What Does “Cash in Lieu” Mean? Definition, 4 Facts About It

Put simply Cash-in-lieu is payment of cash instead of stock when a stock splits or changes, the shareholder only owns a partial share. Here you can find what it means, why it’s important and others information about it.

What Does “Cash in Lieu” Mean?

“Cash in lieu” is a word used to describe particular sorts of exchanges that may occur in relation to stock shares.

This specific technique may be employed as part of a procedure including the recognition of fractional shares over the course of a transaction, with the assignment of entire shares to each investor accompanied by a cash payment of some kind.

What Does "Cash in Lieu" Mean?

This strategy is applicable in a variety of scenarios, such as firm reorganizations, the acquisition of one company by another, a friendly merger or takeover, and even the fortunate event of a stock split.

As it relates to a merger or the acquisition of one business by another, the cash in lieu strategy may be used to arrange for investors owning shares in the acquired firm to receive a mixture of shares in the new owner and maybe partial exchange compensation in the form of a cash payment.

Typically, this method is used to pay the investor for a fractional share, or an asset that is not exactly equivalent to a complete share.

For instance, if an investor is judged to be entitled to 200.5 shares of stock in the new firm as a consequence of a buyout or merger, he or she will get 200 shares of the new stock and be reimbursed in cash for the 0.50 share instead of maintaining it as a holding.

This cash-in-lieu-of-equity method is also occasionally utilized for stock splits. If a certain split results in fractional shares being held by investors, the issuer may exercise an option to purchase back those fractional shares in exchange for cash. Similar to other circumstances, investors continue to own complete shares for as long as they like.

Why Investors Receive “Cash in Lieu”

For a variety of reasons involving firm reorganization that changes the number of outstanding shares, the stock price, or both, investors may receive cash in place of their shares.

Several corporate occurrences might result in investors getting cash in place of fractional shares.

Stock Split

When a company’s board of directors considers that their company’s stock price may be too high for new investors, a stock split happens.

To make the stock price appear more appealing to investors and to increase liquidity and marketability, a stock split is done to artificially decrease the stock price by issuing more shares at a predetermined ratio while keeping the company’s value intact.

Depending on the planned ratio, a stock split may result in the creation of fractional shares. For instance, a three-for-two stock split of a stock valued $111 would result in the creation of three shares for every two shares held.

What Does "Cash in Lieu" Mean?

Thus, a stock split would result in fractional shares for investors holding an odd number of shares. Nonetheless, if the company’s board is not interested in holding or dealing with fractional shares, they will distribute investors’ full shares and sell the unequal remainders, offering investors cash in place of fractional shares.

The ratio or cash rate established by the firm executing the stock split may be found in the company’s SEC 8-K filing. A corporation may undertake a reverse stock split if its shares prices are too low and it want to boost them artificially.

In contrast, a firm may undertake a reverse stock split if it believes that a stock’s price is too low and it want to artificially increase it. If stock prices go too low, investors may be hesitant to purchase, and the stock may be delisted from exchanges.

When a stock undergoes a reverse stock split, each share is turned into a fraction of a share, but investors are granted shares with a greater price based on the reverse split ratio. A stock priced at $3.50, for instance, may undergo a reverse one-for-ten stock split.

Each 10 shares are transformed into one new share with a $35.00 value. Unless the corporation opts to give cash in place of fractional shares, investors who possess 33 or more shares that are not divisible by 10 will get fractional shares.

On Forms 8-K, 10-Q, or 10-K, corporations may inform their shareholders of an upcoming reverse stock split, as well as any necessary settlement terms.

Merger or Acquisition

Company mergers and acquisitions (M&As) can also lead to the creation of fractional shares. When firms merge or are absorbed, new common stock is combined based on a predefined ratio, resulting in fractional shares for investors in all participating companies.

What Does "Cash in Lieu" Mean?

In these situations, it is uncommon for the ratio of newly acquired shares to be a whole number. Companies have the option of returning full shares to investors, selling fractional shares, and compensating investors with cash.

Spinoff

If an investor owns shares of a company that spins off a portion of its operations as a new corporation with a separately traded stock, the investor may get a specified number of shares of the new company for each current company share held.

How Is “Cash in Lieu” of Fractional Shares Taxed?

Cash in lieu of fractional shares, like many other types of investment income, is taxable, even though it was acquired without the investor’s permission or activity. The corporation may send investors a check followed by an IRS Form 1099-B with a “cash in lieu” or “CIL” remark at the end of the year.

What Does "Cash in Lieu" Mean?

Some investors may simply record the payout as sales proceeds with zero cost on Schedule D of IRS Form 1040 and pay capital gains tax on the whole cash settlement.

The most accurate and tax-efficient procedure, however, would apply the modified cost basis to the fractional shares and impose capital gains tax solely on the net gain.

How to Report “Cash in Lieu” of Fractional Shares

Calculating the cost basis for cash in lieu of fractional shares is quite complicated owing to the fluctuating share price and number. The newly issued stock is not taxable, nor does its cost basis change; nevertheless, the basis per share changes.

Consider the case below:

• An investor has 15 shares of Company X, each at $10.00 (a total value of $150).

• The cost basis for each of Investor’s 15 shares is $7.00 ($105 total cost basis).

• Company X declares a 1.5 stock split.

The investor is entitled to 22.5 shares with a per-share value of $6.67, but the corporation will only issue full shares. Therefore, the investor obtains 22 shares in addition to $2.73 in cash for the fractional share.

The entire cost basis of the investor stays same, less the cash in lieu of fractional shares. However, the adjusted cost basis now includes 22 shares instead of 15, resulting in a per-share cost basis of $4.66 and a fractional share cost basis of $2.33.

The final taxable “net gain” for the cash amount received in place of fractional shares is $0.39 ($2.725 – $2.33).

What Does "Cash in Lieu" Mean?

“cash in lieu” is a word used to describe particular sorts of exchanges that may occur in relation to stock shares.

This specific technique may be employed as part of a procedure including the recognition of fractional shares over the course of a transaction, with the assignment of entire shares to each investor accompanied by a cash payment of some kind.

This strategy is applicable in a variety of scenarios, such as firm reorganizations, the acquisition of one company by another, a friendly merger or takeover, and even the fortunate event of a stock split.

Conclusion

Cash in Lieu (CIL) means “cash instead” in its literal sense. It is payment paid with cash, as opposed to, for instance, bank transfers or stocks.

In use, however, its literal meaning is rarely intended. We can utilize the payment in cash in lieu in instances such as fractional share payment, “Cash in place of” anything.

With cash in lieu, one party chooses to settle a value exchange in cash as opposed to the underlying asset or provided services.

Cash in lieu, in the context of investment, refers to payments received by investors following structural firm changes that disturb existing stock prices and volumes in an unequal manner.

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