A Reverse Morris Trust (RMT) is a way for a parent company to shed a business without a big corporate tax bill: it separates the unit into a new company, hands that company's shares to its own shareholders, and the unit then merges with a smaller public company, with the parent's holders ending up with more than 50% of the combined group. The cleanest live example is Dana ($DAN) combining with Eaton's ($ETN) Mobility business, a deal Dana valued at about $5.1 billion when it was announced on June 11, 2026, with roughly $1.1 billion in cash going to Eaton. For traders, the structure dictates who owns what, when the stock gets messy, and which dates matter.
How a Reverse Morris Trust works, step by step
The Dana–Eaton filings spell out the sequence in plain terms. Stripped down, an RMT has four moves:
- Carve out. The parent drops the unit into a new subsidiary. Eaton's is Mobility (USA) Corporation, called "SpinCo" in the filings.
- Cash out. SpinCo borrows and pays the parent before the separation. Here that is the "SpinCo Cash Payment" of about $1.1 billion, subject to adjustments.
- Distribute. The parent hands SpinCo shares to its own shareholders, through either a pro rata spin-off or an exchange offer (a split-off).
- Merge. SpinCo combines with the partner right away. A SpinCo subsidiary merges into Dana, each Dana share converts into one SpinCo share, and SpinCo is then renamed "Dana Incorporated" and trades on the NYSE as $DAN.
Note the "reverse" part. Legally, SpinCo is the acquirer and Dana becomes its subsidiary. For accounting, Dana is the acquirer. The October 16, 2026 letter agreement added a second step in which Dana then merges into an LLC subsidiary of SpinCo.
Why parent holders need 50.1%
The majority split is the whole trick. According to the Form S-4 filed October 19, 2026, the distribution is meant to be tax-free under Section 355 of the Internal Revenue Code, and the merger is meant to qualify as a reorganization under Section 368. The filing says the requirements for that treatment include that "the ultimate parent company shareholders own, for tax purposes, more than 50% of the stock of the combined entity immediately after the merger."
The reason sits in 26 U.S.C. §355(e). That section reaches a distribution that is part of a plan under which one or more persons "acquire directly or indirectly stock representing a 50-percent or greater interest" in the parent or the spun-off company. If Dana's holders ended up with 50% or more, the deal could fall into that trap. At 49.9%, they stay below the line. The merger agreement also includes a true-up: if needed, more SpinCo shares go to Eaton holders so they own at least 50.1% for tax purposes, and the cash payment can shrink to make room. This is general information about how the Code is structured, not tax advice.
The trade-off: the partner company's holders give up control. Dana investors will own 49.9% of a company still named Dana.
Spin-off vs. split-off: why Eaton chose an exchange offer
In a spin-off, every parent holder gets SpinCo shares pro rata and keeps all of their parent shares, with no choice involved. TTFY's coverage of Honeywell's aerospace separation shows that version. In a split-off, the parent offers to swap its own shares for SpinCo shares. Holders who tender give up Eaton shares, and Eaton's share count drops by the number it takes back. In effect, it works like a buyback paid in stock.
The exchange offer prospectus says Eaton weighed "the relative valuation of Eaton Ordinary Shares compared to Dana common stock, the implied valuation of the Mobility Business," expected tender levels, and "the size of the discount, if any, expected to be required to incentivize participation." Key mechanics:
- SpinCo shares are offered at a discount to Dana's per-share value. That value is based on daily VWAP averages over set valuation dates. The discount percentage is still blank in the preliminary filing.
- An upper limit caps how many SpinCo shares each Eaton share can get.
- If the offer is oversubscribed, tenders are prorated. If it is undersubscribed, the leftover SpinCo shares go out in a pro rata "Clean-Up Spin-Off."
The precedent shows how proration can bite. In Lockheed Martin's 2016 RMT with Leidos, holders tendered 95,518,064 shares, but Lockheed accepted only 9,369,694. The company's release put the preliminary proration factor at about 8.01%, and the final factor came in at about 8.05%. That deal used the same template: Lockheed holders got about 50.5% of Leidos, and Lockheed received a $1.8 billion special cash payment.
Worked example: the Dana–Eaton share math
The S-4's pro forma table assumes the exchange offer is fully subscribed. The table below uses the filing's share counts and re-prices them at the latest close.
| Item | Figure | Source / arithmetic |
|---|---|---|
| Dana shares (adjusted for estimated buybacks) | 97,688,341 | S-4 pro forma |
| Exchange ratio | 1.004 | 50.1 / 49.9 = 1.00401 |
| SpinCo shares to Eaton holders | 98,079,878 | 97,688,341 x 1.00401 |
| Eaton holders' stake | 50.1% | 98,079,878 / 195,768,219 |
| Equity value at S-4 price ($27.93, Oct 12) | $2,739M | 98,079,878 x $27.93 |
| Equity value at $23.72 (Nov 4, 2026 close) | about $2,326M | 98,079,878 x $23.72 |
| Cash payment to Eaton | about $1.1B | Subject to adjustments |
At announcement, Dana's deck valued the equity piece at about $4 billion, based on Dana's 5-day VWAP as of June 4, 2026. Add the roughly $1.1 billion in cash and you get the $5.1 billion headline. Since then, $DAN has fallen. It went from $35.47 at the June 10 close to $30.11 on June 11, a 15.1% drop ((30.11 - 35.47) / 35.47). It closed at $23.72 on November 4, 2026, which is 33.1% below the June 10 close. The stock half of an RMT is not fixed, so its value moves with the partner's share price. The cash half moves only with contractual adjustments.
