"Cash in lieu" is a term that is used to identify specific types of exchanges that may occur in regard to shares of stock. This particular strategy may be used as part of a process that involves the recognition of fractional shares during the course of a transaction, with some type of cash payment accompanying the assignment of whole shares to each of the investors. This approach can be used in a number of situations, including events like company reorganizations, the purchase of one company by another, a friendly merger or takeover, 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 lieu approach may be used as a means of arranging for investors holding 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 normally used to compensate the investor for what is known as a fractional share, or an asset that does not quite equal a whole share. For example, if it is determined that as the result of the buyout or merger, a given investor is entitled to 200.5 shares of stock in the new company, he or she will receive 200 shares of that new stock and be compensated in cash for that 0.50 share in lieu of retaining that half share as a holding.
This cash in lieu approach is also sometimes used with stock splits. If a given split results in investors holding fractional shares, the issuer may exercise an option to buy back those specific portions or shares, paying cash to the investors. As in other situations, investors continue to hold whole shares for as long as they wish to do so.
Determining the amount of compensation that is considered equitable in a cash in lieu situation involves assessing the current market value of the shares of stock involved. In most cases, the market value of the shares as of the day that the issuance of those new shares to the investor took place will serve as the figure to use in calculating the value of the fractional shares. Once the calculation is complete, the investor is notified and the payment is tendered according to any provisions for payment that are currently in place with the investor. Since the issuer is effectively using a cash in lieu process to buy those fractional shares back from the investor, the investor continues to retain whole shares for as long as he or she wishes, but the investor account no longer reflects partial shares.