What Happens to Company Stock When It Is Acquired?

When one company acquires another, the fate of the target company’s stock becomes a central concern for shareholders. Shareholders of the target company often face decisions about their investment, as their shares will typically be converted into a different form of consideration.

Acquisition Structures and Their Impact on Stock

Company acquisitions proceed through various frameworks, dictating how target company stock is handled. These structures determine the legal continuity of the acquired entity and the method by which its shares are exchanged or canceled. The choice of structure is influenced by tax considerations, regulatory requirements, and the acquiring company’s strategic goals.

Mergers are a common acquisition structure where two companies combine to form a single entity. In a direct statutory merger, the target company merges directly into the acquiring company, typically ceasing to exist as a separate legal entity. Its stock is then converted into shares of the acquiring company, cash, or a combination. State laws dictate specific merger requirements, including shareholder consent thresholds.

Indirect mergers, particularly triangular mergers, protect the acquiring company from the target’s liabilities. In a forward triangular merger, the target company merges into a newly formed subsidiary of the acquiring company, and the subsidiary survives. Conversely, a reverse triangular merger involves a subsidiary of the acquiring company merging into the target company, with the target company surviving as a subsidiary of the acquirer. In both types, the target company’s stock is converted, and shareholders receive consideration from the acquiring company or its subsidiary.

A tender offer involves an acquiring company directly offering to purchase shares from the target company’s shareholders. Shareholders individually decide whether to sell their stock at the offered price. If enough shares are tendered, the acquiring company gains a controlling interest, and a subsequent merger may follow to acquire any remaining shares.

Stock purchases involve the acquiring company buying the target company’s shares directly from its shareholders. This results in the target company becoming a wholly-owned subsidiary of the acquiring entity, and its legal existence often continues.

In contrast, an asset purchase involves the acquiring company buying specific assets and, optionally, specific liabilities directly from the target company, rather than acquiring its stock. In this scenario, the target company usually retains its legal existence, and its shares are not directly exchanged. After selling its assets, the target company may choose to distribute the proceeds to its shareholders and then dissolve.

Shareholder Consideration and Equity Treatment

Once an acquisition structure is in place, the form of consideration received by shareholders becomes the next focus. Consideration refers to the payment method shareholders receive in exchange for their ownership in the acquired company.

Cash deals provide shareholders a fixed amount of cash for each share. For example, if an acquiring company offers $100 per share, shareholders receive that amount directly upon the deal’s closing. This offers immediate liquidity and a clear value for their investment.

Stock deals involve shareholders receiving acquiring company stock in exchange for their target company shares. This means shareholders continue to hold an equity interest, but now in the acquiring company. The exchange ratio determines how many acquiring company shares they receive for each target company share. For instance, a 1:2 exchange ratio means one acquiring company share for every two target company shares.

Mixed deals offer shareholders a combination of cash and acquiring company stock. This provides a balance, allowing for immediate cash realization while maintaining an equity stake in the combined entity. The specific proportion of cash to stock is negotiated in the acquisition agreement.

The treatment of different equity types varies during an acquisition. Common stock is converted or exchanged based on the chosen consideration: cash, stock, or a combination. Preferred stock often has specific terms in its original issuance documents dictating its treatment, which may include a liquidation preference or conversion rights.

Employee stock options, such as Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs), are addressed in acquisition agreements. These options may be cashed out, with the holder receiving the difference between the acquisition price and the option’s exercise price. Alternatively, unvested options might have their vesting accelerated, or convert into options of the acquiring company. Treatment depends on the acquisition terms and original equity plan.

Restricted Stock Units (RSUs) are promises to deliver shares after a vesting period. In an acquisition, RSUs frequently undergo accelerated vesting, converting into shares or cash. They might also be assumed by the acquiring company, with the original vesting schedule continuing but representing acquiring company shares. Employee Stock Purchase Plans (ESPPs) typically see existing contributions refunded or purchased shares treated similarly to common stock.

Tax Consequences for Shareholders

The consideration received in an acquisition has significant tax implications for shareholders. The nature of the consideration received, whether cash or stock, primarily dictates the tax treatment.

Capital gains tax applies to profit from the sale or exchange of common and preferred stock. This gain is calculated as the difference between proceeds received and the shareholder’s cost basis. Short-term capital gains (assets held one year or less) are taxed at ordinary income rates. Long-term capital gains (assets held more than one year) generally benefit from lower tax rates, ranging from 0% to 20% depending on income.

Cost basis is fundamental to calculating capital gains or losses. It includes the original purchase price plus any commissions or fees paid. When shares are sold or exchanged in an acquisition, capital gain or loss is determined by subtracting this adjusted cost basis from the consideration received.

Consideration for certain equity awards may be taxed as ordinary income rather than capital gains. For example, the value of unvested RSUs that accelerate and vest upon acquisition, or the “spread” on cashed-out NSOs, is often treated as ordinary income subject to regular income tax rates and payroll taxes. This occurs because these amounts are generally considered compensation.

Acquisition transactions can be either taxable or tax-deferred. Most cash deals are taxable events; shareholders must recognize any capital gains or losses in the year the acquisition closes. Conversely, some stock-for-stock exchanges, particularly those structured as qualifying reorganizations under Internal Revenue Code Section 368, can be tax-deferred. In these cases, shareholders do not pay tax on the exchange until they later sell the new shares received from the acquiring company. However, if a stock deal includes any cash or other non-stock assets, that portion (known as “boot”) is generally taxable.

Shareholders typically receive tax forms, such as Form 1099-B, from their brokerage or the transfer agent after an acquisition. This form reports transaction proceeds, necessary for accurately reporting capital gains or losses on federal income tax returns. Consulting a tax professional is often advisable to understand specific tax implications.

Post-Acquisition Fate of Target Company Shares

After an acquisition is completed and the consideration has been distributed, the target company’s shares undergo a definitive change in status. For publicly traded companies, the most immediate and significant change is delisting.

Delisting means the target company’s shares are removed from public stock exchanges, such as the New York Stock Exchange (NYSE) or Nasdaq. This occurs because the acquiring company owns all or substantially all outstanding shares, eliminating the need for a public market. Once delisted, shares no longer trade publicly, and their market price is no longer quoted.

The target company often transitions into a private, wholly-owned subsidiary of the acquiring entity. It continues to operate, but its financial results are consolidated within the acquiring company’s reporting. Its corporate structure and governance become subject to the acquiring company’s control.

For shareholders with physical stock certificates, these typically become null and void after the acquisition. The transfer agent or acquiring company usually provides instructions on surrendering certificates to receive consideration. This process ensures all shares are accounted for and properly converted.

Shares held in brokerage accounts are handled electronically. The brokerage firm automatically processes the conversion of target company shares into the cash, new stock, or combination specified in the acquisition agreement. The proceeds, whether cash or new shares, then appear in the shareholder’s account.