Resources / Glossary / Reverse triangular merger

Reverse triangular merger.

Aka. RTM · reverse subsidiary merger
All terms

What is a reverse triangular merger?

A reverse triangular merger is a common way to structure an acquisition in which the buyer forms a temporary subsidiary, and that subsidiary merges into the target. The merger subsidiary disappears, the target survives, and the target's shares are converted into the right to receive the deal consideration. The result is that the target lives on as a wholly owned subsidiary of the buyer.

It is called triangular because three entities are involved — the buyer, its merger subsidiary, and the target — and reverse because the direction of the merger runs from the subsidiary into the target, rather than the target merging up into the buyer. The buyer never directly merges with the target; it acquires it by collapsing a shell subsidiary into it.

The whole point of the structure is that the target entity is preserved. Because the target survives rather than being absorbed, its contracts, licenses, and permits generally stay in place, and the buyer's own balance sheet is insulated from the target's liabilities behind the subsidiary.

How a reverse triangular merger works

The sequence is engineered to land the target intact under the buyer's ownership.

  1. Form the merger sub. The buyer creates a wholly owned shell subsidiary for the sole purpose of effecting the merger.
  2. Merge sub into target. The shell subsidiary merges into the target. The subsidiary ceases to exist; the target is the surviving entity.
  3. Convert the shares. The target's existing shares are cancelled and converted into the merger consideration — cash, buyer stock, or a mix — paid to the target's former shareholders.
  4. Target becomes a subsidiary. Because the buyer owned the merger sub, it now owns the surviving target outright, holding it as a wholly owned subsidiary.

The structure is popular because it preserves the target's existence — protecting contracts that might otherwise need consent to assign — while still giving the buyer complete ownership and liability separation. Under U.S. tax rules it can also qualify as a tax-free reorganization when enough of the consideration is buyer stock.

Reverse triangular vs. forward triangular merger

Both use a merger subsidiary, but the surviving entity differs. In a reverse triangular merger, the subsidiary merges into the target and the target survives as a subsidiary of the buyer — preserving the target's contracts and licenses. In a forward triangular merger, the target merges into the buyer's subsidiary and the subsidiary survives, meaning the target ceases to exist and its assets and contracts may need to be transferred or re-consented.

Practitioners often prefer the reverse form precisely because keeping the target alive avoids the assignment problems that arise when contracts contain anti-assignment clauses but no change-of-control restriction — the target's agreements typically ride through untouched.

Frequently asked.

5 questions
01 Why use a merger subsidiary instead of merging with the target directly?

Using a shell subsidiary keeps the target's liabilities ring-fenced behind the subsidiary structure, protecting the buyer's main balance sheet, and it can simplify the shareholder-approval mechanics on the buyer's side.

It also lets the buyer acquire the target without exposing its own operating entity to the merger, which is why the triangular structure is the default for many public-company acquisitions.

02 What's the difference between a reverse and a forward triangular merger?

In a reverse triangular merger the buyer's subsidiary merges into the target and the target survives as a subsidiary of the buyer. In a forward triangular merger the target merges into the subsidiary, so the subsidiary survives and the target ceases to exist.

The reverse form preserves the target entity and its contracts; the forward form can require transferring or re-consenting the target's assets and agreements.

03 Does a reverse triangular merger preserve the target's contracts?

Usually yes. Because the target survives as the same legal entity, its contracts, licenses, and permits generally continue without needing individual assignment.

The exception is a change-of-control clause, which some contracts contain — these can still require counterparty consent even though the entity itself survives the merger.

04 Can a reverse triangular merger be tax-free?

It can qualify as a tax-free reorganization under U.S. tax rules if the consideration is composed largely of the acquirer's stock and the other statutory requirements are met.

If the consideration is mostly cash, the transaction is generally taxable to the target's shareholders, so the tax outcome turns on the mix of stock and cash.

05 When is a reverse triangular merger the right structure?

It is well suited to acquiring a company whose value depends on contracts, licenses, or regulatory approvals that would be hard to reassign, since keeping the target alive lets those stay in place.

It is also the standard mechanism for public-company takeovers where the buyer wants full ownership, liability separation, and, where applicable, tax-free treatment.

VectorShift for deal teams

Put VectorShift to work on every deal.

VectorShift reads the documents your team actually works on — CIMs, management decks, filings, expert calls, portfolio reports — and returns structured, sourced analysis in minutes, not weeks.

Request a demo