What Happens to Stock When a Company Is Bought?

When one company purchases another, it creates significant changes for shareholders of the acquired entity. These corporate buyouts are common occurrences in the financial landscape, impacting everything from share ownership to investment value. Understanding the various ways these acquisitions unfold helps clarify the direct consequences for your stock. This article explains the different structures of these transactions and their effects on your shares.

Understanding Acquisition Structures

Companies combine or acquire each other through several distinct legal and corporate mechanisms. The chosen structure determines how the target company’s stock is treated and what happens to its legal existence.

Stock Acquisition

In a stock acquisition, the acquiring company directly purchases shares from the target company’s shareholders. This often occurs through a tender offer, where the acquirer proposes to buy a specified number of shares at a set price, typically above the current market value, to encourage shareholders to sell. The target company generally remains a separate legal entity after the transaction, but its ownership shifts from its previous shareholders to the acquiring company.

Merger

A merger involves two companies combining to form a single legal entity. In a statutory merger, one company is absorbed by the other and ceases to exist as a separate legal entity, with the acquiring company surviving. In a merger, the shares of the target company are typically converted into consideration from the acquiring company, which can be cash, shares of the acquiring company, or a mix of both. Triangular mergers are a common variation where the target merges with a subsidiary of the acquirer.

Asset Acquisition

An asset acquisition involves the acquiring company purchasing specific assets and sometimes certain liabilities from the target company, rather than buying the target company’s stock. The target company’s stock does not directly change hands in this scenario. After selling its assets, the target company often liquidates its remaining assets and distributes the proceeds to its shareholders, or it may continue to exist as a shell company with limited operations. This structure allows the buyer to selectively acquire desired assets.

The Fate of Your Shares in an Acquisition

In a Stock Acquisition (e.g., Tender Offer)

When a stock acquisition occurs, particularly through a tender offer, shareholders are presented with an offer to sell their shares at a specific price. The acquiring company publicly announces its intention to buy a defined quantity of shares, usually at a premium to the current market price, to incentivize shareholders to participate. Shareholders can then choose to “tender” their shares, meaning they agree to sell them under the proposed conditions. This offer typically remains open for at least 20 business days to allow shareholders time to evaluate the terms.

In a Merger

In a merger, shares of the acquired company are typically converted into a different form of consideration once the merger is approved. This conversion is often an automatic process. Shareholders might receive cash for each share they own in a cash merger, shares of the acquiring company’s stock in a stock merger, or a combination of both in a mixed consideration merger. For instance, in an all-stock deal, a conversion ratio determines how many shares of the acquiring company’s stock shareholders receive for their original shares.

In an Asset Acquisition

In an asset acquisition, your stock in the target company is not directly purchased by the acquiring company. Instead, the original company sells its business assets. Following the sale, the original company may decide to liquidate its remaining assets and distribute the proceeds to its shareholders, or it might continue to operate as a smaller entity with its remaining assets. Your shares would then represent ownership in this potentially smaller or liquidating entity.

Delisting

Once an acquisition is complete, especially in stock acquisitions and mergers where the target company is fully integrated or ceases to exist, its stock will typically be delisted from public stock exchanges. This means the shares can no longer be publicly traded on exchanges like the NYSE or Nasdaq. Shareholders usually have a limited time to sell their shares before this occurs, as they will be converted into cash or exchanged for the acquiring company’s stock at a predetermined rate. In the context of an acquisition, it signifies the end of public trading for the acquired entity’s stock.

Dissenters’ Rights

In certain merger scenarios, shareholders who object to the acquisition may have legal rights to demand “appraisal” of their shares. These “dissenters’ rights” or “appraisal rights” allow shareholders to petition a court to determine the fair value of their shares, rather than accepting the merger consideration offered. If the court determines the fair value is higher than the proposed consideration, the dissenting shareholder may be entitled to receive that higher amount in cash. This right provides a mechanism for shareholders to protect their investment if they believe the merger’s terms are unfavorable.

Shareholder Financial and Tax Implications

Understanding the financial value shareholders receive and the tax consequences of their stock being acquired is important. These implications are distinct from the corporate mechanics or the physical handling of shares.

Valuation and Consideration

The acquisition price, referred to as the “consideration,” is the value offered to the target company’s shareholders in exchange for their ownership. This consideration can take various forms: cash, stock in the acquiring company, or a combination of both. The determination of this price often includes a premium over the target company’s pre-acquisition market price to entice shareholders to sell. Factors such as the target’s financial performance, market value, and strategic fit for the acquirer influence the final negotiated price.

Tax Treatment of Proceeds

The tax implications for shareholders receiving consideration in an acquisition depend on the form of payment and how long the shares were held. If shareholders receive cash, they generally incur a capital gain or loss, which is the difference between the cash received and their original cost basis in the stock. This gain or loss is classified as short-term if the shares were held for one year or less, and taxed at ordinary income tax rates, which can be up to 37% for high earners. Long-term capital gains, for shares held over one year, are typically taxed at lower preferential rates, such as 0%, 15%, or 20%, depending on the shareholder’s overall taxable income. When shareholders receive stock in the acquiring company, the transaction may qualify as a tax-deferred exchange under IRS rules, especially in a stock-for-stock merger. In such cases, shareholders generally do not pay taxes until they sell the new shares, and their original cost basis transfers to the new shares. If a mixed consideration is received, combining cash and stock, the cash portion is usually taxable, while the stock portion may be tax-deferred, depending on the specific terms of the deal and applicable IRS guidance. Shareholders should consult a tax advisor for detailed guidance.

Employee Stock Compensation

Employee stock compensation, such as Restricted Stock Units (RSUs) and stock options, also faces specific financial and tax treatment during an acquisition. For RSUs, the fair market value of the shares at the time they vest is generally treated as ordinary income and reported on an employee’s Form W-2, subject to federal, state, and payroll taxes. If an acquisition accelerates the vesting of RSUs, this income tax liability is triggered immediately. Stock options, including Non-Qualified Stock Options (NSOs) and Incentive Stock Options (ISOs), have different tax triggers. NSOs are typically taxed as ordinary income upon exercise, with any subsequent appreciation taxed as capital gains when the shares are sold. ISOs generally do not trigger regular income tax at exercise, but they can trigger the Alternative Minimum Tax (AMT), and favorable long-term capital gains rates apply if specific holding period requirements are met. In an acquisition, unvested grants might be canceled, their vesting schedules accelerated, or they could be substituted for equity in the acquiring company or cashed out. Employees should consult with a tax advisor, as the outcome and tax consequences can vary significantly based on the deal terms.