What Happens to My Stock if the Company Is Bought Out?

When a company you hold shares in is acquired, it marks a significant shift in your investment. This change in ownership structure directly affects existing stockholders, and the outcome for your shares depends on the specific terms of the acquisition agreement, transitioning your ownership from one entity to another form of consideration.

Understanding the Acquisition Process

An acquisition typically begins with a public announcement after the acquiring company and the target company reach an agreement. This announcement usually signals the start of a multi-stage process before the deal is finalized. The target company’s stock price often rises following this news, as acquiring companies commonly offer a premium over the current market value to encourage shareholder approval.

Shareholders of the target company frequently need to vote to approve the merger or acquisition. They receive proxy statements with information about the proposed transaction. Government agencies, such as antitrust regulators, must also review and approve the deal to ensure it complies with market competition laws.

Once all necessary approvals are secured and any stipulated conditions are met, the transaction proceeds to a “closing” phase. At this point, the terms of the acquisition become effective, and the shares of the target company are converted according to the agreed-upon consideration. This process, from announcement to closing, can take several months due to regulatory and approval hurdles.

Common Shareholder Outcomes

When a company is acquired, shareholders of the target company typically receive one of three forms of consideration for their shares. The specific “deal terms” outlined in the merger agreement dictate which type of compensation shareholders will receive.

In a cash buyout, shareholders receive a specified cash amount for each share they own. This is a common method where the acquiring company directly purchases shares from the target company’s stockholders, often at a premium to the market price. Sometimes, this occurs through a tender offer, where the acquiring company makes a direct offer to buy shares from shareholders.

Alternatively, a stock-for-stock exchange involves shareholders receiving shares of the acquiring company in exchange for their shares in the target company. The number of new shares received is determined by an agreed-upon exchange ratio, which reflects the relative valuations of the two companies involved.

A third common outcome is mixed consideration, where shareholders receive a combination of both cash and stock for their shares. The precise split between cash and stock is negotiated in the acquisition agreement.

Tax Considerations for Stockholders

The type of consideration received in a company buyout has distinct tax implications for individual stockholders. The calculation of capital gains or losses relies on the difference between the sale price and the cost basis of the shares.

For cash buyouts, receiving cash typically results in a taxable event. Any gain realized is treated as a capital gain, which can be short-term or long-term depending on the holding period. Shares held for one year or less are subject to short-term capital gains tax rates, equivalent to ordinary income tax rates. Shares held for more than one year qualify for long-term capital gains rates. Investors calculate their gain or loss by subtracting their original cost basis from the cash received per share.

In contrast, stock-for-stock exchanges can often be tax-deferred if they qualify as a “reorganization” under tax laws like Internal Revenue Code Section 368. Taxes are generally not due until the newly received shares of the acquiring company are sold. The original cost basis of the target company shares carries over to the new shares, deferring the recognition of gain or loss until a future taxable disposition.

When shareholders receive mixed consideration, the cash portion is generally taxable at the time of the transaction, similar to an all-cash buyout. The stock portion may qualify for tax deferral under reorganization rules. Stockholders should maintain accurate records of their original cost basis for all shares, as this information is necessary for calculating any taxable gains or losses upon the transaction or future sale of new shares.

Employee Stock and Equity Awards

For employees holding company stock or equity awards, a company buyout introduces specific considerations that differ from those for general shareholders. The treatment of these awards is often detailed in the company’s equity compensation plan documents and the acquisition agreement.

Restricted Stock Units (RSUs) and restricted stock typically have provisions addressing unvested awards during an acquisition. Depending on the deal terms, unvested RSUs or restricted stock may accelerate vesting. Alternatively, these awards might be converted into equivalent RSUs or restricted stock of the acquiring company, with the original vesting schedule continuing.

Stock options, both vested and unvested, also have specific treatments. Vested options may become immediately exercisable, allowing the holder to purchase shares and potentially participate in a cash-out. Unvested options might accelerate vesting, be cashed out if they are in-the-money, or be converted into new stock options of the acquiring company, with an adjusted exercise price and share count based on a conversion ratio.

Employee Stock Purchase Plans (ESPPs) are also affected by acquisitions. If an acquisition occurs during an ongoing ESPP purchase period, the plan may be shortened, leading to an early purchase of shares, or employee contributions may be refunded. For employee equity awards, the income recognized upon vesting or exercise is generally taxed as ordinary income. Any subsequent gain from the sale of shares obtained through these awards is subject to capital gains tax.