A merger between companies is a major business event that affects the stockholders of both companies. Once the merger is completed, shareholders must deal with certain changes and financial effects that will depend on whether they hold shares of stock in the acquiring company or the target company and on how the merger is structured.
The financial structure of the merger transaction will affect what happens to your shares. If your company is being bought in a cash deal, you might receive a check for your shares based on a set number of dollars per share. If the merger transaction is being financed with stock, you may receive shares in the new merged company in exchange for your shares in the pre-merger company. The number of post-merger shares you get for each share of your pre-merger stock will be prescribed by a formula in the merger agreement, and may be more or less than 1 for 1. Some merger deals may provide you with both stock and a check.
If you hold shares in the target company, those shares will cease to trade upon completion of the merger. You will have an opportunity to exchange your pre-merger shares for post-merger stock. If you hold your shares electronically in the street name of your broker, the broker will handle the mechanics of exchanging your old shares for the new ones and receiving any cash payment. Your broker typically can complete this transaction within a few days of the merger closing. In most cases, the share exchange will be a tax-free transaction.
If you hold your shares as paper stock certificates, you must send your old certificates to the stock transfer agent, who will cancel them and issue you new stock and a check for any cash proceeds. You will receive instructions on how to do this. In general, your new shares will be issued in electronic form through the national Direct Registration System and deposited in an account created for you by the transfer agent. You can leave them alone, transfer them to a brokerage account or sell the shares. If you have shares in the acquiring company, you may not have to do anything at all, or you may have to exchange them for post-merger shares in the same manner as shareowners of the target company.
Shares in 401(k)
If your shares are held in a retirement plan such as a 401(k) or IRA, the plan administrator will take care of the share exchange, which normally will be a tax-free transaction. If you are enrolled in the target company’s employee 401(k) plan and that plan won’t be continued after the merger, you should have an opportunity either to roll over your retirement assets to the post-merger company’s 401(k) plan or to an IRA.
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