A Brief Introduction About the Share Exchange Agreement
Share exchange agreement is a contract between two corporations in which some or all of the shares of one business corporation are exchanged with shares of another corporation through mutual understanding as well as accepting certain terms and conditions. And both of the corporations never stop to continue their businesses.
Who Takes the Share Exchange Agreement?
In this agreement, two business corporations under accepting certain terms and conditions enter into this contract. In other words, transferor and transferee involved in the agreement in which the transferor is the registered proprietor of the shares or stocks, and the transferee is the person acquiring all such shares based on certain terms and conditions. All the business officials of the corporation, such as the board of directors and shareholders, must allow this exchange of shares between two corporations without any hesitation. After the approval of all such board members and shareholders, the agreement is set forth.
Purpose of the Share Exchange Agreement
The main purpose of the agreement is to avoid any disputes between the corporations due to the exchange of shares in the future and to mention the rules to be followed by both the parties of the agreement. According to the agreement definition, the following points need to be considered in the contract.
- A corporation can only get the part of shares or whole shares of another corporation only when the board of directors of both corporations accepts the contract, and also its shareholders approve the stock exchange plan.
- The agreement has to mention the name of both parties involved in exchanging shares. Additionally, the share exchange contract also mentions the terms and conditions to be followed by two parties.
- The agreement set other rules and standards to begin the process of exchange.
- The contract does not limit the power of the corporation in acquiring the part of the shares or whole shares of another corporation using a voluntary exchange method.
So, the agreement mentions various terms and conditions to help the parties involved in it for the process of exchanging the shares.
Contents of the Share Exchange Agreement
The share or stock exchange agreement is the contract between the parties where one corporation agrees to exchange certain shares with another business for accepted funding or shares of the business. The stock exchange agreement contains the following elements:
- Transfer of Shares: This element identifies the parties involved in this agreement. Thus the name of the corporations mentioned here. The transferor who transfers the shares to the transferee will agree upon the transfer of the shares based on the amount set out by transferee.
- Transfer Price: Both the parties agree upon the transfer of shares for a certain price known as the transfer price.
- The Action Section: This section explains the value of the shares being exchanged by the business parties. The agreement has to identify the total number of shares and the funds paid for that share.
- Rights of the Parties: Based on the owner
- ship interest, the agreement mentions the rights of the business parties involved in the contract.
- The Warranties and Indemnities: Warranties and indemnities are essential elements at the time of closing the agreement.
- The Covenants: Before signing the agreement, both the parties must read this section where the duties that each party should undertake will be mentioned.
- Other elements: Other elements of the agreement include the cost of the transfer, the effect of lack of formality, variations, notices, governing law, disputes, and arbitration.
How to Draft the Share Exchange Agreement?
To draft the share exchange contract, one can browse the net where they will get the agreement sample. One can edit such a sample document according to their needs or else seek the help of an attorney experienced in this stock exchange. Though you might think about the fees of an attorney, it is helpful to hire him/her when you are a newbie in the share exchange market.
Negotiation Strategy
In most of the cases, transferee negotiates on transfer price or cost of transfer with the help of a lawyer. It is crucial to make proper negotiations with the transferor before signing the agreement. Thus, consult and hire a lawyer to get legal help.
Benefits & Drawbacks of the Share Exchange Agreement
Pros:
- In a share swap agreement, shareholders of the target company become the shareholders of the merged corporation too.
- The risks and benefits of the business will be shared equally by both transferor and transferee.
- The agreement helps to save the acquirer borrowing costs.
- The transferee or acquiring company enjoys with the lower taxes.
- Higher returns and higher profile.
Cons:
- Difficult to estimate the fluctuations in the market
- Disputes may arise between the parties leading to higher risks of both party’s businesses.
[ Also Read: Swap Contract ]
What Happens in Case of Violation?
It will be mentioned in the agreement that any disputes between the parties in the future or breach of the agreement by any of the parties are subject to the jurisdictions of the court of the particular state or country. Thus, in the case of disputes, both parties have to enter into arbitration(1) before a single arbitrator, and he/she decides the final statement.
Thus, the share exchange agreement acts as a statutory form of business combination in which the two different corporations able to exchange their shares based on terms and conditions without any disputes. The agreement also helps the acquirer in many ways to sort out the tax-related issues.