A “double merger” is exactly what it sounds like: two mergers completed back-to-back as part of a single, integrated transaction.
In the first step, the buyer acquires the target through a reverse triangular merger, with the target surviving as a wholly owned subsidiary of the buyer.
In the second step, the buyer merges the target either upstream into the parent or sideways into another subsidiary within the buyer’s corporate group.
Why Not Just Do One Merger?
Because the “standard” merger structures each come with tradeoffs.
A reverse triangular merger is popular for its simplicity on the front end. Since the target survives, contracts, licenses, and permits often remain in place without requiring consent. However, this structure comes with meaningful tax limitations. In order to qualify as a tax-free reorganization (which allows tax to be deferred on stock received as purchase price), the sellers are generally limited to receiving no more than 20% of the total consideration in cash. If that requirement is not satisfied, the transaction typically becomes a taxable stock sale—resulting in a single level of tax at the shareholder level.
A forward merger, by contrast, offers more flexibility on the consideration mix. Sellers can receive significantly more cash—up to 60%—while still qualifying for tax-free treatment with respect to the stock consideration. But that flexibility comes with increased downside risk: if a single-step forward merger fails to qualify as tax-free, it is treated as a taxable asset sale, which can trigger two levels of tax—one at the corporate level and another at the shareholder level.
The double merger structure is designed to capture the best of both approaches. By combining a reverse triangular merger with a follow-on forward merger, the transaction is allowed the greater cash flexibility associated with forward mergers while preserving the more favorable risk profile of a reverse triangular merger. In other words, if the tax-free treatment is ultimately not respected, the structure will result in a single level of tax rather than two.[1]
About the Author
Mike Baker frequently advises with respect to tax-free reorganizations. He possesses a breadth and depth of experience in tax and employee benefits & compensation law that spans multiple decades. For additional information, please contact mike@mbakertaxlaw.com.
[1] See Rev. Rul. 2001-46 which concludes that if a double merger fails to qualify as tax-free, the first step generally may qualify as a qualified stock purchase, and the second step may be treated as a tax-free liquidation of a wholly-owned subsidiary into its parent corporation.