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ADTM - Reverse Triangular Mergers: Explained


Reverse Triangular Mergers: Explained

A Reverse Triangular Merger

is the formation of a New company
that occurs when an acquiring company
creates a subsidiary,
the subsidiary purchases the target company
and the subsidiary is then absorbed
by the target company.

A Reverse Triangular Merger
is more easily accomplished than a Direct Merger
because the subsidiary has only one shareholder
— the acquiring company —
and the acquiring company may obtain control
of the target's non-transferable
assets and contracts.

Reverse Triangular Mergers,

like Direct Mergers and Forward Triangular Mergers,
may be either taxable or nontaxable,
depending on how they are executed
and other complex factors set forth in Section 368
of the Internal Revenue Code;
if nontaxable,
a Reverse Triangular Merger
is considered a reorganization for tax purposes.

Because a Reverse Triangular Merger
may qualify as a tax-free reorganization
when 80% of the seller’s stock is acquired
with voting stock of the buyer,
non-stock consideration
may not exceed 20% of the total.

Qualifications of a Reverse Triangular Merger

In a Reverse Triangular Merger,

the acquirer creates a subsidiary
that merges into the selling entity
and then liquidates,
leaving the selling entity as the surviving entity,
and a subsidiary of the acquirer.

The buyer’s stock is then issued
to the seller’s shareholders.

Because the Reverse Triangular Merger
retains the seller entity
and its business contracts,
the Reverse Triangular Merger
is used more often than the Triangular Merger.

In a Reverse Triangular Merger,
at least 50% of the payment
is in stock of the acquirer,
and the acquirer gains all assets and liabilities
of the seller.

Because the acquirer must meet
the bona fide needs rule,
a fiscal year appropriation may be obligated
to be met only if a legitimate need arises
in the fiscal year
for which the appropriation was made.

Since the acquirer must meet
the continuity of business enterprise rule,
the entity must continue the target company’s business
or use a substantial portion
of the target’s business assets
in a company.

The acquirer must also meet
the continuity of interest rule,
meaning the merger may be made on a tax-free basis
if the shareholders of the acquired company
hold an equity stake in the acquiring company.

In addition,
the acquirer must be approved of
by the boards of directors of both entities.

https://www.investopedia.com/terms/r/rtm.asp#ixzz5CDGGH659


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Reverse Mergers: Guide and Stages of Readiness


A Reverse Merger

allows a privately held company to go public
by acquiring a controlling interest in,
and merging with,
a public operating or public shell company.


In a Reverse Merger process,

the private operating company shareholders
exchange their shares of the private company
for either new or existing shares
of the public company

At the end of the transaction,
the shareholders of the private operating company
own a majority of the public company
and the private operating company
has become a wholly owned subsidiary
of the public company.

_______________________________________________________________

A shell company
a publically traded company with

(1) no, or nominal operations and

(2) either no or nominal assets
or assets consisting solely of
any amount of cash and cash equivalents.


A Reverse Merger

is the most common alternative
to an initial public offering (IPO)
or direct public offering (DPO)
for a company seeking to go public.

http://www.legalandcompliance.com/reverse-mergers/

________________________________________________________________


The Cost of the Shell

In a Reverse Merger transaction,
the private operating business
must pay for the public shell company.

That payment may be in cash, equity or both.

The average cash value
of a fully reporting public entity
with no liabilities, no issues
and which is otherwise “clean”
is between $280,000 – $400,000.

http://www.legalandcompliance.com/reverse-mergers/

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