A forward triangular merger (also called a forward subsidiary merger) is an acquisition structure where one company acquires another company using a subsidiary of the acquiring company. In the the forward triangular merger, the acquired company merges with and into a merger subsidiary of the acquiring company, with the merger subsidiary surviving the merger.The forward triangular merger can be contrasted with the reverse triangular merger in which the acquired company survives the merger.
The following is a diagram of a forward triangular merger:
The forward triangular merger is not as common as the reverse triangular merger, but is still a reasonably common structure. Like the reverse triangular merger, it has the advantage of isolating the liabilities of the acquired company in a separate subsidiary (unlike the direct merger). But unlike the reverse triangular merger, it does not preserve the acquired company as a corporate entity.
The most common scenario for a forward triangular merger is when the merger consideration is a combination of cash and stock. In such cases, the cash component of the merger consideration has the potential to upset the tax-free reorganization treatment of a reverse triangular merger. The forward triangular merger has more lenient rules for cash consideration, making it preferable in such cases. In a pure cash merger, there is no need for the forward triangular structure because the merger will be taxable anyway.
Distinguish: Reverse Triangular Merger