You should be able to roll it over into a self directed IRA.

You would have to ask your HR, or bypass them and ask the company that provides your 401 service (such as Fidelity, ADP, etc...) The 401K is company controlled, and contributed to, they set the rules along with the service provider to what is allowed. I have typically been able to roll over to an IRA, but have seen ones that only allow it when you leave the company. I would ask the service provider directly, or HR as a second shot. I have had a few 401K's at different companies, and the rules vary slightly.

Best of my knowledge you cant transfer to ira either you can transfer to new company or you can with drawn but you can't transfer directly to IRA.

You cannot roll your 401K into an IRA just because the existing compnay was aquired. The new entity must maintain a bifurcated plan going forward. Depending on the options offerd in the new plan I may be inclined to roll it into the new plan. Compare the asset options and act accordingly.

completely legal for them to do this as it 100% depends on how the sale transaction is structured. As they are not allowing cash outs then it looks like the assets of the plan were merged into the assets of the new plan but they were allowing you the choice of the old investments or the new investments. So, technically, it's not even a rollover; just a change in who the assets are invested with. Happens all the time. Only thing I question is whether they can legally limit contributions to the new plan....but if you push that they may force everyone out of the old which wouldn't serve your purpose or make you the most popular kid on the block.