Restricted Stock Units After an Acquisition: Know What Could Happen

The Basics of RSUs

At the time of grant, RSUs have no tax or income implications as they are not yet earned, guaranteed or issued as stock. To earn the shares, you must meet the vesting requirements set forth in your grant. The value of RSUs is the market value on the date when the shares vest and are delivered. After vesting and share delivery, you own the stock.

Many public companies require time-based vesting. However, RSU grants can also include performance-related requirements, such as a target stock price or a goal for total shareholder return. Some private companies may have a time-based vesting requirement in conjunction with an event-based requirement, such as an initial public offering (IPO), funding or an acquisition for liquidity.

Factors Affecting the Treatment of Unvested RSUs

Employees with unvested RSUs may feel apprehensive about M&A discussions. How unvested RSUs will be handled by the acquiring firm won't be announced until the M&A agreement with your employer is finalized. Assuming your stock plan and grant agreement give your company's board discretion on the treatment of RSUs in this situation, there are many contributing factors that may relate to the M&A agreement. Some common considerations include:

• A plan for employees of the acquired firm. Equity compensation is often used as a retention tool to keep qualified employees. If the acquiring firm has a desire to keep talent, they will likely want to be sure the employees are considered in the transition.

 

• Compensation at the acquiring firm for existing employees. If newly acquired co-workers are given equity awards or if their existing grants are allowed to continue, equity compensation for the acquiring company’s existing employees may be a consideration.

 

• Differing approaches to M&A. Public and private companies often handle M&A differently. The maturity and track record of the acquired firm may also play a role in the amount of leverage it has. 

 

Common Outcomes for Unvested RSUs

What actually happens can take many forms, such as:

Accelerated vesting. The terms of your grant agreement and/or the M&A arrangement may specify that your unvested awards will be accelerated at the time of closing or earlier. In this case, you will be given common stock of the new company and will no longer hold RSUs from your old employer. Valuation will depend on the agreement. With performance shares granted in the form of RSUs, there may be some type of pro-rated acceleration or payout at the target award size.

Transfer or rollover of RSUs to the acquiring firm. If the acquiring company offers equity compensation to its employees, it may decide to bring unvested RSUs over with the new employees or convert the RSUs to another type of stock grant. Valuation will be determined by the M&A agreement, as will any changes to the vesting schedule.

Full or partial cashout. Cashing out RSUs is one way an acquiring firm can compensate talent without disrupting company culture and an existing compensation package. Cashout types vary. A portion of your equity grants may be canceled while another portion is paid out in cash, or the cashout can be partly in cash and partly in stock. The value of unvested RSUs in a cashout is subject to the agreement between the two companies.

Cancellation. Unvested grants can be canceled as a result of the merger or acquisition. 

Company Stock You Already Own

RSUs become company stock when they vest. Employee stockholders must await the terms of the agreement with the acquiring firm to understand how their shares will be treated. Luckily, in most instances, existing shares can't be canceled or otherwise dissolved without some form of payment in exchange. Depending on the terms of the agreement, the acquiring firm may choose to cash out your shares at their current value or another agreed-upon price, or it may convert your shares into its stock.

What Is the Tax Treatment of My RSUs in an Acquisition?

Your tax treatment depends on what happens to your unvested shares.

• Cashout: If your unvested RSUs are cashed out, the money you receive is considered ordinary income for tax purposes. Keep in mind that although your employer may withhold a portion of the proceeds to cover the tax due, the withholding may be insufficient.

 

• Rollover of unvested RSUs: Typically, there are no tax consequences if unvested RSUs are rolled over to the acquiring firm.

 

• Sale or exchange of vested RSUs (company stock): RSUs become company stock when they vest. In an acquisition, the buyer may require the outstanding shares from the acquired company to be sold or exchanged for shares of the new company. If the shares are sold, the sale is treated as a regular stock sale and will be subject to capital gains tax. The tax treatment of exchanged shares depends on how the deal is structured. If there is a provision for a tax-free share swap, the exchanged shares will not be taxed, and your holding period and basis will carry over. If there is not a tax-free provision, you will owe capital gains tax on the gain, and your cost basis in the new shares will reset.

 

• Combination of stock and cash received: Regardless of the agreement's structure, if cash is received it will be taxable income. In a taxable exchange, capital gains tax will be due on the difference between the value of the cash and new stock received, minus your original basis. In a tax-free exchange, you will only owe capital gains tax on the cash received.

 

These are just some of the things that you need to know if your company experiences a merger or acquisition. For specific details on the treatment of your RSUs, consult the terms of your M&A agreement.