Analysis of global trends shows that share swap structures have become integral elements in most M&A transactions. The acceptance of stocks as currency for such acquisitions is well established, as Disney’s US$71 billion acquisition in the US of the entertainment assets of 21st Century Fox demonstrates. As the M&A market increasingly adopts global standards, acquirers more frequently use share swap structures in M&A transactions, replacing the all-cash deals that were the usual framework in the past.
Partner
Shardul Amarchand Mangaldas & Co
A share swap transaction is one in which consideration for the deal is not cash, but the issuance to the other party of shares of the acquiring entity. These arrangements are commonly used in strategic acquisitions by growth stage companies, which have little liquidity and resources, any such being better used for operational purposes. Mature companies typically use this structure in combination with cash payments to minimize immediate and significant cash outflows.
One factor contributing to this structural shift, especially in cross-border acquisitions, was the part-liberalization of foreign exchange regulations in India (FEMA regulations). Before November 2015, FEMA regulations required that share swap transactions be undertaken only with the prior approval of the government. However, after that date foreign direct investment regulations as well as the overseas direct investment (ODI) regulations were amended to permit cross-border primary share swap transactions (that is share swaps involving the issuance of new shares by the acquiring entity to the existing shareholders) under the automatic route, subject to compliance with specified conditions.
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Jay Gandhi is a partner and Abhishek Parekh is a principal associate at Shardul Amarchand Mangaldas & Co.
Shardul Amarchand Mangaldas & Co
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Executive Chairman: Shardul Shroff
Managing Partner: Pallavi Shroff & Akshay Chudasama
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