When a company is sold who gets the money? The scene is set for a high-stakes drama where millions—or even billions—of dollars are in play. Merger arbitrage is thrilling and can change lives, create instant millionaires, or leave some empty-handed. But who walks away with the spoils of such a monumental transaction?
When a Company is Sold Who Gets the Money?
When a company is sold, the public/private shareholders, debt holders, preferred and common shareholders get the money. Sale proceeds distribution depends on the company structure, its financial obligation, and the terms and conditions of the transaction. To answer the question, when a company is sold who gets the money? Requires the following context.
Public/Private Shareholders – The proceeds from the sale of a publicly traded company go to the firm’s shareholders. During an acquisition, the firm being acquired is the target company and its shareholders are paid a premium over the company’s fair market value.
When a private company is sold, the proceeds go to the owners of the company. Owner-shareholders can be singular or multiple and proceed distribution is based on ownership percentage.
Debt Holders – All outstanding debts and obligations must be amortized prior to any shareholder proceeds distribution. Debt holders are paid before shareholders and in a particular order:
Secured debt holders are creditors that have a claim or lien against specific company assets. Secured creditors are paid first.
Unsecured creditors do not have a lien on the firm’s assets securing their loan and they are paid after secured debt holders.
What about bondholders? A company issues corporate bonds to raise capital for growth initiatives, market expansion, research and development (R&D), and debt reduction. These bondholders are paid prior to shareholders and according to the terms of the bond indenture.
Preferred Shareholders – Preferred shareholders have a higher claim on the firm’s assets and are paid after bondholders and prior to common shareholders. These shareholders with specific liquidation provisions are remunerated before preferred shareholders without liquidation clauses.
Common Shareholders – After all debts, obligations, the secured and unsecured creditors, and the bondholders have been paid, the common shareholders are paid any remaining sales proceeds. Again, distribution is according to shareholder ownership percentage.
When a company is sold who gets the money? Proceeds distribution is dependent on the firm’s structure and the terms and conditions of the sale. The funding pecking order remains generally the same with lien-secured claimants being first and common stockholders being the last fund recipients.
Shareholder Considerations
Stock Options – Employee stock option holders may also receive sale proceeds depending on the terms of their stock option agreement.
Transaction Costs and Fees – Stakeholder sale proceeds are a net amount due to the deduction of investment banking fees, and relevant legal and transaction costs.
Taxes – The sale of the company can trigger a taxable event for the firm and its shareholders. This possibility should be taken into consideration when determining net proceeds.
When a company is sold who gets the money? The recipients and the exact proceeds amount are determined by the company structure, vested interest pecking order, and additional unique terms and conditions of the sale. Understanding the privileges, rights, and obligations of your investment instruments is essential to accurately determine your anticipated proceeds.
Read next: What is Multiple Arbitrage?
