Treatment of warrant at acquisition: Overview, definition, and example
What is the treatment of warrant at acquisition?
The treatment of a warrant at acquisition refers to how outstanding warrants (financial instruments that give the holder the right to purchase shares at a predetermined price) are handled when one company acquires another. Warrants can be converted, canceled, or exchanged depending on the terms of the acquisition agreement. The treatment may involve the acquiring company honoring the warrants, allowing warrant holders to exercise them, or replacing them with new securities such as shares of the acquiring company.
Why is the treatment of warrant at acquisition important?
The treatment of warrants at acquisition is important because it affects the rights of warrant holders and can influence the overall value of the deal. For the acquiring company, properly handling warrants ensures that all outstanding securities are addressed in the acquisition and that there are no unforeseen liabilities. For warrant holders, it clarifies whether they can exercise their warrants, convert them into shares, or if they lose the right to do so. This aspect of an acquisition can impact shareholder value and affect negotiations during the acquisition process.
Understanding treatment of warrant at acquisition through an example
For example, a company with outstanding warrants to purchase 1,000 shares at $10 each is being acquired by another company. The acquiring company might choose to honor the warrants by allowing the holders to exercise them before the acquisition is finalized, converting the warrants into shares at the predetermined price. Alternatively, the acquiring company may decide to cancel the warrants and provide cash or substitute them with an equivalent number of shares of the acquiring company.
In another example, an acquisition agreement might specify that the warrants will be converted into warrants for the acquiring company’s stock, allowing the holders to exercise their right to purchase shares of the new company rather than the target company.
An example of treatment of warrant at acquisition clause
Here’s how a clause related to the treatment of warrants at acquisition might appear in an acquisition agreement:
“Upon the closing of the Acquisition, all outstanding warrants issued by the Target Company will be assumed by the Acquirer and converted into warrants to purchase shares of the Acquirer’s common stock on the same terms, or at the discretion of the Acquirer, the warrants will be exercised in full with the proceeds paid to the Acquirer.”
Conclusion
The treatment of warrants at acquisition ensures that all parties—particularly warrant holders—are clear on how their financial instruments will be handled in the event of a merger or acquisition. Properly addressing warrants in an acquisition agreement helps protect the rights of warrant holders and supports a smoother transaction process. It is an essential consideration for both the acquiring company and the target company, as it impacts the financial outcome of the deal and the value of the securities involved.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.