What Happens to My Stock When a Company Is Bought?

When one company acquires another, it marks a significant event for shareholders. This process, often referred to as a merger or acquisition, means the target company’s ownership structure changes. As a shareholder, your investment typically transforms, as shares are exchanged for new value. Understanding these changes is important for navigating the outcomes. Shareholders must understand how their existing shares will be treated and what they can expect.

Understanding Acquisition Consideration

When a company is acquired, shareholders receive “consideration” for their shares. This consideration can take several forms, each with distinct implications.

A common approach is a cash offer, where shareholders receive a specific dollar amount per share. This provides immediate liquidity and a clear valuation.

Another common form is a stock offer, where shareholders receive shares of the acquiring company. An exchange ratio dictates how many shares of the acquiring company are given for each share of the acquired company. For example, a ratio of 0.5 means you receive half a share of the acquiring company for every one of your original shares. This allows shareholders to maintain an equity interest in a different company.

Sometimes, an acquisition includes a mixed offer, combining cash and stock. Shareholders might receive a set amount of cash per share plus a certain number of shares in the acquiring company. Some mixed offers include an election option, allowing shareholders to choose a preference for more cash, more stock, or a specific blend. These elections are often subject to proration limits.

A less common form of consideration involves Contingent Value Rights (CVRs). CVRs represent a right to receive future cash payments if certain milestones are met, such as regulatory approvals or financial targets. These rights are conditional, and their ultimate value depends on future events. CVRs introduce an element of uncertainty regarding the final value shareholders may receive.

The Stock Exchange Process

Shareholders typically receive formal notification of an acquisition through various channels. This can include proxy statements, tender offer documents, or press releases. Your brokerage firm will also likely send direct communications outlining the terms and next steps. These documents provide details about the transaction, including the type of consideration and timeline.

For shares held in a brokerage account, the exchange process is generally seamless. The brokerage firm automatically handles the conversion of old shares into the new consideration (cash, acquiring company shares, or a combination). The new assets or cash proceeds will appear in your account, usually within a few business days following the acquisition’s closing date. This automated process simplifies the transaction for most investors.

If you hold shares directly, perhaps through physical stock certificates or with the company’s transfer agent, you will typically need to take a more active role. You will likely receive a Letter of Transmittal from the exchange agent, which must be completed and returned with your stock certificates, if applicable. This letter provides instructions on how to surrender your shares and receive the new consideration. Failure to submit the required documentation can delay the receipt of your proceeds.

In some acquisitions, particularly tender offers, shareholders may be invited to “tender” their shares. A tender offer is a public offer to all shareholders to buy their stock at a specified price, usually at a premium, within a defined timeframe. If you choose to tender, you agree to sell your shares under the offer’s terms. Shareholder voting may also be required for certain acquisitions, particularly for mergers, where shareholders must approve the transaction.

The entire process, from initial announcement to final exchange of shares and receipt of consideration, can vary in length. It often takes several weeks or even months, depending on regulatory approvals, shareholder votes, and other closing conditions. Shareholders should pay close attention to deadlines in official communications to understand the timeline.

Taxation of Stock Acquisitions

Understanding the tax implications of a stock acquisition is important. Taxable gain or loss involves your “cost basis,” typically the original price paid for shares, including commissions. When shares are sold or exchanged, the difference between your cost basis and the consideration received determines your capital gain or loss. This gain or loss is subject to taxation.

When an acquisition involves a cash offer, the transaction is generally a taxable event. You realize a capital gain if cash received exceeds your cost basis, or a capital loss if it is less. This gain or loss is typically categorized as short-term if shares were held for one year or less, and long-term if held for more than one year. Short-term capital gains are usually taxed at ordinary income tax rates. Long-term capital gains often receive preferential lower tax rates, such as 0%, 15%, or 20% for most taxpayers, depending on income level.

For stock offers, tax treatment can vary significantly. Many stock-for-stock exchanges qualify as tax-free reorganizations under Internal Revenue Code Section 368. In a tax-free reorganization, you generally do not recognize a capital gain or loss at the time of exchange. Instead, your original cost basis in the acquired company’s shares is carried over to the new shares received. This defers taxation until you sell the new shares.

However, not all stock-for-stock exchanges are tax-free. If the transaction does not meet strict requirements for a tax-free reorganization, or if too little consideration is stock, the exchange may be fully taxable. In such cases, the fair market value of the acquiring company’s stock received is treated as proceeds, and you recognize a capital gain or loss immediately. Review acquisition documents to understand the intended tax treatment.

Mixed offers, including both cash and stock, are typically treated as partially taxable. The cash portion, often called “boot,” is generally taxable up to the capital gain realized. This means you recognize a gain equal to the lesser of cash received or your total capital gain. The stock portion may still qualify for tax-deferred treatment, with a carryover basis, similar to a pure stock-for-stock exchange. Regardless of consideration type, your brokerage firm or the exchange agent will issue Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, detailing acquisition proceeds for tax reporting.

Considerations for Employee Stock

Employees holding equity in an acquired company, such as Restricted Stock Units (RSUs), restricted stock, or stock options, face unique considerations during an acquisition. For RSUs and restricted stock, the vesting schedule can be significantly impacted. Many acquisition agreements include provisions for accelerated vesting, meaning unvested RSUs or restricted stock may become fully vested upon transaction closing. Once vested, these units are typically converted into the same consideration (cash, stock, or mixed) as regular common shares.

Stock options also have specific treatments. One common outcome is a “cash-out” of options, where the company pays employees the difference between the acquisition price per share and the option’s exercise (strike) price, multiplied by vested options. This provides a direct payout for the intrinsic value of the options. Another possibility is a “roll-over,” where options are converted into equivalent options of the acquiring company, with terms and strike prices adjusted to reflect the exchange ratio.

In some cases, unvested stock options may also be subject to accelerated vesting upon acquisition. This makes them immediately exercisable, allowing employees to participate in the acquisition’s value. The specific treatment of employee stock options depends on terms outlined in the acquisition agreement and original option grant agreements. These details are usually communicated directly to affected employees by human resources or legal departments.

Shares acquired through an Employee Stock Purchase Plan (ESPP) are generally treated similarly to regular common shares held by other investors during an acquisition. However, employees should be mindful of specific tax rules related to ESPP shares, particularly if sold shortly after acquisition. The tax treatment of ESPP shares can involve both ordinary income and capital gains, depending on how long shares were held after purchase and grant date, and whether the plan met IRS requirements for qualified ESPPs.