“Cash in lieu” is a strategy used in transactions to compensate investors for fractional shares with a cash payment. It can be used in mergers, acquisitions, reorganizations, and stock splits. The compensation is based on the market value of the shares involved.
“Cash in lieu” is a term used to identify specific types of trades that may occur with respect to shares. This particular strategy can be used as part of a process that involves the recognition of fractional shares during the course of a transaction, with some form of cash payment accompanying the allocation of whole shares to each of the investors. This approach can be used in a number of situations, including events such as company reorganizations, the purchase of one company by another, a friendly merger or acquisition, and even the happy event of a stock split.
As it relates to a merger situation or the purchase of one company by another, the cash-in-place approach can be used as a means of arranging for investors who own shares in the purchased company to receive a combination of shares in the new owner and possibly partial compensation for the exchange with a cash payment. This approach is typically used to compensate an investor for what is known as a fractional share, or an asset that does not equal a full share. For example, if it is determined that as a result of the purchase or merger, a given investor is entitled to 200.5 shares of the new company, they will receive 200 shares of that new share and will be compensated in cash for it. 0.50 shares instead of retaining that half as participation.
This cash-in-place approach is also sometimes used with stock splits. If a given split results in investors owning fractional shares, the issuer may exercise an option to repurchase those specific portions or shares, paying cash to investors. As in other situations, investors continue to hold entire shares for as long as they wish.
Determining the amount of compensation that is considered equitable in a cash-in-place situation involves evaluating the current market value of the shares involved. In most cases, the market value of the shares as of the day the new shares were issued to the investor will serve as the number used to calculate the value of the fractional shares. Once the calculation is complete, the investor is notified and payment is tendered in accordance with the payment provisions currently in effect with the investor. Since the issuer is effectively using a cash process instead of purchasing those fractional shares from the investor, the investor continues to hold full shares for as long as they want, but the investor’s account no longer reflects partial shares.
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