What Happens If I Own Stock in a Company That Gets Bought Out?

When a company you hold stock in is acquired, the outcome for your shares depends on the acquisition deal’s structure. Understanding this process is important for shareholders.

Types of Acquisition Deals

Acquisition deals primarily involve three forms of consideration for shareholders: cash, stock, or a combination. In a cash deal, shareholders receive a predetermined cash payment for each share, providing immediate liquidity.

A stock deal involves shareholders exchanging their shares in the acquired company for shares in the acquiring company, making them owners in the new entity. An exchange ratio determines how many shares of the acquiring company’s stock are received for each share of the target company’s stock.

Mixed deals provide shareholders with a combination of cash and shares in the acquiring company, offering both immediate cash and continued participation. When an acquisition is announced, shareholders should review details on the offer price and consideration type.

Impact on Your Stock Ownership

The acquisition deal type dictates the fate of your stock holdings. In an all-cash acquisition, your shares convert to a cash payout, typically deposited into your brokerage account. Your shares in the acquired company will cease to exist and be delisted.

For stock deals, your shares are exchanged for shares in the acquiring company based on the exchange ratio. If fractional shares result, you typically receive a cash payment for that portion. You will then hold shares of the acquiring company, and your original shares will no longer trade independently.

In mixed deals, you receive a combination of cash and new shares. In “squeeze-out” mergers, minority shareholders can be compelled to sell their shares to the majority. State corporate laws often permit this, especially if the acquirer obtains 90% or more of the target’s shares.

Shareholders might have “appraisal rights,” allowing them to petition a court to determine the fair value of their shares, potentially receiving more than the offer price. Once an acquisition closes, the acquired company’s shares are typically delisted.

Tax Considerations

Tax implications for shareholders vary based on the consideration received. For cash deals, the cash is generally treated as proceeds from a sale, resulting in a capital gain or loss. This is calculated as the difference between the cash received and your cost basis.

If shares were held for one year or less, profit is a short-term capital gain, taxed at your ordinary income rate. If held for more than one year, profit is a long-term capital gain, typically taxed at a lower rate. Your brokerage firm usually provides Form 1099-B, reporting proceeds and potentially your cost basis.

Stock-for-stock exchanges may qualify as a tax-deferred event if they meet specific IRS requirements, generally under Section 368 of the Internal Revenue Code. Shareholders postpone paying capital gains taxes until they sell the new shares. The original cost basis of your old shares typically carries over.

Not all stock-for-stock exchanges are tax-deferred; for instance, if the acquired company’s shareholders do not receive at least 40% stock in the acquiring company, or if the transaction lacks a legitimate business purpose, it may be taxable. In mixed deals, the cash portion is usually taxable immediately as a capital gain, while the stock portion may qualify for tax deferral, depending on terms and IRS rules.

Shareholder Actions

When an acquisition is announced, shareholders should review all available information. This includes proxy statements, tender offer documents, and press releases from the companies. These documents outline the deal’s terms, consideration, timeline, and any required shareholder actions.

Shareholders may be asked to vote on the merger, so understanding the proposal is important. If the acquisition is a tender offer, you must tender your shares by a specific deadline. For shares in a brokerage account, the process for receiving consideration is often handled automatically by the broker.

If you hold physical stock certificates, you will need to follow instructions from the company’s transfer agent to surrender them and receive your consideration. This usually involves sending the certificates to the transfer agent after endorsing them. Consult a financial advisor or tax professional to understand the implications for your investment situation and ensure proper tax reporting.