And what is the difference between a reverse merger and a forward merger?

A merger is a transaction in which one corporation is legally absorbed into another, and the surviving corporation succeeds to all of the assets or liabilities of the absorbed corporation. There are no separate transfers for the assets or liabilities; the entire transfer occurs by operation of law when the certificate of merger is filed with the appropriate authorities of the state.

In a forward merger, the target merges into the buyer or a subsidiary of the buyer, and the target shareholders exchange their stock for the agreed-upon purchase price. When the transaction is complete, the buyer owns all the assets and liabilities of the target.

For federal income tax purposes, such a transaction is treated as if the target sold its assets for the purchase price, and then made a liquidation distribution (that is, as if it liquidated the company and distributed the money to the target’s shareholders). Where the consideration consists of stock in the buyer and other requirements are met, the merger may qualify as a tax-free reorganization.

In a reverse merger, the target absorbs the “buyer,” in the form of a newly formed subsidiary of the buyer (called a reverse subsidiary merger). The buyer—as shareholder of the merging subsidiary in the reverse subsidiary merger—gets all the stock in the target, and the shareholders of the target receive the agreed-upon consideration.

For example, in an all-cash deal, the shareholders of the target will exchange their shares in the target for cash. At the end of the transaction, the old shareholders of the target are no longer shareholders, and the buyer, or shareholders of the buyer, own the target. For federal tax purposes, a reverse merger is often treated like a stock deal.