A "reverse triangular merger" is a specific type of acquisition where a wholly-owned subsidiary of the acquiring company ("Merger Sub") merges with the target company. In this merger, the target company continues to exist as the surviving entity, while Merger Sub ceases to exist. The consideration for the merger is typically shares of the acquiring company's stock or cash. After the merger is completed, the target company becomes a wholly-owned subsidiary of the acquiring company.

In practice, there are currently only cases of “reverse triangular merger” between Taiwan companies and Cayman Islands companies which are proceeded under the Cayman Islands Companies Act.

For example, in 2020, Pegatron Corporation (Stock Number: 4938) (“Pegatron”) acquired Casetek Holdings Limited  (Stock Number: 5264) (“Casetek”) by merging Casetek with its wholly owned Cayman Islands subsidiary under Cayman Islands Companies Act. Casetek was the surviving company and Pegatron's subsidiary ceased to exist. Pegatron paid Casetek’s shareholders in cash for the merger. After the transaction, Casetek became a wholly-owned subsidiary of Pegatron.

In the case of the acquisition of StrongLED Lighting Systems (Cayman) Co., Ltd. (Stock Number: 5281) (“StrongLED”) by Tons Lightology Inc. (Stock Number: 4972) (“Tons Lightology”) in 2023, Tons Lightology also set up a wholly-owned subsidiary in Cayman Islands. Afterwards, StrongLED and Tons Lightology‘s subsidiary were merged in accordance with Cayman Islands Companies Act with StrongLED as the surviving company and Tons Lightology‘s subsidiary ceasing to exist. Tons Lightology then paid the shareholders of StrongLED with Tons Lightology’s new shares as consideration. After the transaction, StrongLED became a wholly-owned subsidiary of Tons Lightology (Note: In this case, there was issuance of new shares by Tons Lightology. To apply regulations of issuance of new shares under Article 8 of Taiwan Business Mergers and Acquisitions Act (“M&A Act”), besides Cayman Islands Companies Act, the merger between StrongLED and Tons Lightology‘s subsidiary also proceeded with regulations of share swap under Article 29 of the M&A Act. In other words, this case involved a combination of reverse triangular merger under Cayman Islands law and share swap under Taiwan law.)

However, there are currently no cases found in Taiwan where Taiwan companies have conducted "reverse triangular merger" with each other under the M&A Act. Whether two Taiwan companies are allowed to engage in "reverse triangular merger" under M&A Act is open for discussion. According to Article 4(3) of the M&A Act, a merger involves an act where the "surviving company" delivers its shares, the shares of another company, cash, or other property as consideration. However, in "reverse triangular merger," the "acquiring company" (i.e., Merger Sub) delivers shares of the "target company" (i.e., the parent company of Merger Sub) or cash as consideration. The entity delivering the merger consideration in “reverse triangular merger” is not identical with the definition of "merger" provided by the M&A Act. Therefore, it appears that the concept of "merger" under the M&A Act does not cover "reverse triangular merger."

Although it appears that "reverse triangular merger" is not permitted under the M&A Act, the nature of transactions under "reverse triangular mergers" is equivalent to "share swap" under the M&A Act. For instance, if an acquiring company intends to make the target company its wholly-owned subsidiary, both the acquiring company and the target company can enter into a share swap agreement according to Articles 29 and subsequent provisions of the M&A Act. Upon approval by shareholders' meetings of the parties, the acquisition can be completed through share swap, achieving the same effect as "reverse triangular merger."

In summary, although reverse triangular merger is restricted by Taiwan’s legal framework, there is still other M&A approach available to companies that could achieve their business goals.  Whether the reverse triangular merger will become a legally permissible M&A approach in Taiwan still remains to be seen.

(The article is originally in Chinese which can be found here.)