A reverse triangular merger (RTM) is the most widely used structure for acquiring a company, especially a public one. The buyer forms a wholly owned merger subsidiary, which then merges into the target. The merger sub disappears, the target survives — now as a wholly owned subsidiary of the buyer — and target shareholders receive the merger consideration.
The structure, step by step
- The buyer (P) forms a transitory, wholly owned merger sub (S).
- S merges into the target (T). S disappears; T survives.
- Target shareholders exchange their shares for cash, stock or a mix.
- T continues to exist and operate, now owned by P.
As with all triangular mergers, only the target's shareholders vote, and the target's liabilities stay isolated within the surviving subsidiary rather than landing on the parent.
Why it dominates: contract continuity
The defining advantage of the RTM is that the target legal entity survives unchanged — only its ownership changes. As a result, the target's contracts, leases, permits and licenses generally remain in force without assignment or third-party consent, exactly as in a stock purchase but with the added ability to squeeze out non-consenting minority shareholders through the statutory vote. For businesses built on non-assignable contracts or hard-to-transfer regulatory licenses, this continuity is decisive — and it is why the RTM is the default for public-company deals.
(One caveat: some contracts contain "change of control" provisions that are triggered by a shift in ownership even without an assignment, so continuity is strong but not absolute.)
Tax treatment
A reverse triangular merger can qualify as a tax-free "Type A" reorganization under IRC §368(a)(2)(E), but the consideration test is stricter than the forward form: the target shareholders must receive at least 80% of the consideration in voting stock of the buyer, and the surviving target must hold substantially all of its and the merger sub's properties. If the buyer wants to pay more than ~20% in cash, the RTM cannot be tax-free, and the parties may pivot to a forward triangular structure (which tolerates a higher cash component while still qualifying) or simply accept a taxable deal. See reorganization types and taxable vs tax-free.
When it is used
The RTM is the standard structure for public-company acquisitions and for private deals where preserving the target's contracts and licenses matters. Its main limitation is on the tax-free / high-stock end: a buyer wanting a tax-free deal with a large cash component must look to other reorganization forms.
See also
- Forward triangular merger — A merger in which a wholly owned subsidiary of the buyer survives and the target merges into it. Often used for tax and liability isolation reasons.
- Statutory merger — A combination governed by state corporate-law statute in which one constituent corporation absorbs the other, with the surviving entity inheriting all rights and obligations by operation of law.
- Stock purchase — A deal structure in which the buyer acquires the equity of the target entity, taking it whole — assets, liabilities, contracts and history. Generally favoured by sellers.
- Section 368 reorganization types — The Section 368 categories of tax-free reorganizations — Type A (statutory merger), Type B (stock-for-stock), Type C (stock-for-asset), Type D (acquisitive D), Type F (form change) and others.
- Taxable vs tax-free reorganization — The threshold tax-structure question in U.S. M&A: whether the seller recognises gain at closing (taxable) or whether the transaction qualifies for non-recognition under the reorganization rules of Section 368.