Treatment of warrant upon acquisition of company: Overview, definition, and example
What is treatment of warrant upon acquisition of company?
The treatment of a warrant upon acquisition of a company refers to the way in which outstanding warrants (which are securities giving the holder the right to purchase shares of a company at a specific price) are handled when one company acquires another. The terms of the warrant may require modification or replacement as part of the acquisition process. The treatment can vary depending on the terms of the acquisition agreement and the warrant itself.
In an acquisition, the acquiring company may either convert the warrants, cash them out, or offer replacement warrants in the acquiring company’s stock, based on the agreed terms. The purpose of this treatment is to reflect the change in ownership and ensure the warrant holders' rights are respected and enforced after the acquisition.
Why is treatment of warrant upon acquisition important?
The treatment of a warrant upon acquisition is important because it ensures that warrant holders are treated fairly during the acquisition process and are given clear guidelines regarding their options. Failure to address the treatment of warrants could lead to disputes or legal complications involving the warrant holders, especially if the acquisition affects their ability to exercise their rights or if the value of their warrants changes.
For the acquiring company, understanding how to treat outstanding warrants helps avoid liabilities and ensures that the transaction proceeds smoothly. For warrant holders, the treatment determines how their interests are protected and what options they have following the acquisition.
Understanding treatment of warrant upon acquisition through an example
Imagine that Company A is acquiring Company B, which has outstanding warrants allowing holders to purchase shares of Company B at $10 each. During the acquisition process, Company A decides to offer replacement warrants in its own stock, at an exercise price adjusted to the equivalent value of Company B’s shares. This ensures that the warrant holders continue to have the opportunity to benefit from the acquisition and receive equivalent value in the new company.
Alternatively, Company A might cash out the warrants, offering holders a cash payment equivalent to the value of the warrants based on the acquisition price per share. This method gives warrant holders an immediate financial return, rather than allowing them to continue holding or exercising the warrants.
An example of treatment of warrant upon acquisition clause
Here’s how this type of clause might appear in an acquisition agreement:
“Upon the acquisition of Company B by Company A, the outstanding warrants of Company B shall be treated as follows: (i) each warrant will be assumed by Company A and converted into a warrant to purchase Company A’s stock, with an exercise price adjusted to reflect the value of Company B’s shares; or (ii) Company A shall, at its discretion, elect to cash out the outstanding warrants by paying each warrant holder an amount equal to the difference between the acquisition price per share and the exercise price of the warrant.”
Conclusion
The treatment of warrants upon acquisition is a critical aspect of ensuring that the rights of warrant holders are respected and that their interests are adequately addressed during an acquisition. The treatment can involve converting warrants to the acquiring company’s shares, replacing them, or cashing them out, depending on the terms of the deal. For both the acquiring company and warrant holders, clearly defining the treatment of warrants ensures transparency, fairness, and legal compliance throughout the acquisition process.
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.