Distinguish a share issue from an owner transfer in a debt swap
Distinguish company share issue and existing-owner share transfer mechanics in a proposed debt-for-equity arrangement.
Corporate Recovery Partners
01 / 06
The proposal says shares without explaining the source
A creditor offers to take an ownership interest instead of cash. Ask the corporate lawyer whether the proposal involves the company issuing new shares or an existing shareholder transferring some of theirs. Those are different transactions. The documents also need to establish exactly what happens to the company's debt; the word shares does not answer either question by itself.
Imagine a company with one hundred ordinary shares considering a creditor proposal. If twenty-five new shares were issued on the simplified assumption of equal rights, the new holder would own twenty-five of one hundred and twenty-five shares, or twenty per cent. Transferring twenty-five existing shares would instead represent twenty-five per cent of the unchanged total. This arithmetic is illustrative, not a recommended structure.
ASIC describes a share issue as the company creating and allocating shares and requires records of issued shares on the share register. Give the adviser the current register and relevant company documents. Different classes, rights or other interests can make the real analysis more complex than the simple example, so do not negotiate from a remembered percentage alone.
Ask the lawyer and accountant to explain the before-and-after position for each existing owner and the creditor. In the example, an issue changes the total number, while a transfer changes who holds existing shares. Do not assume that an owner can promise another shareholder's holding or that management can complete the proposed transaction without the appropriate authority and process.
Have the advisers identify the balance involved, conditions and point at which any discharge takes effect. Consider guarantees, security, accounting and tax issues specifically. Do not mark the creditor account paid because an ownership schedule has been drafted. The share transaction and debt outcome must be properly connected in the actual arrangement.
Obtain advice about valuation, rights, approvals and the company's remaining financial position. Keep proposals distinct from completed changes and retain the relevant confirmations. A precise explanation of where the shares come from helps prevent a debt negotiation proceeding on two incompatible understandings of the ownership bargain.
