A reverse triangular merger agreement is a type of merger agreement in which the target company becomes a subsidiary of the acquiring company. This agreement differs from a direct merger in that the target company’s shareholders remain as shareholders, rather than being absorbed into the acquiring company.

In a reverse triangular merger agreement, the acquiring company creates a new subsidiary, which is formed with the purpose of acquiring the target company. The subsidiary becomes the buyer in the transaction, and the target company’s shares are exchanged for the subsidiary’s shares. The subsidiary then merges with the target company, and the target company becomes a subsidiary of the acquiring company.

This type of merger agreement is often used when the target company has significant liabilities or outstanding litigation. By forming a new subsidiary to acquire the target company, the acquiring company can protect its own assets and shield itself from potential liabilities.

Reverse triangular merger agreements also offer tax benefits to both the acquiring and target companies. The target company can benefit from tax-free reorganization, while the acquiring company can benefit from the step-up in the basis of the assets it acquires.

It is important to note that reverse triangular merger agreements are subject to regulatory approval, as they can potentially violate antitrust laws. The acquiring company must prove that the merger will not result in a significant decrease in competition in the market.

Overall, reverse triangular merger agreements can offer many benefits to both the acquiring and target companies. They offer protection against liabilities and tax benefits, but require careful consideration and regulatory approval.