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Reverse Triangular Mergers:
(a)(2)(E) Reorganizations




This portion of the introduction to the basic principles of United States federal income taxation of corporate acquisitions is part of the Pillsbury Winthrop Shaw Pittman LLP Tax Page, a World Wide Web demonstration project. Comments are welcome on the design or content of this material.

The information presented is only of a general nature, intended simply as background material, is current only as of the latest revision date, October 15, 2007, omits many details and special rules and cannot be regarded as legal or tax advice.


Internal Revenue Code §§ 368(a)(1)(A) and 368(a)(2)(E)

In a reverse triangular merger, a subsidiary ("Sub") of the acquiring corporation ("Acquiring") merges into the target corporation ("Target"). Acquiring's Sub stock is converted into Target stock and the former Target shareholders receive the merger consideration in exchange for their Target stock. This form of acquisition is often desirable for regulatory or contractual reasons when it is important that no transfer of Target assets take place.

(a)(2)(E) Reorganization Diagram
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Post-Transaction Structure
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These transactions must also still qualify as A reorganizations, i.e., the merger must be a "statutory merger or consolidation" and the general reorganization requirements must be satisfied.

Target shareholders can receive Acquiring stock as long as:

  • Acquiring is in control of Sub immediately prior to the merger.

  • After the merger Target holds substantially all of its properties and substantially all of the properties of Sub (other than stock of Acquiring distributed in the merger).

  • In the merger, the former Target shareholders exchange Target stock constituting control of Target for voting stock of Acquiring.

Note the more restrictive requirements: Acquiring voting stock must be used to acquire control of Target. The escrowed and contingent stock rules of A reorganizations apply, but Acquiring voting stock must generally be used.

Target can transfer all or a part of its assets to a subsidiary controlled by Target and Acquiring can transfer its Target stock to a subsidiary controlled by Acquiring.


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