
vs. one level of tax) should the merger fail

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