Reverse Merger
A merger structure (most commonly "reverse triangular") in which the target entity survives and the acquirer's subsidiary is the disappearing entity. Economically equivalent to a stock purchase but provides specific tax, contractual, and regulatory advantages.
A reverse merger (sometimes called a "reverse triangular merger" in its most common form) is a merger structure in which the target entity survives the merger and the acquirer's subsidiary is the disappearing entity. The economic effect is identical to a stock purchase, the target's equity is exchanged for the buyer's consideration and the target becomes a wholly-owned subsidiary of the buyer, but the merger structure provides specific tax, contractual, and regulatory advantages.
Reverse triangular merger structure
The buyer forms a wholly-owned merger subsidiary ("MergerCo"). MergerCo merges with and into the target, with the target as the surviving entity. The target's shareholders receive the merger consideration; their target shares are cancelled; MergerCo's shares (held by the buyer) are converted into the target's surviving equity. The result: target is now a wholly-owned subsidiary of the buyer.
Why use the structure
Continuity of contracts. The target survives, so contracts with change-of-control provisions triggered by acquisition may not be triggered by a reverse merger (depending on contract language). This is the principal practical advantage.
Tax treatment. A reverse triangular merger using buyer voting stock can qualify as a tax-free "B reorganization" under IRC § 368(a)(1)(B) (or § 368(a)(2)(E)), permitting tax-free treatment for target shareholders.
Regulatory and licensing. Where target holds licenses or permits non-transferable on transfer of equity but unaffected by survival of the target entity, reverse merger preserves the licenses.
Forward merger distinguished
A "forward triangular merger" uses the same triangular structure but has the target merge into MergerCo (so MergerCo survives, target disappears). Tax and contract continuity considerations differ, forward triangular mergers receive different IRC treatment and do not preserve target's contracts.
Reverse triangular mergers are the dominant Texas M&A structure for acquisitions of corporate targets where (a) the buyer wants the operational continuity of a stock purchase and (b) the target's contract portfolio includes meaningful change-of-control provisions that survival of the target may avoid.
Companion article: Selling Your Business in Texas