One more detail: under a July 27, 2026 side letter, Eaton consented to Dana's buybacks. In return, the cash payment rises by every dollar Dana spends on repurchases times 100.4008016%, which is the same 50.1/49.9 ratio.
What each set of shareholders gets
- Eaton holders: they can tender Eaton shares at a discount for SpinCo stock, which becomes new $DAN shares. If they don't tender, they may receive SpinCo shares in a clean-up spin-off, or nothing if the offer is fully subscribed. Eaton keeps the cash. Per its November 3 filing, it plans to use the cash in line with its capital allocation framework, including paying down debt.
- Dana holders: one new share for each old share, giving them 49.9% of a larger company. They vote on the deal, and approval needs a majority of the outstanding shares (99,837,574 were outstanding on the October 15 record date). In certain circumstances Dana owes Eaton a $158.7 million termination fee. Eaton owes no fee, so there is no reverse fee here. For contrast, see the reverse termination fee explainer.
- Options holders on either ticker face contract adjustments. For how those work, see options in a buyout.
Timeline milestones to watch
| Date | Milestone |
|---|---|
| Jan 26, 2026 | Eaton announces plan to separate Mobility via spin-off |
| Jun 10–11, 2026 | Definitive agreements signed; deal announced |
| Jun 25 / Jul 27, 2026 | HSR forms filed; waiting period expired 11:59 p.m. ET Jul 27 |
| Oct 15, 2026 | Record date for Dana vote |
| Oct 19, 2026 | SpinCo files Form S-4 (Dana proxy) and Form S-1/S-4 (exchange offer) |
| Oct 30, 2026 | S-4 Amendment No. 1 (exhibits) |
| Dec 7, 2026 | Dana special meeting, per the preliminary proxy |
| After effectiveness | Schedule TO filed; exchange offer opens; proration announced |
| First four months of 2027 | Targeted close (originally Q1 2027); outside date Jun 10, 2027 |
Foreign approvals are still part of the path. The S-4 lists competition reviews in Canada, Mexico, Brazil, the EU, China and others, plus foreign-investment reviews in France and Italy. If the RMT fails, Eaton says it intends to spin off Mobility instead.
Checklist: common RMT mistakes
- Treating the headline as fixed. The $5.1 billion was a June number. At the November 4 close, the equity piece is worth about $413 million less ($2,739M minus $2,326M, measured against the S-4's own price).
- Assuming a tender fills in full. Lockheed's roughly 8% proration shows how much can come back.
- Ignoring discount pressure. The exchange offer prospectus warns that during the offer, "the existence of this discount could negatively affect the market price of Dana common stock."
- Missing the true-up. If the 50.1% test needs more shares for Eaton holders, the cash payment can be cut.
- Relying on stale dates. The close target moved from "first quarter of 2027" to "the first four months of 2027."
More deal mechanics live in the Analysis section, with daily coverage on the TTFY homepage. Original deal coverage is in Dana to Combine With Eaton Mobility.
Bull/Bear Verdict
Bull Case: An RMT lets a parent collect cash (about $1.1 billion here) and shrink its share count through a split-off with tax-efficient treatment intended. The exchange-offer discount gives tendering holders a built-in edge, and the partner's holders keep 49.9% of a larger company.
Bear Case: The stock leg floats. $DAN is down 33.1% from its June 10 close. Proration can leave tendering holders mostly unexchanged, the discount can weigh on the partner's stock during the offer, and the tax treatment depends on meeting the Code's requirements.
FAQ
What is a Reverse Morris Trust in simple terms?
A parent separates a unit, gives its stock to the parent's shareholders, and the unit immediately merges with a smaller public company. The parent's holders end up with more than 50%, which in Dana–Eaton is 50.1%.
Why is the split exactly 50.1% and 49.9%?
The tax-free treatment depends on parent holders owning more than 50% after the merger. Section 355(e) targets 50%-or-greater acquisitions made under a plan. This is general information, not tax advice.
Do Dana shareholders get cash?
No. Each Dana share converts into one SpinCo share, with cash only in place of fractional shares. The roughly $1.1 billion cash payment goes to Eaton subsidiaries.
When does the Dana–Eaton deal close?
The companies target the first four months of 2027. That depends on the Dana vote (set for December 7, 2026, in the preliminary proxy), foreign regulatory approvals and the exchange offer. The outside date is June 10, 2027.