Where Does the Money Go When a Company is Sold?
The process of selling a company is a complex transaction that can significantly impact various stakeholders, including shareholders, creditors, and employees. Understanding where the money ultimately goes can provide clarity and help manage expectations.
Ownership and Shareholders
Generally, when a company is sold, the funds from the sale go to the business owners, who are typically the shareholders. This is the most straightforward scenario, where the acquiring company pays cash or stock to the shareholders of the target company.
Cash for Stock Transactions
In a cash for stock transaction, the acquiring company pays out cash to the owners of the target company's shares in exchange for the stock. This transaction is commonly used when the acquiring company wants to quickly gain control without the complexity of taking on additional debt.
Stock for Stock Transactions
Alternatively, a company can be acquired through a stock-for-stock exchange. In this case, the acquiring company's shares are exchanged for the target company's shares, allowing the target's shareholders to maintain their ownership while becoming shareholders of the acquiring company.
Cash for Assets Transactions
In a cash-for-assets transaction, the acquiring company pays cash to the target company in exchange for specific assets. In this scenario, the target company still exists, but its assets are transferred to the acquiring company, and its shareholders retain their ownership in the target company's stock.
Stock for Assets Transactions
A similar transaction occurs in a stock-for-assets exchange, where the acquiring company's stock is exchanged for specific assets of the target company. Like the cash-for-assets scenario, the target company retains its existence, and the shareholders continue to hold their shares.
Rewriting Transaction Details for Flexibility
While the above scenarios are the most common, sometimes the transaction can be more complex:
Creditors: Creditors may be repaid before the sale proceeds are distributed to shareholders. However, in some situations, creditors might agree to a payment plan if the acquiring company takes on the target company's debt.
Employees: Employee benefits, such as pensions and severance, might be settled before the sale proceeds are distributed to shareholders. In these cases, the employees' interests might take precedence over those of the shareholders.
After all dues, taxes, and other liabilities have been paid, any remaining funds are ultimately distributed to the shareholders according to their shareholding proportion or as decided by the shareholders in a general meeting.
Final Disbursements and Withdrawals
Once the sale is finalized, the funds flow to the shareholders. However, it's important to note that these funds are not immediately accessible. Shareholders selling shares often face a settlement period. Traditionally, this could take up to two working days from the sale date.
However, with changes in regulatory rules, this period has been shortened, allowing shareholders to withdraw funds the very next day after the sale. For HDFC Securities account holders, there's an additional option to encash shares during the sale to receive funds within hours, with the money typically credited to your bank account by 5-6 pm.
Understanding the process of distributing the proceeds from a company sale can help stakeholders make informed decisions and manage their expectations.