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M&A: Basics

How is the treatment determined for stock options and restricted stock in a merger or acquisition?

Usually, the senior officers of the two companies in the transaction, and their attorneys, work out how stock options, restricted stock, and other equity awards will be handled as they negotiate the other terms of the sale or merger agreement.

The most significant factors in making this determination typically are:

  • the terms of the stock option and/or restricted stock plan of the target company, including how much discretion the board is given and its definition of "change in control"
  • the use of equity compensation as a retention strategy to keep talented employees
  • the compensation used for employees at the acquiring company; if the company does not use equity compensation, it will probably not want this to continue after the deal closes
  • the tax consequences to the plan participants
  • the tax consequences to the target and the acquirer
  • the financial accounting goals for the transaction
  • the willingness of the acquirer to preserve equity participation by employees of the target company
  • the value of the target company's stock relative to that of the acquirer, as this affects the exchange ratio
  • any special provisions in individual grant, employment, or severance agreements

For details on the alternative treatments of your stock options and restricted stock in an acquisition/merger, see the FAQs in the section M&A: Impact, elsewhere on this website.

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