The structure of a merger transaction has important implications, particularly when it comes to tax treatment. Mergers are generally structured as triangular mergers, meaning that the target company will merge with a subsidiary of the acquiror company, rather than the acquiror company itself. This subsidiary of the acquiror is known as the “Merger Sub” entity. Using a Merger Sub offers the acquiror company more protection from issues involving the target company’s liabilities.

There are two flavors of triangular mergers—reverse triangular mergers and forward triangular mergers. The reverse triangular structure is more commonly used. In a reverse triangular merger, the Merger Sub entity merges with and into the target company, with the target company surviving. In a forward triangular merger, the target company merges with and into the Merger Sub entity, with the Merger Sub entity surviving. In contrast to a triangular merger, the parties can opt to use a direct merger structure. A direct merger simply involves the target company merging directly into the acquiror company itself. However, this is often a less advantageous transaction structure.

Regardless of the structure used, the acquiror company may pay the merger consideration in the form of cash, stock, or a combination of cash and stock. Furthermore, the merger agreement will contain a number of customary representations and warranties. Examples of typical representations and warranties include representations with respect to compliance with laws, accuracy of financial statements, and there being no undisclosed liabilities. The merger agreement will also contain a number of customary covenants. Covenants are contractual provisions that obligate a party to take a specific action or not take a specific action. Examples of typical merger agreement covenants include a covenant to make certain regulatory filings necessary for closing, a covenant to notify the parties of any transaction-related litigation, and a covenant to consult with the other party before issuing any press release relating to the pending merger transaction.

Public company mergers, whether forward or reverse triangular mergers, require a similar set of filings with the Securities and Exchange Commission (SEC). At the time of signing the merger agreement, the acquiror and target company will each file a Form 8-K announcing the key terms of the transaction. A few weeks later, the target company will file a preliminary proxy statement on Schedule 14A with the SEC. This will later by followed by the filing of a definitive proxy statement. Once the target company clears SEC comments, it will have to get approval from the target company’s shareholders by holding a vote on the merger proposal at a special meeting.

There have been a number of recent examples of multibillion-dollar public company M&A deals involving forward triangular merger structures. In October 2022, Prologis completed its acquisition of Duke Realty for approximately $23 billion. Prologis is a global leader in logistics real estate. The merger involved all stock consideration. As another example, in March 2022 Goldman Sachs completed its acquisition of GreenSky, a consumer lending platform, using a forward triangular merger structure. Blackstone, the large U.S. asset management firm, has conducted a number of mergers in recent years using a forward triangular structure. For instance, in August 2021, Blackstone completed its acquisition in cash of QTS Realty Trust, a provider of data center solutions.