What is an Upstream Merger?

An upstream merger involves merging a subsidiary entity into its parent corporation. As a result of the merger, the subsidiary’s assets and liabilities are shifted into the parent company, and the subsidiary ceases to exist. This transaction is conducted in order to simplify the overall corporate structure, as well as to enhance the operational efficiencies of the combined entities. There may also be favorable tax considerations. And, in some cases, the reason for the merger may simply be that the subsidiary’s operations were failing, so the parent is eliminating its operations.

A disadvantage of instituting an upstream merger is that the parent corporation takes on the liabilities of the subsidiary. If some of these liabilities are undocumented, the parent may find itself unexpectedly burdened with a substantial liability from which it might otherwise have been protected.