If a Company Gets Bought Out, What Happens to My Stock?

When one company acquires another, it creates a significant change for the acquired company’s shareholders. The specific outcome for stockholdings depends on the acquisition’s structure, the type of shares held, and applicable regulations. Shareholders experience a shift in their investment, which could involve receiving cash, new shares in the acquiring company, or a combination of both.

How Acquisitions Are Structured

Acquisitions can be structured in several ways, directly determining what shareholders receive for their stock. An all-cash deal involves the acquiring company paying a predetermined cash amount for each share of the target company. This structure offers simplicity and immediate liquidity to the target company’s shareholders. For instance, if a company is acquired for $100 per share, shareholders receive $100 for each share they own when the deal closes.

An all-stock deal involves shareholders of the target company receiving shares in the acquiring company. This exchange is based on a specified conversion ratio, meaning a certain number of shares in the acquiring company are given for a set number of shares in the target company. For example, a 1-for-2 stock merger agreement means target shareholders receive one share of the acquiring company for every two shares they own. The value of the shares received is tied to the acquiring company’s stock performance.

Mixed deals provide shareholders with a combination of cash and shares in the acquiring company. This approach gives shareholders some immediate cash while allowing them to participate in the future performance of the combined entity. Once the transaction is complete, the target company’s shares typically cease trading as they become part of the larger entity.

Impact on Various Stock Holdings

The impact of a company buyout varies depending on the type of stock holdings an individual possesses. Common stock follows the terms of the acquisition deal. Existing shares cannot be canceled without some form of payment.

Restricted Stock Units (RSUs) are promises to deliver a set number of shares after a vesting period. In an acquisition, unvested RSUs may be treated in several ways:
Undergo accelerated vesting, converting immediately into shares.
Be converted into RSUs of the acquiring company, often with their original vesting schedule maintained.
Be canceled.
If RSUs are cashed out, the payment is based on the market value of the shares.

Stock options, including Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs), give employees the right to buy company stock at a predetermined price. The treatment of options during a buyout can include:
Cash settlement for “in-the-money” options (where the acquisition price exceeds the exercise price).
Conversion into options of the acquiring company.
Accelerated vesting followed by exercise.
ISOs offer potential tax advantages if specific holding period requirements are met, while NSOs are taxed as ordinary income upon exercise.

Shares acquired through an Employee Stock Purchase Plan (ESPP) are treated similarly to common stock during an acquisition. Some plans may have specific provisions such as blackout periods, preventing purchases or sales leading up to the acquisition, or accelerated purchase periods. The specific terms for ESPP shares will be outlined in the acquisition agreement.

Shareholder Involvement in the Process

Shareholders receive detailed information and have opportunities to participate during an acquisition process. Companies inform shareholders through various disclosures, including proxy statements and tender offer documents. These communications explain the terms of the deal and its implications.

Shareholder approval is required for many mergers, particularly for the target company. This involves a shareholder vote, often requiring a majority of outstanding shares to approve the transaction. Companies conduct proxy solicitations to gather these votes.

In a tender offer, the acquiring company directly offers to purchase shares from the target company’s shareholders. Shareholders then decide whether to “tender” their shares at the offered price. Tender offers must remain open for at least 20 business days, and shareholders retain the right to withdraw their tendered shares during this period.

Shareholders who disagree with the acquisition price may have dissenters’ rights, also known as appraisal rights. These rights, which vary by state law, allow a dissenting shareholder to petition a court to determine the fair value of their shares and receive a cash payment based on that appraisal.

Tax Implications of a Buyout

A company buyout has various tax implications for individual shareholders, depending on the form of consideration received. If shareholders receive cash for their shares, this triggers capital gains or losses. The gain or loss is calculated based on the difference between the cash received and the shareholder’s cost basis in the stock. This gain is classified as short-term if held for one year or less, and long-term if held for more than one year, with different tax rates applying to each.

In stock-for-stock exchanges, the transaction may be tax-deferred, meaning shareholders do not immediately pay taxes on the exchange. The cost basis of the original shares transfers to the new shares received in the acquiring company. This defers the recognition of capital gains until the new shares are eventually sold. However, if the exchange does not meet the requirements for tax deferral, capital gains tax may be due immediately, and the cost basis of the new shares will reset.

For equity compensation such as Restricted Stock Units (RSUs) and stock options, income recognized at vesting or exercise is taxed as ordinary income. This applies if vesting or exercise is accelerated due to the buyout. For RSUs, the fair market value of the shares at vesting is treated as ordinary income. For Non-Qualified Stock Options (NSOs), the difference between the exercise price and the fair market value of the stock at exercise is taxed as ordinary income. Incentive Stock Options (ISOs) can have more favorable tax treatment, potentially allowing for long-term capital gains rates if specific holding period requirements are met, but they can also be subject to the Alternative Minimum Tax (AMT).

In some instances, proceeds from a buyout may be subject to tax withholding. Consulting with a qualified tax advisor is advisable.