Instead of paying cash outright, a share swap allows a company to acquire shares in another business by issuing its own shares as payment.
In Malaysia, it is a common strategy for transactions where issuing shares better serves a company’s commercial position, and this guide covers:
- what a share swap involves
- why businesses choose it over a cash deal
- valuation and tax points to consider, and
- what a Share Swap Agreement needs to cover
Let’s begin.
What is a share swap
A share swap typically involves two linked steps rather than a single transaction. First, the seller transfers its shares in the target company to the acquiring company. Second, the acquiring company allots new shares to the seller as consideration, instead of paying in cash.
Why use a share swap instead of cash
Businesses turn to share swaps for reasons that go beyond avoiding cash outlay, and common settings include:
- as consideration in an acquisition where the purchase price is satisfied with shares instead of cash
- to consolidate ownership within a group of related companies
- to bring in a new partner through a joint venture where the seller continues to play an active role in the business
A company with a strong valuation can use its own shares as acquisition currency, extending its buying power without touching its cash reserves. Issuing shares also avoids the cost and complexity of raising debt to fund a cash purchase, such as interest, security arrangements, and the impact on the company’s balance sheet.
The arrangement can work in the seller’s favour too. Rather than a one-off cash payout, the seller becomes a shareholder in a larger group and shares in its future upside, sometimes alongside more preferential share terms.
Valuation and tax considerations
As parties need to agree on the value being exchanged on each side, the valuation method used should be one that both companies can stand behind, determined with the assistance of a financial adviser or valuer where appropriate.
Although no cash changes hands, a share swap can still give rise to stamp duty and other tax consequences depending on how the transaction is structured, and tax advice should be obtained accordingly.
Documenting a share swap
Just as a Share Sale Agreement or a Share Subscription Agreement governs title issues and other commercial protections until completion in a cash transaction, a Share Swap Agreement serves the same purpose, adapted to this form of consideration and setting out:
- the shares being exchanged on both sides
- the mechanics of the swap itself
- mutual warranties on title and authority to allot shares, and
- the steps required to complete the transaction
Completing a share swap also requires resolutions beyond the agreement itself.
The transfer of the target’s shares and the allotment of the acquirer’s new shares each require their own board or shareholder resolution and statutory filing, and one cannot be completed without the other.
Where new shares are being issued as part of the swap, existing shareholders of the issuing company may hold pre-emption rights entitling them to subscribe for those shares first. This needs to be checked, and either waived or structured around, before the agreement is signed.
Key takeaways
- A share swap involves two linked steps: a transfer of shares out, and an allotment of new shares in return
- It can conserve cash, avoid debt financing costs, and work to the seller’s advantage by giving them a stake in a larger group
- Commonly used for acquisitions, group restructurings, and joint ventures
- A Share Swap Agreement, along with the necessary resolutions and filings, is needed to properly document and complete the transaction
Let ELP structure your share swap
Whether a share swap is being used to fund an acquisition, restructure a group, or bring in a new joint venture partner, getting the sequencing and documentation right matters more than it appears. We assist businesses with structuring, drafting, and reviewing Share Swap Agreements suited to the specific transaction. Contact us for an initial consultation.
