To talk about reverse mergers, we have to start at the beginning. There are two ways in which two companies can be merged: takeover and merger:

  • In a takeover process one of the two companies (the absorbed company) disappears and is fully integrated into the other (the absorbing company).
  • In a merger process two companies merge to create a new company. As a result, the two initial companies cease to exist as independent companies.

The big fish doesn’t always eat the little fish

In corporate practice, as in the natural world, it is most common for the big fish to metaphorically eat the little fish. Thus, in both cases it is usually the company with the larger assets that ends up controlling the resulting company. The company with smaller assets does not necessarily lose its legal identity, but becomes subordinate. However, there are exceptions.

What is a takover or reverse merger?

A reverse merger is a merger of two companies in which the smaller company takes control of the new company. It is rare, but sometimes it is the larger company that disappears or moves to a subsidiary position.

Such reverse mergers are neutral in accounting terms, irrespective of who acquires whom and irrespective of the name, registered office or majority shareholding of the resulting company. Nor can they have any tax implications. It would be tax evasion if as a result of a reverse merger the resulting company were to pay less tax than if it had carried out a conventional merger.

Strategic reasons for opting for a reverse takeover

In practice, there are many reasons why takeovers and acquisitions are sometimes carried out in a manner contrary to what is usually done:

  • Legality and taxation. In cases where the smaller company has its registered office in a location where there is a legal or fiscal framework that is more beneficial to the activity of the company resulting from the operation.
  • Geography. When the smaller company is closer to the centres of power, to customers or suppliers, to logistical centres…
  • Competitiveness. In sectors undergoing major change, it may be that the smaller company nevertheless has more commercial potential in the medium to long term.
  • Reputation. Sometimes the company with less equity has a better brand image and offers more potential from a marketing point of view.

Are transactions between subsidiaries and parents reverse mergers or improper mergers?

There is much confusion as to the true nature of reverse mergers and how they differ from so-called improper mergers. For example, stricto sensu, we cannot speak of a reverse merger when it involves operations in which a subsidiary takes control of its parent group. A practical example of this would be the recent merger of Ferrovial’s parent company with its subsidiary Ferrovial International SE.

These types of vertical operations fit better under the definition of improper mergers. This is also a problematic denomination, because although the law allows for such operations, they are called “improper” because they are not really mergers.

It should be borne in mind that parent and subsidiary are already from the outset companies of the same group and share a common shareholding. Thus, when a subsidiary takes control of the parent company, it is more an internal reorganisation than a merger or takeover per se.

At Confianz we are specialists in M&A. Contact us and we will advise you to make your transaction a success.


Full name