Negotiating Reverse and Forward Triangular Mergers

Overview
(1) What is a forward/reverse triangular merger?
(2) Legal steps to follow
(3) Anti-assignment clauses
(4) Benefits of triangular mergers
(5) Forward vs. reverse

1. IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication, including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein. Roger Royse Royse Law Firm, PC Palo Alto, San Francisco, Los Angeles [email protected] www.rogerroyse.com www.rroyselaw.com Skype : roger.royse Twitter @rroyse 00 Negotiating Reverse and Forward Triangular Mergers

2. Overview What is a forward/reverse triangular merger? Legal steps to follow Anti-assignment clauses Benefits of triangular mergers Forward vs. reverse

3. Forward Triangular Merger Target Company Shareholders receive merger consideration consisting of at least 50% Acquiring Company stock Target Company merges into Acquisition Subsidiary with Acquisition Subsidiary being the surviving corporation Acquiring Company Shareholders Acquiring Company Acquisition Subsidiary Target Company Shareholders Target Company Acquisition Subsidiary (post-merger) Merger Merger Consideration Acquiring Company Shareholders Acquiring Company Before After

4. Reverse Triangular Merger Target Company Shareholders receive merger consideration consisting of at least 80% voting stock of Acquiring Company Acquisition Subsidiary merges into Target Company with Target Company being the surviving corporation Acquiring Company Shareholders Acquiring Company Acquisition Subsidiary Target Company Shareholders Target Company Target Company (post-merger) Merger Merger Consideration Acquiring Company Shareholders Acquiring Company Before After

5. Legal steps Form Acquisition Subsidiary Capitalize Acquisition Subsidiary with merger consideration Agreement and plan of merger Board of Directors approvals Acquisition Subsidiary Acquiring Company Target Company Target Company shareholder vote

6. Anti-assignment clauses Beware “anti-assignment” provisions in Target Company’s contracts Look for anti-assignment or anti-transfer provisions Are there any IP license grants to Target Company that will require consent for transfer? Consider the state law merger statute Generally, forward triangular mergers trigger anti-assignment provisions, but reverse triangular mergers do not Exception: Under California law, reverse triangular mergers may trigger anti-assignment clauses Review any “change of control” provisions in Target Company’s contracts

7. Why adopt a triangular merger? Acquiring Company remains separate from Target Company liabilities However, Acquisition Subsidiary needs to assume “substantially all” of Target Company’s business and therefore it cannot leave behind the liabilities No approval from Acquiring Company shareholders There is a shareholder vote of Acquisition Subsidiary, however Acquiring Company is usually the sole shareholder of Acquisition Subsidiary

8. Forward vs. reverse Forward triangular mergers More likely to trigger anti-assignment provisions in Target Company’s contracts Will need a new Taxpayer Identification Number (TIN) and therefore new payroll However, only 50% of the merger consideration needs to be stock of the Acquiring Company Stock does not need to be voting stock Reverse triangular mergers Less likely to trigger anti-assignment provisions in Target Company’s contracts Retain TIN and continue existing payroll 80% of the merger consideration needs to be voting stock of the Acquiring Company

9. Forward vs. reverse Failure to satisfy the respective stock consideration requirements results in a “busted” merger Reverse triangular mergers are riskier due to the 80% voting stock requirement Busted forward triangular merger = reclassification as an asset sale followed by a liquidation Two levels of tax Busted reverse triangular merger = reclassification as a stock sale One level of tax Therefore the forward triangular merger is the safest option, but with the highest penalty (two levels of tax vs. one level of tax) should the merger fail

10. RoyseLink: Connecting founders with investors and service partners. Royse University: Providing business, tax, and personal finance ideas to founders and executives. Royse Law Legal Wizard: Offering legal document templates and more. RoyseUniversity.com RoyseLink.com RoyseLaw Legal Wizard Royse Law Incorporator: Designed to help you incorporate and structure your company in Delaware or California. RoyseLaw Incorporator.com

11. www.rroyselaw.com @ RoyseLaw PALO ALTO 1717 Embarcadero Road Palo Alto, CA 94303 LOS ANGELES 11150 Santa Monica Blvd. Suite 1200 Los Angeles, CA 90025 SAN FRANCISCO 135 Main Street 12 th Floor San Francisco, CA 94105 Palo Alto Office: 650-813-9700 Contact Us