Mergers & Acquisitions Quiz

Mergers and acquisitions (M&A) can affect stock compensation in meaningful ways. Test your knowledge of the impact that a corporate change in control can have on outstanding equity awards.

Please answer the following 10 questions. This quiz is also a course of study. The answer key links to content on the topic for follow-up reading. For in-depth courses of study that offer CE credits, see the myStockOptions Learning Center.

1. Which of the following is not a type of corporate M&A transaction that can affect outstanding equity awards?

Divestiture Spinoff Private equity Management buyout

2. What is the difference between a merger and an acquisition?

No real difference—the terms are synonymous An acquisition is a merger involving a hostile takeover In a merger, there is never any acquirer or target—two companies simply fuse A merger is a type of acquisition in which the acquirer and the target combine to become one legal entity

3. What term is often used in stock plans to denote an M&A transaction that can affect outstanding equity awards?

Change in (or of) control Initial public offering (IPO) Corporate union Lockup transaction

4. What are some of the major factors that influence the treatment of stock options and restricted stock/RSUs in an M&A deal?

The terms of the target company's stock plan The tax consequences for the target and the acquirer The value of the target's stock relative to that of the acquirer All of the above

5. What happens to contributions in an employee stock purchase plan (ESPP) when the company is acquired?

Contributions are automatically rolled over into the ESPP of the acquiring company The offering and purchase periods are cut off early, and a purchase is made just before the closing of the deal All ESPP shares are sold, and the proceeds are reinvested in the stock of the acquiring company The ESPP is closed, and all contributions are refunded to the plan’s participants

6. In what ways can vested stock options be handled when the company is acquired?

They can be converted into restricted stock units or stock appreciation rights, depending on the terms of the stock plan They can be backdated to align their grant price with the grant price of the acquirer’s options They can be rolled over into options in the acquirer according to an exchange ratio Any of the above

7. In what ways can restricted stock/RSUs be handled when a company is acquired?

The vesting can be accelerated to occur at the time of the deal’s closing The grants can be converted into restricted stock/RSUs in the buyer with a new number of shares/units but the same vesting schedule The unvested grant can be cashed out Any of the above

8. How are unvested stock options treated in an M&A transaction?

Unless they are automatically cashed out, the options are given a new grant date upon the deal’s closing, and vesting starts over Vesting may be accelerated for some or all of the unvested portion of the grant, the unvested options may be rolled over into options in the acquirer, or the options may be cashed out or terminated Unvested options are either canceled or automatically cashed out The board of directors in the acquiring company always makes this decision

9. What is the typical tax treatment of stock options in an acquisition?

If the options are preserved after the deal, there is no tax consequence, but if they are cashed out directly to you, the payment is taxed as ordinary income If the options are preserved after the deal, there is no tax consequence, but if they are cashed out directly to you, the payment is taxed as capital gain You pay taxes on the portion of the option value commensurate with the number of working days between the grant date and either the vesting date or the closing date of the M&A deal (whichever is first) You pay taxes on the total value of the options, both unvested and vested, as determined by a standard option-valuation model (e.g. Black-Scholes or binomial)

10. What is the typical tax treatment of restricted stock/RSUs in an acquisition?

If vesting continues, there is no tax consequence, but if the grant is cashed out directly to you, the payment is taxed as capital gain If vesting continues, there is no tax consequence, but if the grant is cashed out directly to you, the payment is taxed as ordinary income If vesting continues, the value of the grant at the time of the deal's closing is taxed as ordinary income, but if the grant is cashed out directly to you, the payment is taxed as capital gain If vesting continues, the value of the grant at the time of the deal's closing is taxed as capital gain, but if the grant is cashed out directly to you, the payment is taxed as ordinary income

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