What Happens to RSUs When a Company Is Acquired?

Restricted Stock Units (RSUs) are a common form of equity compensation provided by employers, representing a promise to grant company shares or their cash equivalent once specific conditions, typically continued employment over a vesting period, are met. During corporate acquisitions, the treatment of these units introduces complexities for employees, as the fate of their unvested RSUs can vary significantly depending on the terms negotiated in the acquisition agreement.

How RSUs are Handled in an Acquisition

When a company is acquired, the treatment of unvested Restricted Stock Units (RSUs) is determined by the specific terms outlined in the acquisition agreement and the original RSU plan documents. The acquiring company, the target company’s board, and the executive team negotiate these terms, impacting whether RSUs convert into new equity, are cashed out, or accelerate their vesting.

One common outcome is the acceleration of vesting, where some or all unvested RSUs become fully vested sooner than originally scheduled. This can happen through a “single-trigger” mechanism, where vesting accelerates solely upon the change of control event, such as the acquisition itself. Alternatively, “double-trigger” acceleration requires two events for vesting, the change of control and an involuntary termination of employment within a specified period after the acquisition. Double-trigger provisions are often designed to incentivize employees to remain with the new company while also providing protection.

Another possibility is the conversion or assumption of RSUs, where the acquiring company replaces the existing RSUs with its own shares or RSU equivalents. This often involves an exchange ratio, meaning a certain number of old company RSUs are swapped for a different number of the acquiring company’s shares. The new RSUs continue to vest according to a modified or even the original schedule. The valuation and any changes to the vesting schedule are determined by the merger and acquisition agreement.

In some acquisitions, unvested RSUs may be cashed out. This means the RSU holder receives a cash payment equivalent to the value of their unvested RSUs at the acquisition price. The timing of this payment depends on the agreement, and it may be immediate or spread out over time. Lastly, unvested RSUs can be forfeited or canceled, particularly if the acquiring company chooses not to honor prior unvested grants or if the acquired company was in a distressed situation.

Taxation of Acquired RSUs

The tax implications for Restricted Stock Units (RSUs) in an acquisition largely depend on how they are handled, specifically whether they vest, are converted, or cashed out. RSUs are taxed as ordinary income upon vesting or settlement, based on the fair market value of the shares received or cash paid at that time. This income is reported on an employee’s Form W-2, similar to regular wages or a cash bonus.

When RSUs vest, the value is subject to federal income tax, state and local income taxes (if applicable), and payroll taxes, including Social Security and Medicare taxes (FICA). Employers are required to withhold a portion of the RSU income to cover these taxes. The federal withholding rate for supplemental wages is often 22% for income under $1 million. This rate may not cover the full tax liability for individuals in higher tax brackets, potentially leading to an unexpected tax bill.

The ordinary income recognized at vesting establishes the cost basis for capital gains purposes. The cost basis is essentially the fair market value of the shares on the date they vested, which is the amount already taxed as ordinary income. If shares are sold immediately upon vesting, there might be little to no capital gain or loss, as the sale price would likely be close to the cost basis.

Subsequent sale of shares acquired through RSUs can result in short-term or long-term capital gains or losses. If the shares are sold within one year of vesting, any gain is considered a short-term capital gain and is taxed at ordinary income tax rates. If held for more than one year after vesting, any gain is treated as a long-term capital gain, which qualifies for lower tax rates. It is important to accurately track the cost basis, as brokerage firms might report a $0 cost basis on Form 1099-B, which could lead to double taxation if not adjusted when filing taxes. Form 1099-B details stock sales and helps calculate capital gains or losses, while supplemental information from brokers can provide the necessary adjustments for the cost basis.

Actions for RSU Holders

A foundational step involves thoroughly reviewing the original RSU grant agreements and the company’s overall equity plan. These documents contain the specific terms and conditions governing your RSUs, including vesting schedules and clauses related to corporate control changes.

It is also important to scrutinize all communications from the company regarding the acquisition. These official announcements often include crucial details about how RSUs will be treated, such as acceleration provisions, conversion ratios, or cash-out terms. Understanding your current vesting status is also important, as the acquisition may alter future vesting timelines or conditions.

Given the complexities of RSU treatment and taxation in an acquisition, seeking professional advice is highly recommended. Consulting with a financial advisor can help in understanding the potential financial impact and planning for future investments. A tax professional can provide guidance on the specific tax consequences, including ordinary income recognition, capital gains, and proper tax reporting. Additionally, legal counsel may be necessary to interpret intricate clauses within the acquisition agreement or RSU plan documents.

Finally, RSU holders should remain vigilant and monitor all subsequent communications from the company. Information regarding the acquisition timeline, changes to RSU administration, and any required actions will be disseminated through official channels.