# Proration: What it Means, How it Works, Examples

> **Definition**
>
> Proration is a corporate action that occurs during an event such as a merger or acquisition, where a company splits its original cash and equity offer in response to shareholder preferences.

## What Is Proration?

Proration is a type of [corporate action](https://www.investopedia.com/terms/c/corporateaction.asp) that may arise during an event such as an acquisition, where a company splits its original cash and equity offer in response to shareholder preferences.

In certain situations, the acquiring firm will offer a combination of cash and [equity](https://www.investopedia.com/terms/e/equity.asp), and shareholders of the firm being acquired can elect to take either. If available cash or shares are not sufficient to satisfy the offers that shareholders tender, the remaining stock is prorated: the company grants a proportion of both cash and shares for each offer tendered so that everyone gets their fair share of the deal.

Proration should not be confused with [pro-rata](https://www.investopedia.com/terms/p/pro-rata.asp), which indicates some proportional allocation or distribution.

### Key Takeaways

*   Proration refers to actions when a company splits its original cash and equity offer to accommodate investor choices.
*   It occurs when available cash or shares are not sufficient to satisfy the offers that shareholders tender during a certain corporate action.
*   Examples of instances in which proration can occur are mergers and acquisitions, stock splits, and special dividends.
*   Shareholders may prefer cash over equity due to differences in taxes, interest rates, and growth opportunities.
*   Proration is not the same as pro-rata, which is a proportional allocation of something like a payment or expense.

## Understanding Proration

Proration supports shareholders by ensuring that a company holds to its initial target and does not favor some investors over others (e.g., giving a percentage of shareholders the cash they wanted while delivering shares to the rest). While this means that every investor might not receive their initial election, it ensures that all receive the same value.

Other situations in which the need for proration might occur include [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp) or liquidation, [special dividends](https://www.investopedia.com/terms/s/specialdividend.asp), [stock splits](https://www.investopedia.com/terms/s/stocksplit.asp), and [spinoffs](https://www.investopedia.com/terms/s/spinoff.asp).

> **Tip**
>
> While these corporate actions must be approved by shareholders, and a company will typically list them on a firm's proxy statement in advance of its annual meeting, shareholders must occasionally sacrifice to maximize wealth for all shareholders.

## Proration and Merger Considerations

Mergers occur for several reasons, including to gain [market share](https://www.investopedia.com/terms/m/marketshare.asp) through a [horizontal merger,](https://www.investopedia.com/terms/h/horizontalmerger.asp) reduce the costs of operations through a vertical merger, expand to new markets, or unite common products through a [congeneric merger](https://www.investopedia.com/terms/c/congeneric-merger.asp). After a merger, shares of the new company are distributed to existing shareholders of both original businesses.

When deciding to merge, in addition to how both companies will reward shareholders, it is important to take into consideration the Federal Trade Commission’s [guidelines](https://www.ftc.gov/advice-guidance/competition-guidance/guide-antitrust-laws/mergers) on keeping the industry competitive and avoiding the creation of monopolies.  

> **Important**
>
> It is important to ask whether a proposed merger will create or enhance market power or not. An antitrust concern arises particularly with proposed horizontal mergers between direct competitors.

## Example of Proration

Suppose a company decides to acquire a rival for $100 million, which consists of 75% cash and 25% equity. The cash-equity split might undergo a revision if a majority of investors of the company being acquired elect to be paid in cash.

In that case, the acquiring company will change its accounting figures in order to accommodate the demand for cash. This will result in each investor of the acquired company receiving less cash than originally planned. A firm, for example, may have to revise an original offer to [buy back stock](https://www.investopedia.com/terms/b/buyback.asp) and reduce it by a factor of, say two-thirds, in order to balance investor demand and its stock price at that time.

## What Is a Proporation Factor?

The proration factor refers to the fraction of equity shares accepted by an acquiring company needed for the target company's shareholders to participate in a takeover offer.

Proration factor may also refer to the amount of pension eligibility a plan participant is entitled to.

## Why Does Proration Happen?

Proration can occur if a corporate action is planned, but there is not enough cash available to complete the transaction. Instead, equity shares are used as a form of payment, either in full or in part.

## What Is Proration in Accounting?

In business accounting, proration can refer to the logical allocation of over- and under-utilized resources (e.g., finished inventories vs. works-in-progress) that a firm has in order to settle the books at the end of an accounting period.