Map of the world with coins in various currency

Global Considerations for Cashing Out Equity Awards in Mergers

August 09, 2023

In M&A transactions, it is common for companies to cash out the vested equity awards of the target company and convert any unvested portion of the award into an award that will pay out in the future. In this blog post, we will look at the various global tax and regulatory considerations and flag potential risks ranging from unfavorable tax treatment to compliance issues under local rules and regulations. 

Cash-Out and Conversion Defined


Under a cash-out, equity awards are cancelled in exchange for a right to receive a cash payment. Typically, any vested portion of the equity award is converted into a cash payment at closing, based on the deal price for target shares (minus any applicable exercise price). If the exercise price of an option is equal to, or higher than, the deal price (i.e., the option is not "in-the-money"), the option is typically cancelled without any payment.

Occasionally, the grant documents or the merger agreement may provide for accelerated vesting, in which case the cash-out treatment may apply to the entire award. 


More often, the unvested portion of an award is not accelerated at closing (because that would eliminate any retentive value of the award) but is converted into a right to receive a payment in the future. Some companies convert the unvested portion of the award into a similar equity award over the acquirer's shares and such award retains the same vesting and other conditions of the original award.

Increasingly, though, we see companies converting unvested awards into deferred cash awards, (i.e., a cash payment based on the deal price which also retains the same vesting and other conditions of the original award, to the extent applicable).  This approach tends to be used by acquirers that do not have an equity program (e.g., private equity funds) and it may also be used by acquirers that have an equity program but can't or do not want to offer equity awards to the target employees (e.g., due to share reserve, administrative, or regulatory concerns).

Given the prevalence of this type of converted award, we are focusing our comments about converted awards on the potential issues with deferred cash awards.

Tax Considerations for Cash Out and Conversion

Tax-Qualified Status

For tax-qualified awards, their qualified status may be lost at cash-out. Most tax-qualified equity programs are offered on the basis that awards are settled in company shares, and a cash-out makes this condition impossible to meet.

  • In Greece and Poland, proceeds from equity awards may not qualify for capital gains tax treatment as they normally would if awards were settled in shares (among other conditions). 
  • For capital gains route trustee awards in Israel, the underlying shares must satisfy a holding period in order to qualify for capital gains tax treatment. If a cash-out occurs before the holding period ends, they are generally disqualified. That said, it may be possible to obtain a tax ruling with the local tax authority to preserve favorable tax treatment on the condition that the cash payment is deposited with the Israeli trustee for the remainder of the holding period. 

Qualified status is also typically compromised by the conversion of awards into deferred cash awards for the same reason: the qualified status requires settlement in company shares (e.g., French-qualified RSUs, UK tax advantaged options). 

Taxation at Conversion

Deferred cash awards can potentially be subject to taxation at the time of conversion. For instance, in Singapore, the conversion of an equity award is generally considered a “release” of the outstanding award, which constitutes a taxable event for Singaporean tax purposes (although a tax ruling can usually be obtained to neutralize this result). Similar risks exist in a number of other countries (e.g., Australia, Canada, Japan). 

In many jurisdictions, tax authorities take a more reasonable view that the conversion of equity awards into deferred cash awards does not constitute a taxable event so long as the following conditions are met:

  • the intrinsic value does not increase with the conversion,
  • the employees do not receive any immediate benefit as a result of the conversion, and
  • the vesting schedule and other conditions stay the same.

Even so, companies should be careful with conversions into deferred cash awards as seemingly minor details (e.g., rounding up of amounts) could inadvertently trigger a taxable event. 

Withholding/Reporting and Social Tax

In many countries, if equity awards are cashed out at closing or converted into deferred cash awards, they can trigger different tax obligations than if the awards were settled in company shares. 

  • Such liabilities include social insurance contributions for both the employee and the employer that may not apply to a stock-settled award. In countries where social taxes are uncapped and/or set at high rates, such additional burdens on both the employee and the employer can be substantial. 
  • Cash settlement may also trigger tax withholding and reporting obligations for the employer that would not have applied to stock-settled awards. This requires an additional or at least different process for the parent company to work out with the local employer / payroll and the payment agent (if any).

Note: There may be differences on both these points depending on whether the cash is paid through local payroll or through a payment agent (e.g., by sending a check or by depositing funds into employees’ overseas brokerage accounts).

Payment through local payroll is generally more straightforward from an administrative standpoint (for instance, tax withholding can be directly taken from the payment), but payment through an agent or into overseas brokerage accounts can potentially avoid certain taxes (e.g., social insurance contributions, fringe benefits tax) and the employer’s tax withholding and reporting obligations. Such differences can apply to both the cash-out payment at closing and future payments under the deferred cash awards. 

Other Tax Considerations

Companies should not lose sight of unique, country-specific items if there are outstanding equity awards in certain countries. For instance, in the UK, a company may require the transfer of the liability for employer National Insurance contributions (NICs) to the employee as a condition of the grant of equity awards. There is a question as to whether this transfer of liability would also apply to the cash-out payment or deferred cash award payment, the answer to which depends on the specific set of facts. 

Regulatory Compliance

Securities and Financial Regulation

Since the cash-out and conversion to deferred cash awards is typically carried out unilaterally without the need for participant consent, there are generally fewer securities compliance concerns. 

However, in a small number of jurisdictions, there may be some considerations. For instance, in the UK, there are financial regulation considerations that apply to cash awards (these considerations also apply to stock-settled awards but there is a more readily-available exemption for stock-settled awards). For instance, there is a risk that communications to the employees regarding the conversion of awards could constitute financial promotions, which may only be made by an authorized person, unless an exemption applies. 

Exchange Controls

In certain countries, the cash-out of equity awards and the settlement of deferred cash awards can trigger exchange control registration requirements. 

  • In China, if the target company’s plans are registered with the State Administration of Foreign Exchange (SAFE), an application is required to terminate the registration of its plans. Any cash payment made after the registration has been terminated cannot cross borders and can only be sourced in China. As such, for cash-out at closing, companies typically want to complete the repatriation of funds from overseas to China before deregistering their plans with SAFE.
  • The analysis is similar in Vietnam at a high level.

Labor and Employment Law

In certain countries, the works council at the local entity may have the right to review the terms and conditions of award cash-out or conversion, particularly if the works council has been consulted in the past on equity awards offered to the local employee population. 

Further, if equity awards are converted into deferred cash awards (and especially if they are paid through local payroll), they may be viewed as a remuneration item.  This may create additional labor law exposure for the award versus a stock-settled award (albeit there are ways to minimize this risk with appropriate language in the documentation about the deferred award).

Key Takeaway

M&A transactions are an exciting and challenging time for a company and its equity awards but can also create significant work and surprises for companies and employees if the impact of the treatment of the awards is not understood at the outset.

Ideally, companies should review the implications of the cash-out and conversion of equity awards ahead of agreeing to such treatment in the transaction documents or, if that is not possible, include language in the transaction documents that the parties will work together to ensure that the treatment will not create tax, administrative or legal problems for the companies and the employees.

Be prepared to be flexible on solutions—as always, a one-size-fits-all approach is not always possible for equity awards granted on a global basis.

  • By Baker McKenzie

    Global Equity Services