5.11 Shares as a Means of Payment 257A two-party share exchange requires the issuing of new shares or the sale of ex-
isting shares owned by the company itself. The legal framework can be compli-
cated, and the share exchange process requires careful planning.
Issuing of new shares. If the company issues new shares, many questions can
require a resolution by the general meeting under the European legal capital re-
gime. (1) There must be a decision to issue new shares. The decision on the issu-
ing of new shares will have to be complemented by other decisions. (2) There
must be a decision on the withdrawal of existing shareholders’ pre-emption rights
and (3) a decision on the acceptance of a consideration other than in cash. (4) The
decision to issue new shares can also require a decision to increase the legal capi-
tal of the company. (5) This may require the amendment of the articles of associa-
tion. (6) Furthermore, it may be necessary to decide on stabilisation measures.
All such decisions require a certain amount of disclosure to existing sharehold-
ers and the general meeting. There can also be other forms of disclosure.
The issuing company may have to comply with securities markets laws appli-
cable to public offers. Securities markets laws provide for the publication of an of-
fer document or a prospectus and may require other forms of disclosure.
The valuation of the shares may be constrained by provisions of company or
securities markets laws that protect shareholders in general or minority sharehold-
ers in particular.
As the share exchange process may trigger a duty to make a mandatory offer
for the remaining shares, or the remaining shareholders’ sell-out right under com-
pany or securities markets laws, the valuation of the shares will, in practice, be in-
fluenced by how it will affect the price that the firm will have to pay for the re-
maining shares.
For obvious reasons, the firm should signal both to its existing shareholders
that it is in their interests to vote for the transactions, and to shareholders of the
target company that it is in their interests to accept the offer.
It may also be necessary to apply for customary regulatory approvals. Where
one of the parties is a listed company, the publication of an offer document or pro-
spectus may require the consent of the competent authorities or the operator of the
market place. There may be competition law aspects. In some regulated industries
like banking, insurance, or defence, the change of control may require the consent
of the competent authorities.
Mitigation of legal and commercial risk: general remarks. In practice, there are
ways to simplify the process and mitigate legal and commercial risk.
First, the firm can ensure that the internal decisions can mostly be taken by the
board of directors. This requires that the general meeting has, in advance, empow-
ered the board to take those decisions.
According to the Second Company Law Directive, any increase in the author-
ised or subscribed capital must be decided on by the general meeting.^618 However,
the board may be empowered to decide on the increase in the subscribed capital
within certain limits and for a period not exceeding five years.^619
(^618) Article 25(1) of Directive 77/91/EEC (Second Company Law Directive).
(^619) Article 25(2) of Directive 77/91/EEC (Second Company Law Directive).