Corporate Transactions: Considerations for Addressing Equity Awards

May 13, 2024

In corporate transactions of all kinds—mergers, acquisitions, and other business combinations—the purchaser company (Purchaser) must confront the question of how to treat the outstanding equity awards and the current equity incentive compensation plan of the target company in the transaction (Target). In this Insight, we describe the primary decision points and considerations for a Purchaser when determining how to address a Target’s equity compensation program.

In addition, we discuss the alternatives available to a Purchaser for addressing a Target’s equity compensation awards and plans. In general, this Insight assumes that a Purchaser is a US company with shares of its common stock traded on a national securities exchange and will be the surviving entity, with several considerations potentially not applicable or different in the private company transaction context.

At a high level, when a Purchaser is structuring a corporate transaction and considering how a Target’s equity compensation program will be treated, there are three main decision points the Purchaser will need to address. As a threshold matter, these decisions may be limited by or informed by the provisions of the Target’s applicable equity plan and the individual award agreements governing the outstanding Target equity awards.

For example, participant consent may be required to assume, substitute, or cash out awards. Once the plan parameters and requirements have been assessed, the following three equity compensation questions will be a point of deal negotiation and will likely be reflected in the applicable transaction agreement.

Treatment of Vested and Unvested Awards

The first overarching decision point relates to the treatment of outstanding stock options, restricted stock units, and other equity awards of the Target. Typically, and nearly universally, vested awards are cashed out (subject to the terms of a Target’s equity plan). References to “cash out” refer to settlement of the awards in cash or in shares of a Purchaser’s stock, depending on the structure of the transaction. The following alternatives are available for unvested awards:

  • Acceleration: Accelerate vesting of unvested awards and cash out unvested awards at the closing of the transaction
  • Assumption: Assume the unvested awards under a Target’s equity plan, with the awards continuing to vest based on post-closing service and shares of a Purchaser’s stock, will be awarded upon vesting in lieu of the Target’s shares
  • Substitution: Substitute the unvested awards by cancelling awards under a Target’s equity compensation plan and issuing new awards under the Purchaser’s equity compensation plan, with the awards continuing to vest based on post-closing service
  • Note that, depending on the type of award, the existing vesting schedule may need to be maintained and certain other requirements (discussed below) must be met

Treatment of Target’s Existing Equity Plan

The second overarching decision point relates to the treatment of a Target’s existing equity plan. A Target’s equity plan can be terminated at the time of the transaction, or the Purchaser can assume the Target’s equity plan and the remaining share reserve under the plan. Note that if the remaining share reserve is assumed, it can only be used for the issuance of new grants to legacy employees of the Target, under national listing exchange rules. This table addresses additional restrictions that apply if a Target’s share reserve is assumed.

New Grants to Target’s Employees

The third overarching decision point is one of incentives and retention—a Purchaser will need to consider whether legacy Target employees should be granted new equity awards of Purchaser equity in connection with the proposed transaction. This decision is often informed by whether current Target equity awards have sufficient retention value and post-closing service requirements to act as an incentive for Target employees to continue working toward the successful integration of the Target’s business post-closing.

If the Purchaser would like to make new grants to the Target’s employees (in addition to any substituted or assumed grants) in connection with the transaction, it can make the grants (1) under its current equity incentive plan or (2) if the grants are a condition of employment with the Purchaser and other requirements are met, as “inducement grants” under the applicable listing exchange. Please see our earlier blog post discussing the requirements and considerations for inducement grants.

The foregoing decision points are often a central feature of the early stages of negotiating the deal terms for a corporate transaction. The Purchaser’s approach to these points and the treatment of equity awards, generally, is informed by interrelated human resources, business, and legal considerations. From a legal perspective, a Purchaser’s considerations are likely to include the following.

Retention Incentives

Assuming or substituting unvested equity awards will provide an incentive for employees to continue in employment post-closing. If there is limited value in a Target’s current equity awards or there is limited duration left in the vesting schedule applicable to the equity awards being assumed or substituted, the Purchaser will want to consider whether to grant new awards.

Current Share Reserve Under Purchaser’s Equity Plan

The Purchaser will need to consider the current share reserve under its shareholder-approved equity plan and determine whether there are sufficient shares available to provide substitute awards or new grants under the Purchaser’s plan. Many public company plans permit—and national listing exchange rules permit—substitute awards to not count against the share reserve of a Purchaser’s equity plan, subject to requirements that are discussed in greater detail in the table.

Conforming Awards to Purchaser’s Equity Compensation Program

If unvested awards are to be substituted under a Purchaser’s equity plan, the Purchaser should determine whether the Target’s equity award types and vesting schedules are compatible with the Purchaser’s equity plan, stock administration platform, and equity compensation program. Likewise, when assuming a Target’s equity awards, the Purchaser should review such awards to determine whether they are compatible with the Purchaser’s stock administration platform or plan to work with their stock plan administrator to update its platform.

Single-Trigger or Double-Trigger Protection

Consideration should be given as to whether assumed or substituted awards are single trigger or double trigger with respect to the transaction.

  • Single Trigger: If the awards are single trigger, they will fully vest upon the closing—these vested awards will then typically be cashed out, rather than assumed/substituted
  • Double Trigger: If the awards are double trigger, then the involuntary termination/good reason provisions included in Target’s award agreements for unvested awards will typically carry over post-closing for the assumed/substituted awards

Performance-Based Awards

If a Target has granted performance-based awards, the Target’s equity plan and award agreements should be reviewed to determine whether the plan or applicable award agreements provide for hardwired treatment on a change in control. For example, the equity plan or award agreements may provide for the termination of the performance period and measurement of performance at the time of the change in control. If treatment is not hardwired, the transaction agreement should specify how the awards will be treated, which is typically a two-step analysis.

First, the number of shares underlying the award post-closing should be determined (e.g., by measuring performance as of the date of the transaction or treating the awards as having achieved an assumed performance level, such as at Target).

Second, once the number of shares is determined, the parties to the transaction will need to determine whether the awards should be cashed out or assumed/substituted. If the awards are assumed/substituted, a typical approach is to convert the awards into time-vesting awards post-closing. For more detail about the considerations for performance awards in the context of a corporate transaction, please refer to this blog post from our Morgan Lewis team.

Internal Revenue Code Considerations

Depending on the award type, the award may be subject to specific tax requirements relating to their treatment in connection with a transaction. For example, in the case of incentive stock options that are cancelled for a cash payment, the income tax consequences are similar to those for the cancellation and cash out of nonqualified stock options—in both instances, the option holder will be subject to ordinary income tax.

Particular consideration should be given to (1) compliance with Section 409A of the Internal Revenue Code given the penalties on both the employee and the employer for noncompliance, and (2) potential tax and loss of tax deduction, as applicable, on golden parachute payments under Sections 280G and 4999 of the Internal Revenue Code.

Awards Outside the US

If a Target’s employees who hold equity awards are located outside the US, any tax, securities, and other requirements of those countries should be considered.


The foregoing summary is not exhaustive. Any approach will be subject to the specific terms of a Target’s equity plan and award agreements, as well as the Purchaser’s equity documents, as applicable.

To further illustrate the above alternatives and considerations, the table lists the alternatives generally available to a Purchaser and describes the material legal principles and requirements that will apply for each of the alternatives. Specifically, the table provides a broad overview of the considerations and impacts of each alternative on the applicable transaction agreement, shareholder approval requirements, registration requirements, and administrative considerations.

View the table >>


If you have any questions about the information addressed in this Insight, or any other questions relating to the treatment of Target’s equity plan and award agreements in a transaction, please contact your usual Morgan Lewis contacts or any of the following: