Forward merger and reverse merger

The terms forward merger and reverse merger describe the direction in which a Merger between two related companies takes place, typically a parent and its subsidiary. In a forward merger, the parent absorbs its subsidiary, the most common pattern. In a reverse merger, it is the subsidiary that absorbs its parent, the structure being in a sense turned around.

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The choice of direction is not neutral. The reverse merger is sometimes chosen to keep items attached to the absorbing subsidiary, such as contracts, licences, administrative authorisations or a trade name, which would be harder to transfer the other way. It may also answer considerations of Carry-forward of tax losses (France), security interests or legal continuity specific to one of the entities.

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By way of illustration, a subsidiary holds a non-transferable operating licence and a recognised brand. Rather than the parent absorbing the subsidiary, the group chooses the reverse merger, the subsidiary absorbing the parent, in order to keep the licence and the brand attached to the surviving entity.

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Each direction carries distinct consequences for Merger surplus and deficit (boni and mali), the treatment of shares and the governance of the resulting entity. Choosing between forward and reverse merger is a matter of analysis combining company law, tax and wealth objectives, at the heart of a mergers and acquisitions advisory engagement.