Share-for-share Exchanges Explained

I often get involved in share-for-share exchanges. This can be a standalone transaction, part of exit planning or part of wider group restructuring.

What is a Share-for-share Exchange?

This is where shareholders exchange shares in an existing company for shares in a holding company. This may involve the following:

• Step 1: Apply for tax clearance. I would recommend that you speak to your accountant/tax adviser for advice on the tax implications.

  
  

• Step 2: Incorporate the new holding company ("Holdco").

  
  

• Step 3: Transfer shares in the first company ("Target") to the Holdco in return for shares in the Holdco. The Holdco will own the Target and the individuals will now hold their shares in the Holdco. It may be important for this to be in the same percentages and share classes as they held before.

  
  

• Step 4: Apply for Stamp Duty relief, if available.

A corporate law solicitor will ensure that the share-for-share exchange is correctly documented to create the intended structure. They will also consider the legal implications of the transfer and whether any other documents should be considered such as a Shareholders Agreement.

Why should businesses consider a Share-for-share Exchange?

• Group structure: Sensible risk management could see a new subsidiary formed by the Holdco to work on a new area of business. The Holdco could be used as a buyer of other companies for those businesses looking to expand by acquisition.

  
  

• Asset and cash protection: Prudent business planning can involve valuable assets like freehold or intellectual property or surplus cash being held in the Holdco; potentially safeguarding them in the event of financial/legal problems in the Target. It is important that the transfers of such assets are properly and legally implemented.

  
  

• Shareholder exit: It can provide greater flexibility than a share buyback for a shareholder looking to leave a business. The continuing shareholders would take greater ownership through the Holdco and the leaver instead receives cash paid in instalments.

  
  

• Succession planning: It can be used by a management team in an MBO. The management team may hold a small take in the Target which they exchange for shares in the Holdco. The majority founder on the other hand receives cash, sometimes paid out over time. The management team would own the Target via the Holdco.

I'm a corporate law solicitor available to discuss on: 07359 989311 or Robert.Flannagan@acuitylaw.com