Share swaps: Taking the cashless route in M&A

Acquisitions, especially by mid to late stage companies having significant venture capital or private equity investments, have recently increased. These acquisitions have usually been of two types: (a) acquisitions across the value chain, and (b) consolidations, and have traditionally been structured as “all cash” deals. However, there has been a paradigm shift in the M&A world, especially where startups are concerned. Such deals are now often financed using either “all stock” or “stock and cash” models, thus minimizing cash outflow.

In a share swap, the acquirer issues its own shares as consideration for the purchase of shares of the target. This mirrors traditional mergers where shareholders of the merging companies are issued shares of the merged entity.

While a share swap transaction prima facie appears simple, it comes with its fair share of regulatory compliances. For instance, a company issuing shares as consideration in a share swap structure, instead of paying cash, must comply with the preferential allotment provisions of the Companies Act, 2013. For instance, an unlisted issuer company has to obtain a report from a registered valuer appointed by the audit committee or board of directors. It will also need to make detailed disclosures of the share swaps in the notice calling the general meeting. Given that most startups are private companies, most of these compliances become onerous.

Ashwini Vittalachar is a partner and Gauri Khanna is an associate at the New Delhi office of Samvad Partners.